INTRODUCTION
Effective cash flow management is crucial for organizations, as it influences key financial decisions When companies generate positive cash flow, they often distribute excess funds to shareholders, typically in the form of cash or stock dividends The choice between paying dividends and reinvesting profits for growth is a significant aspect of dividend policy In recent decades, share repurchase activity has surged, becoming a prevalent practice in developed markets like the US and Europe since the mid-1980s, as noted by Grullon and Michaely (2004) This trend extended to the Asia-Pacific region, with countries like Australia, Hong Kong, Korea, and Japan adopting share repurchase policies between 1989 and 1995 Today, share repurchases are increasingly favored over traditional dividend payments.
Since the establishment of the State Securities Commission in 1997, Vietnam's securities market has evolved significantly, allowing repurchases from its inception in 2000 with the launch of the Ho Chi Minh City Stock Exchange, followed by the Hanoi Stock Exchange in 2005 This development has effectively stimulated the national economy, particularly through the equitization process, which transformed state-owned enterprises into joint-stock companies, thereby enhancing their role in various economic sectors.
Since its inception in 1998, the stock market has experienced substantial growth, expanding from just two traded stocks to nearly 700 listed companies today This evolution highlights the securities market's crucial role as a key channel for capital mobilization in the Vietnamese economy.
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
The government mobilized approximately VND 1,000 trillion (around USD 47.6 billion), while VND 700 trillion (about USD 33.3 billion) was raised for enterprises through auctions related to equitization and share issuance This effort contributed to the securities market capitalization reaching nearly 40% of GDP as of July 2014.
After 2007, stock buybacks became increasingly accepted in Vietnam, with the number of firms engaging in this practice rising from 5-7 in 2005-2006 to 16 in 2007 and 18 in 2010 The period from 2005 to 2006 marked a time of rapid market expansion, but in 2007, the market faced a recession, leading to significant share devaluation and investor losses By 2010, improvements in regulation and economic support policies enabled Vietnamese firms to stabilize their securities markets and return to a growth trajectory.
Firms are increasingly opting for share buybacks over dividends due to several factors One key reason is the desire to enhance shareholder value by reducing the number of outstanding shares, which can lead to higher earnings per share Additionally, buybacks provide companies with greater flexibility in managing their cash reserves, allowing them to adjust their capital allocation strategies without the commitment associated with regular dividend payments Furthermore, tax considerations play a role, as capital gains from share buybacks may be more favorable for shareholders compared to dividend income Overall, this shift reflects a strategic approach to capital management in today's dynamic market environment.
Research has identified two main hypotheses regarding stock repurchases: the signaling hypothesis and the free cash flow hypothesis The signaling hypothesis suggests that when managers perceive their company’s stock as undervalued, they buy back shares at a premium to signal to less-informed investors that the company's future value is not accurately reflected in its stock price In contrast, the free cash flow hypothesis posits that firms with excess cash and limited investment opportunities may incur agency costs if they do not distribute the surplus to shareholders To mitigate these costs, managers may be tempted to invest excess funds in unproductive projects, such as excessive compensation or mergers and acquisitions Thus, stock repurchases become crucial for firms to effectively distribute excess free cash flow and minimize the risk of wasteful investments.
This study seeks to explore the limited research on share repurchase activities within the Vietnamese market, aiming to enhance the understanding of corporate payout policies in this rapidly developing emerging market By investigating the role of share repurchases, the research may uncover insights into future trends, including whether these repurchases can serve as substitutes for dividends This investigation into share repurchase dynamics is crucial for predicting market behaviors and investment strategies in Vietnam.
LITERATURE REVIEW
Share repurchases
The existing literature on repurchases often explores the validity of two key hypotheses: the free cash flow hypothesis and the signaling hypothesis.
The signaling hypothesis suggests that listed companies often perceive their stocks as undervalued relative to their true worth, prompting them to distribute excess funds to shareholders through stock repurchases This practice decreases the number of outstanding shares, which can lead to an increase in stock prices, typically resulting in a positive market reaction upon announcement Numerous studies, including those by Vermaelen (1981) and Ikenberry et al (1995), support this notion, indicating that the market response is even more pronounced for smaller firms Research shows that smaller companies experience greater information asymmetry, as they are less scrutinized by institutional investors and receive less market information Consequently, announcements of share repurchases from smaller firms signal more significant undervaluation to investors.
