Economic factors as determinants of stock prices in viet nam

Title of Research : ECONOMIC FACTORS AS DETERMINANTS OF STOCK PRICES IN VIET NAM Name and Address of Institution : Southern Luzon State University, Lucban, Quezon, Philippines and Thai

i

A Dissertation Presented to the Faculty of the Graduate School Southern Luzon State University, Lucban, Quezon, Philippines

in Collaboration with Thai Nguyen University, Socialist Republic of Vietnam

This is to certify that the research work entitled “ECONOMIC FACTORS

AS DETERMINANTS OF STOCK PRICES IN VIETNAM” orally

defended/presented under the DBA program jointly offered by Southern Luzon

State University of the Republic of the Philippines and Thai Nguyen University

of the Socialist Republic of Vietnam, embodies the result of original work carried

out by the undersigned

This dissertation does not contain words or ideas taken from published

sources or written works by other persons which have been accepted as basis

for the award of any degree from other higher education institutions, except

where proper referencing and acknowledgement were made

NGUYEN QUYET (Tommy)

Date Orally Defended: October 2018

iii

The author extends her sincere and deepest gratitude and appreciation

to the following persons who made significant contributions in the completion of

this dissertation:

Dr Milo O Placino, President of the Southern Luzon State University

in the Philippines and chair of the oral examination committee, for invaluable

contribution to the development of Doctor of Business Administration program

in Thai Nguyen University;

Dr Nguyen Duy Hoan, Director of the International School, Thai

Nguyen, for his precious and wholehearted assistance and encouragement;

Dr Joanna Paula A Ellaga, research adviser, for her valuable advice,

constructive criticisms, and encouragement; for sharing her sheer intelligence;

for helping the researcher to grow and have her skills;

Dr Chona V Cayabat, Dr Moses T Macalinao, Dr Eriberto A Casiño, and Dr Flormando P Baldovino, oral examination committee, for

their interest in this work, inputs, and for their valuable suggestions for the

improvement of this study;

Professors of Thai Nguyen University in Vietnam and Southern Luzon

State University in the Philippines, for their insightful lectures in the different

subjects that provide the researcher knowledge and technique to develop a

good research; and my parents, my wife and my friends who have supported

in all of the circumstances, for sharing ups and downs of everything during this

work

NQ

iv

This piece of work is humbly dedicated to my colleagues and fellow

instructors, my students, my family and my relatives,

my friends, my wife, and my children…

NQ

-

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PAGE

TITLE PAGE ……… i

APPROVAL SHEET ……… ii

CERTIFICATE OF ORIGINALITY ……… iii

ACKNOWLEDGEMENT ……… iv

DEDICATION ……….………… v

TABLE OF CONTENTS ……….………… vi

LIST OF TABLES ……… viii

LIST OF FIGURES ……… ix

ABSTRACT ……… x

CHAPTER I INTRODUCTION ……….……… 1

Background of the Study ……….… 3

Objectives of the Study ……… 4

Significance of the Study 5

Scope and Limitation of the Study ……… … ………… 6

Definition of Terms ……….………… 7

II REVIEW OF RELATED LITERATURE …… ….…… 10

Conceptual Framework ……… 27

III RESEARCH METHODOLOGY ……… 29

Locale of the Study ……….………….… 29

Research Design ……… 29

Population, Sampling Frame and Sample Size ………… 31

Research