The free cash flow hypothesis is a key reason behind stock buyback activities, as companies utilize repurchases to minimize agency costs Consequently, firms adjust their buyback strategies based on their available cash position This is particularly relevant when there is a separation of ownership and control within the organization, as noted by Easterbrook.
Research by Jensen (1986) and others indicates that distributing cash flows to shareholders via share repurchases or dividends can reduce agency costs Furthermore, Byun et al (2006) demonstrate that companies with significant free cash flow are more likely to engage in share repurchase activities.
The signaling and free cash flow hypotheses suggest that there are various motivations behind share repurchases A critical question arises: can dividends and share repurchases serve the same purpose? According to research by John and Williams (1985), Bernheim (1991), and Allen, Bernardo, and Welch (2000), management tends to utilize dividends to signal the quality of a firm, indicating that dividends and repurchases are not interchangeable Additionally, Dittmar (2000) explores the different motives for share repurchase, further emphasizing the distinct roles of these financial strategies.
Research indicates that the primary motivations for share repurchases are capitalizing on undervalued shares and distributing excess cash, suggesting that repurchases serve a different purpose than dividends Additionally, the study by Jagannathan and Stephens (2003) highlights that companies utilize repurchases and dividends independently, depending on varying stages of the business cycle and distinct firm characteristics.
The Vietnamese market, as a new player in security trading, raises questions about the role of dividends and share repurchases Research indicates that dividend payments significantly influence stock prices, as evidenced by Yen Nguyen's (2011) study on the signaling theory during 2006-2009 Conversely, Kim Thu et al (2013) found a negative correlation between dividend payout ratios and profitability on the Ho Chi Minh stock exchange from 2007 to 2012, while Quoc Trung & Thu Ha (2014) noted that Vietnamese firms maintain stable dividend policies In terms of share repurchases, Byun & Bao Trung's (2016) study from 2005-2014 supports the signaling hypothesis, indicating a relationship between repurchases and market responses.
Researchers often analyze announcement-period abnormal returns to assess how stock repurchases impact prices, but they also consider changes in operating performance related to capital distribution Lang and Litzenberger (1989) highlight two hypotheses regarding corporate payouts, revealing that markets respond more significantly to dividend changes in low-q firms compared to high-q firms In the context of share repurchases, Tom and Vefa (1997) suggest that improvements in operating performance for low Tobin's q companies, following repurchase activities, stem from efficient asset utilization rather than enhanced growth opportunities, as explained by the free cash flow hypothesis.
A study by Grullon and Michaely (2002) highlights a trend in the US market where young firms show a strong preference for share repurchases In contrast, research by Brown et al (2015) using data from the Australian market examines how tax treatment influences the substitutability between repurchases and dividends.
Repurchase regulations and Tax policy in Vietnam
In Vietnam, share repurchase regulations have been in place since the establishment of the securities market in 2000, supported by various laws and amendments, including the Securities Law of 2005 and the Enterprise Law of 2014, as well as Decree 58/2012/NĐ-
According to Decree 60/2015/ND-CP, companies are permitted to buy back their shares using four methods: open market repurchases, fixed price tender offers, Dutch auctions, and private negotiation repurchases Notably, the majority of Vietnamese firms prefer the open market repurchase method as their primary approach to share buybacks.
Under current regulations, companies are allowed to repurchase up to 30% of their total common stock; however, the board of directors can only authorize the buyback of a maximum of 10% of outstanding shares Any repurchase beyond this limit requires approval from shareholders during a general meeting.
Repurchases of shares can only be funded through retained earnings and the share premium account, although other sources may be used if adequately supported by these funds Companies are prohibited from conducting share repurchases during an IPO or rights offering Additionally, listed firms must purchase their own shares at or below the market price on the purchase date Repurchased shares can be held as treasury shares for future stock dividends, employee share option schemes, or resold in the market after a six-month period.
Prior to 2015, Vietnamese investors had two tax options for stock trading: a 0.1% tax on the total trade value at the time of the transaction or a 20% tax on taxable income at the end of the fiscal year Choosing the first option meant paying taxes regardless of trading gains or losses, while the second option taxed only profitable trades However, to streamline tax processes, Vietnamese authorities eliminated the second option after 2015, requiring all investors to pay a 0.1% tax on the total value of each trade.
The Vietnamese market, like other emerging economies, has a significant number of firms distributing dividends, with approximately 80% of companies making payouts between 2006 and 2011 (Alphonse & Tran, 2014) To stimulate further investment in the stock market, Vietnamese authorities have implemented attractive dividend tax policies Notably, both foreign and domestic corporate investors enjoy exemption from dividend taxes, while individual shareholders face a flat 5% personal income tax on cash dividends, applicable to both Vietnamese and foreign investors regardless of their tax-resident status in Vietnam.
Table 1 illustrates the varying tax rates on dividends over different periods in the Vietnamese market Notably, the government implemented a 0% dividend tax for individuals during certain periods to stimulate more active trading in securities.
Table 1: Tax rate by period in Vietnam
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).
Dividend and capital gains taxation are crucial factors influencing a firm's payout policy, as highlighted by Jacob & Jacob (2013) Various studies, including those by Sarig (2004) and Moser (2007), support the positive impact of tax on cash distribution choices to shareholders across different countries, particularly in the US market during the high dividend tax rates from 1993 to 2002 This aligns with findings from Rau and Vermaelen (2002) and Oswald and Young (2004) in the UK, as well as Lee et al (2006) in the Taiwanese stock market Therefore, examining the effects of different tax periods on payouts could enhance understanding of the relationship between dividends and repurchase activities in emerging economies like Vietnam.
The characteristics of Vietnamese listed firms
In December 1986, the Vietnamese government launched a significant socio-economic reform program known as "Renewal," which continues to drive economic development today A crucial aspect of this program has been the establishment and growth of the Vietnamese stock market over the past two decades The stock market has emerged as the primary channel for mobilizing medium- and long-term capital, supporting investment and development activities within the national economy Its remarkable growth is particularly notable since Vietnam's accession to the World Trade Organization in January.
2007 Within 10 years, the market capitalization of Vietnamese stock market has increased about
From 2006 to the first half of 2019, the stock market's growth surged from 22.7% to 78.5% of GDP, attracting a significant influx of both domestic and foreign investors As a result, approximately 2.28 million accounts have been opened in the stock market (Vu, 2019).
As part of the "Renewal" movement in Vietnam's economy, the government has transitioned all State-owned enterprises (SOEs) into publicly listed companies due to their underperformance This shift aims to transform the state-centered economy into an open market, similar to China's approach By privatizing state firms while retaining control over key industries, the Vietnamese government seeks to enhance profitability and safeguard national wealth and security However, this raises concerns about the impact of government ownership on firms' capital distribution decisions Research indicates that firms with government ownership exhibit different payout policies, with studies by Chen et al (2009) showing that dividend payouts increase with higher government share ownership Similarly, Bradford (2013) found that state-controlled firms in China pay higher dividends compared to private businesses.
A study by Brennan and Thakor (1990) found that effective personal income tax policies influence shareholder preferences, with smaller shareholders favoring dividend payouts and larger shareholders advocating for stock buybacks Additionally, firms supported by government policies tend to experience greater advantages and impacts due to legal and political factors.
Share repurchases lead to increased ownership concentration and enhance the power of controlling shareholders, according to corporate governance perspectives (Ginglinger and L’her, 2011) Managers may engage in share buybacks to bolster their control by increasing their shareholdings and to deter potential takeovers (Mork et al., 1988).
The influence of majority or dominant shareholders on a firm's financing decisions has long been acknowledged by economists and researchers Due to the fixed costs associated with information and market analysis, majority shareholders tend to gain more from share buyback initiatives, while minority shareholders face a higher risk of expropriation, as noted by Brennan and Thakor (1990).
In Vietnam's Socialist economic system, the government plays a significant role as a market controller, even as many state-owned firms are being privatized and listed on the stock market Despite this transition, state dominance remains prevalent in these companies, making it challenging for the government to permit takeovers by private investors Consequently, the strategy of share repurchase to prevent takeover activities is not a primary focus for initially listed state-owned companies For state-dominated firms, particularly those where the government holds over 50% ownership, enhancing managerial power through stock acquisition is less of a priority, rendering share repurchase less appealing when evaluating various payout options.
The distribution of cash flows to shareholders by state-owned enterprises (SOEs) raises intriguing questions regarding their preference for traditional dividends versus the flexibility of share repurchases With a significant number of listed firms still partially owned by the government, this scenario presents a valuable opportunity for research into the payout policies of the state-owned sector within the Vietnamese stock market Understanding the payout behavior of these enterprises can provide insights into their financial strategies and shareholder engagement.
From a creditor-oriented governance perspective, Sáez and Gutiérrez (2015) highlight the risks posed by inadequate legal frameworks that fail to regulate the power of dominant shareholders, leading to the expropriation of minority shareholders through lower dividend payouts in firms with concentrated ownership To safeguard creditors, governments may impose restrictions on cash distributions to shareholders until debts are settled, encompassing all forms of distribution, including dividends and share repurchases Successful repurchases can significantly alter a firm's financial structure by depleting available cash, resulting in an increased leverage ratio (Bagwell and Shoven, 1988; Opler and Titman, 1996) Additionally, Sáez and Gutiérrez (2015) suggest that a firm's current leverage level may influence its decisions regarding share repurchases.
Lie (2002) observed that firms with high leverage tend to engage in fewer stock buybacks, while Brown et al (2015) found no significant relationship between debt ratios and the repurchase practices of listed companies, suggesting that the impact of capital structure on buybacks warrants further investigation.
Researchers are investigating the relationship between changes in capital redistribution policies of Vietnamese listed firms, utilizing a comprehensive and current dataset Their findings may align with the free cash flow hypothesis proposed by Lang and Litzenberger (1989), support the signal hypothesis suggested by Byun & Bao Trung (2016), or uncover unique trends The study aims to determine whether a substitute or complement effect is present in these capital redistribution strategies.
DATA AND METHODOLOGY
Data collection
The study analyzes all share repurchases conducted on the Vietnamese Stock Exchange from 2008 to 2017, utilizing data on repurchase dates, cash availability, market and book values, total assets, leverage ratios, dividend payouts, repurchase volumes, payment methods, and firm ownership This information was sourced from the Vietnamese stock exchange database, the financial platform Fiinpro, and reputable online analysis sites such as vietstock.vn and cophieu68.com To account for firms that distribute dividends multiple times annually, the total dividends for the year were aggregated Data accuracy was ensured through cross-verification with firms' financial statements and careful checks of payout amounts from business announcements After removing missing or unclear data, the final study sample consisted of 174 observations.
This study examines the significance of past repurchases, anticipated future buybacks, and changes in dividend value to distinguish between the signaling hypothesis and the free cash flow hypothesis, thereby establishing a link between buyback and dividend payout activities It aims to clarify a firm's intent when announcing a repurchase.
If a company signals improved prospects, we can expect a noticeable reduction in dividend payouts, as retained earnings will be redirected towards share buybacks instead Conversely, if management aims to distribute free cash flow rather than invest in unnecessary perks or unprofitable projects, investors should respond accordingly.
10 the repurchase announcement but the repurchasing firms may or may not exhibit improved performance In short, signaling implies an improvement in performance, but a performance improvement need not imply signaling.
Methodology
This study builds on the research by Brown et al (2015) by examining the relationship between share repurchase and changes in dividend payouts It will analyze the discrepancy between actual dividends and their expected amounts to indicate shifts in dividend policy, while the repurchase yield will reflect the extent of buybacks in corporate financial activities.
The growing trend of share repurchase among companies in the Vietnamese market, although still in its early stages compared to dividend activities, highlights a significant gap in financial decision-making over different periods This study focuses on companies that have completed share repurchases to better understand their financial payout behaviors Previous research has explored the relationship between share repurchase and dividend payouts using various methodologies, including the multinomial logit model by Jagannathan (2000), transition probability and cross-sectional regression by Grullon and Michaely (2004), and time series vector autoregression by Lee and Rui.
Research by Brown et al (2015) and others has shown varying results regarding payout methods, predominantly indicating a linear relationship However, considering that payouts represent the distribution of a firm's after-tax earnings, their annual variability suggests a nonlinear relationship with stock returns, as highlighted by Kanas (2005) This necessitates that boards of directors seek an optimal payout strategy that balances profit sharing with firm growth Given the unique characteristics of the Vietnamese market and the lack of consistent studies on repurchase practices, there is a clear need for further research utilizing nonlinear panel regression Additionally, robustness tests will be performed under various conditions to verify the consistency of the findings.
The disparity in payout levels among firms leads to significant variations in capital distribution, with some companies opting for generous payouts while others allocate minimal funds to maintain their policies Additionally, firms exhibit differing cash expenditures for dividends and buybacks, raising questions about how various groups rank within the conditional population.
11 to review, in which quantile regression is a suitable statistical tool to answer it (Koenker & Bassett,
In this study, we focus on completed share repurchase programs, utilizing quantile regression to effectively analyze censored data This method is particularly beneficial for examining the relationship between dividends and repurchase activities, especially in relation to the size of the buyback program By employing nonlinear quantile regression, we aim to ensure the accuracy of our findings regarding these financial dynamics.
Dividend change measurement
According to the study by Brown et al (2015), a comparison is made between actual dividend payments and their forecasted amounts, derived from prior dividends per share The analysis involves calculating the change in dividend payout using this method.
DDiv (t) = [ Div (t) – dps (t-1) * Outstanding (t) ] / MV (t-1) (1)
DDiv(t) represents the dividend change between year t and year t-1
Div(t) is the total money that company has spent for dividend payout at year t, dps(t-1) stands for the dividend per share in the previous year (t-1),
Outstanding(t) is the total outstanding share of the firm at year t
MV(t-1) is simply the market value of the firm in the last year
The author examines the relationship between repurchase yield and changes in dividend payouts by estimating the differences between current and previous dividend distributions By analyzing completed repurchases, the study aims to uncover any significant correlations between the amount spent on dividends and the company's financial practices.
The following multivariate regression model was used to test the insign relationship between capital distribution methods of listed companies in Vietnamese security market
Ryield t = a1+ a2 DDiv t + a3 DDiv t ^2 + a4 Cash t-1 + a5 MB t-1 + a6 Log(TA) t-1 + a7 Lev t-1 + error term(2)
Ryield Repurchase yield, defined as the total value of conducted repurchase divided by market value of equity in the corresponding year;
DDiv Change in dividend = (Current Dividend– Previous
Dividend)/Market capitalization in current year
Cash (Cash + Cash equivalent + short-term investment)/Total
MB_ratio Market to Book ratio = (Market value of Equity + Total
Asset – Book value of Shareholder equity) / Total asset
Log(TA) Logarithm value of Firm’s total asset -
Lev (Short-term debt + Long-term debt)/ Total Asset -
Table 2 outlines the definitions of key variables This study aims to examine the substitution hypothesis between share repurchase and dividend payout, anticipating a negative correlation between the testing variable Ryield and the main independent variable DDiv Specifically, an increase in share repurchase activities may lead to a decrease in dividend distributions in the current year compared to the previous yield Conversely, a significant positive coefficient could indicate an independent relationship or a complementary effect between these two variables in a firm's capital payout policy Additionally, the inclusion of the squared DDiv in the model will help investigate the potential nonlinear relationship between dividend payouts and share repurchase practices.
A positive cash variable indicates support for the free cash flow hypothesis, while stock buybacks signal to investors that a firm may be undervalued, resulting in a significant negative coefficient for Log(TA) Larger firms tend to provide clearer business information, reducing their undervaluation in the market The market-to-book ratio (MB_ratio) reflects a firm's future growth potential; if firms retain more cash for investment, their payouts decrease, leading to a negative relationship between MB_ratio and repurchases Additionally, firms with a high debt ratio have fewer resources available for share buybacks, as indicated by an expected negative sign for the leverage (Lev) variable.
This article explores the impact of state control and tax policy on firms' capital distribution decisions, focusing on the role of government ownership as a blockholder By classifying firms into two groups based on whether the government holds at least 5% of outstanding shares, we gain insights into their influence on business and managerial decisions Specifically, a group termed Gov5 is created, consisting of firms where the government acts as a blockholder, thereby possessing significant voting rights Notably, among 174 completed share repurchases, over half (92 buybacks) involved firms with government investment, highlighting the substantial role of state ownership in corporate financial strategies.
Approximately 90 to 98% of the firms analyzed had the state as a blockholder, owning at least 5% of the outstanding shares Notably, around 90% of these state blockholders (82 out of 90) possessed more than 10% voting rights To ensure a higher level of robustness in the analysis, a group named Gov10 was created, which included all state blockholders with at least 10% of outstanding stock The impact of tax will be assessed by examining the differing market reactions during the pre- and post-tax issue periods.
EMPIRICAL ANALYSIS
General Statistic
Table 3 provides a comprehensive overview of the characteristics of Vietnamese firms that implemented repurchase policies during the observation period Panel A highlights significant variability in repurchase yield (Ryield), indicating that buyback practices differ widely among firms Some companies allocate nearly 27% of their market value to repurchases, while others invest minimal amounts This disparity may stem from managerial intentions, as firms may buy back shares to simplify the management of outstanding shares or support employee stock option plans, rather than focusing solely on distribution Additionally, the negative mean and median of changes in dividends (DDiv) suggest that, on average, firms are likely to pay lower dividends than anticipated, with the reduced dividend payments potentially being redirected towards share repurchases, indicating a shift in payout strategies.
The analysis of the substitute relationship between payout policies reveals that key explanatory variables, including Cash, Mb_ratio, Ln_TA, and Lev, exhibit median values fluctuating around the mean However, the significant distance between their maximum and minimum values indicates a wide range of financial ratios among firms, suggesting that the observed sample effectively represents the entire market This variability may serve as a benchmark for the accuracy of future findings.
Variables Mean Median Maximum Minimum Std Dev Observations
- The dependent variable Ryield denotes Dividend Yield
- The key testing variable DDiv denotes Change in dividend = (Dividend t – Expected Dividend t)/Market capitalization
The controlling variable for cash is calculated as the sum of cash, cash equivalents, and short-term investments divided by total assets The Market to Book (MB) ratio is defined as the market value of equity plus total assets minus the book value of shareholder equity, all divided by total assets.
Log(TA) denotes Log value of Firm’s total asset; Lev : (Short-term debt + Long-term debt)/ Total Asset
Other information such as industrial and market distribution may be observerd from Panel
Listed firms on the Ho Chi Minh Stock Exchange (HOSE) demonstrate a strong preference for share buybacks, accounting for approximately three-fourths of all repurchase activities.
130 completed repurchases conducted in HOSE while its numberwas only 44 in HNX With the
In the Vietnamese market, larger firms are predominantly listed on the HOSE, while SMEs are more commonly found on the HNX, suggesting that companies with greater capital are more inclined to engage in share repurchase activities Industrial firms lead in share buyback initiatives across both markets, accounting for 62 out of 174 total observations Following them, consumer service enterprises on the HNX have completed 10 share repurchase campaigns, whereas the consumer goods sector on the HOSE has been more active, with 44 completed buyback activities.
The p-value are reported in parentheses
- The dependent variable Ryield denotes Dividend Yield
- The key testing variable DDiv denotes Change in dividend = (Dividend t – Expected Dividend t)/Market capitalization
The controlling variable for cash is calculated by dividing the sum of cash, cash equivalents, and short-term investments by total assets Additionally, the Market to Book (MB) ratio is determined by the formula: (Market value of equity + Total assets - Book value of shareholder equity) / Total assets.
Log(TA) denotes Log value of Firm’s total asset; Lev : (Short-term debt + Long-term debt)/ Total Asset
Table 4 reveals significant correlation coefficients between dependent and key testing variables Notably, cash and leverage (Lev) exhibit a strong negative correlation of -0.451, indicating a robust relationship between a firm's capital and its debt ratio This negative correlation suggests that higher leverage levels lead to increased debt obligations, thereby reducing available cash Additionally, the market to book ratio (MB_ratio) demonstrates the strongest correlation among the explained and tested variables.
Variables RYIELD CASH(-1) MB_RATIO(-1) LN_TA(-1) LEV(-1) DDIV
16 connection to explained variable, Ryield, at -0.269 In detail, MB_ratio is negative significantly to repurchase yield (Ryield), while it is insignificant for the main tested variable, DDiv
Table 5 illustrates the distribution of completed share repurchases based on varying degrees of change in dividends (DDiv) Among the 174 completed buybacks, the data reveals two distinct groups, forming two inverted U-shaped patterns The left group indicates a decrease in dividends, where firms are paying less than expected, while the right group reflects an increase in dividend payouts Notably, firms employing a lower dividend strategy account for the highest proportion, with 55% of repurchasing firms responsible for 44.25% of repurchase activities when dividends decrease by 0% to 10% Activity then slows at the 0% mark before transitioning to the second inverted U-shape, where firms that increase dividends from 0% to 10% of the expected value peak at 32.76% of total repurchases.
Table 5: Distribution of Share repurchases by the Change in dividend (DDiv)
DDIV No of Repurchase % Rep Average Ryield % firm
- The dependent variable Ryield denotes Dividend Yield
- The key testing variable DDiv denotes Change in dividend = (Dividend t – Expected Dividend t)/Market capitalization
A better imagination may be revealed through Figure 1 as belows, for a clearer overview of their relationship It may be a preliminary evidence of non-linear results
Figure 1: Distribution of Share repurchases by the Change in dividend (DDiv)
Substitution and Complementary effects between share repurchases and dividends
The Hausman test indicates an insignificant P-value at 10%, suggesting that the null hypothesis of "individual specific effects are random" cannot be rejected Therefore, it is appropriate to use random effects for panel regression analysis.
The ten-year timeframe is significantly smaller than the cross-section, which includes approximately 174 repurchase observations; therefore, this sample size is statistically inadequate for implementing the Period Random Effect Consequently, Cross-section Random Effects are appropriate for examining the relationship between the explanatory variables in this study The primary analysis of the nonlinear relationship through panel regression will be presented in Table 6.
Table 6 reveals a significantly positive nonlinear relationship between the change in dividend (DDiv) and share repurchase, with coefficients for DDiv and DDiv^2 at 0.051 and 0.212, respectively, significant at the 5% and 1% levels This finding supports the complementary hypothesis, indicating that dividends and share repurchases are independent methods of distributing earnings The F-statistic's P-value is below 1%, confirming that the explanatory variables collectively influence the dependent variable Most explanatory variables align with expected signs, although Cash shows a negative sign, contrary to expectations Notably, the MB_ratio is significantly negative at -0.015, supporting the notion that firms may opt to retain cash for future growth rather than distribute it.
Table 6: Panel regression for the relationship between share repurchase and dividend payout
Variable Coefficient Std Error t-Statistic Prob
Hausman Test Chi-Sq Statistic Chi-Sq d.f Prob
Note: ***, **, and * denote statistical significance at the 0.01, 0.05, and 0.1 levels, respectively.
- The dependent variable Ryield denotes Dividend Yield
- The key testing variable DDiv denotes Change in dividend = (Dividend t – Expected Dividend t)/Market capitalization
The controlling variable for cash is calculated using the formula (Cash + Cash equivalents + short-term investments) divided by total assets Additionally, the Market to Book (MB) ratio is determined by the equation (Market value of equity + total assets - book value of shareholder equity) divided by total assets.
Log(TA) denotes Log value of Firm’s total asset; Lev : (Short-term debt + Long-term debt)/ Total Asset
The result then be rechecked by several robustness as follow.
Robustness test
To enhance the accuracy of the panel regression test results, several robustness conditions were incorporated, as detailed in Table 7 The first model (1) analyzes a subsample of firms that distribute dividends and engage in share repurchases, identified by Dummy_Div = 1 In model (2), additional conditions regarding varying tax levels (Tax_0 = 1 and Tax_0 = 0) are applied alongside Dummy_Div = 1 This approach considers the Vietnamese government's temporary zero tax policy during economic recessions, aimed at supporting individual investors who often lack voting rights compared to dominant blockholder investors Furthermore, the influence of government control on firms' payout policies is evaluated through the lens of state blockholders.
In tests (3) and (4), the analysis focuses on groups with outstanding shares above 5% and 10% (Gov 5 and Gov 10) To ensure the study's consistency, Tobit regression is employed in test (5) due to the censored nature of the dependent variable's observation range The robustness tests presented in Table 5 reveal that the coefficient signs and qualitative results closely align with those from the panel regression tests across most conditions.
The positive correlation between DDiv and DDiv^2 with repurchase yield, observed in models (3), (4), and (5), suggests that Vietnamese state enterprises continue to favor high dividend payout policies even during periods of elevated tax rates This strategy aims to bolster shareholder confidence, indicating that the firm remains financially robust and capable of generating returns on investments (Kien and Chen, 2020).
To enhance the understanding of repurchase activity, the Repurchase Ratio (Rep_ratio) will be utilized as the dependent variable in the main model, providing a broader perspective on the relationship between repurchase actions and dividend payouts The Repurchase Ratio is calculated by dividing the total volume of shares repurchased by the outstanding shares of the firm prior to the buyback This straightforward ratio is commonly used by investors and researchers to gain immediate insights into the impact of financial announcements on a firm's condition The test results are presented in Table 8 below.
Table 7: Robustness by different conditions for the relationship between share repurchase and dividend payout
Note: ***, **, and * denote statistical significance at the 0.01, 0.05, and 0.1 levels, respectively.
- The dependent variable Ryield denotes Dividend Yield
- The key testing variable DDiv denotes Change in dividend = (Dividend t – Expected Dividend t)/Market capitalization
- The controlling variable Cash: (Cash + Cash equivalent + short-term investment)/Total asset; MB_ratio denotes Market to Book ratio = (Market value of Equity
+ Total Asset – Book value of Shareholder equity) / Total asset; Log(TA) denotes Log value of Firm’s total asset; Lev : (Short-term debt + Long-term debt)/ Total Asset
Cross-section random Yes Yes Yes Yes Yes
Table 8: Robustness test using Repurchase ratio as explained variable
(2) Dummy_Div = 1 Variables Coef t-value Sig (P) Coef t-value Sig (P)
Cross-section random Yes Yes
Note: ***, **, and * denote statistical significance at the 0.01, 0.05, and 0.1 levels, respectively.
- The dependent variable Ryield denotes Dividend Yield
- The key testing variable DDiv denotes Change in dividend = (Dividend t – Expected Dividend t)/Market capitalization
The controlling variable for cash is calculated as the sum of cash, cash equivalents, and short-term investments divided by total assets Additionally, the Market to Book ratio (MB_ratio) is determined by taking the market value of equity plus total assets, subtracting the book value of shareholder equity, and then dividing by total assets.
Log(TA) denotes Log value of Firm’s total asset; Lev : (Short-term debt + Long-term debt)/ Total Asset
Table 8 demonstrates consistent results whether using repurchase yield (Ryield) or repurchase ratio (Rep_ratio) as the dependent variable in the panel regression test Specifically, DDiv and DDiv^2 show positive significance at 5% and 10% levels (0.034 and 0.063), while MB_ratio exhibits a negative significance of -0.01 at the 1% level Additionally, the repurchase ratio test indicates a negative significant coefficient of -0.031 for the Leverage (Lev) variable at the 10% level, suggesting that firms may reduce repurchase spending when facing higher liability obligations Furthermore, applying a condition where firms engage in both dividends and repurchases in the same year (Dummy_Div =1) yields results quantitatively similar to the original group.
22 confidence to the found result about the complementary relationship between firm's share repurchase and dividend payout
The discovery of nonlinear effects in the model prompts an investigation into whether different treatments exist across various groups or ranges of the observed sample To explore potential hidden dynamics, quantile regression is employed.
Quantile regression analysis reveals a significant negative relationship between the DDiv variable and repurchase yield at higher quantiles, specifically at the 10% level for the 65th quantile and at the 1% level for the 70th quantile and above This indicates that for firms with high repurchase yields, there is an inverse correlation between repurchase yield and dividend payout, suggesting that these firms may prioritize a shift between their funding distribution policies.
It may become the evidence for the existence of substitution relationship between share repurchase and dividend payout applied by Vietnamese firms
The analysis reveals a strong complementary effect among firms favoring lower repurchase yields, as indicated by the positive correlation of DDiv and DDiv^2 in the full sample In contrast, upper-level quantiles show a negative-positive relationship, highlighting the dominance of the complementary approach in understanding share repurchase behavior within the Vietnamese stock market.
The market to book ratio (Mb_ratio) consistently demonstrates a significant negative relationship with repurchase yield across all quantiles, strongly indicating that Vietnamese firms prioritize future investment plans over buyback activities Additionally, the cash variable reveals a negative significance at the 70th quantile, contradicting the anticipated positive correlation and thereby undermining the free cash flow hypothesis in this study.
Table 9: Quantile regression for the relationship between share repurchase and dividend payout
Note: ***, **, and * denote statistical significance at the 0.01, 0.05, and 0.1 levels, respectively.
- The dependent variable Ryield denotes Dividend Yield
- The key testing variable DDiv denotes Change in dividend = (Dividend t – Expected Dividend t)/Market capitalization
- The controlling variable Cash: (Cash + Cash equivalent + short-term investment)/Total asset; MB_ratio denotes Market to Book ratio = (Market value of Equity
+ Total Asset – Book value of Shareholder equity) / Total asset; Log(TA) denotes Log value of Firm’s total asset; Lev : (Short-term debt + Long-term debt)/ Total Asset
CONCLUSION
This study addresses the previously unexplored non-linear relationship between various capital distribution policies of Vietnamese listed firms The panel regression analysis reveals a dominant complementary effect between share repurchase and dividend payout policies Robustness tests confirm these findings across different conditions However, quantile regression indicates that firms with high repurchase yields exhibit a substitution relationship, where dividends and repurchases are interchangeable Conversely, the complementary approach significantly influences firms in the lower quantile group.
The signaling and free cash flow hypotheses appear to have a minimal impact on the relationship between payout methods However, the research indicates that Vietnamese firms are significantly mindful of their future growth when making share repurchase decisions Ultimately, there is still room for improvement, which presents opportunities for future research.
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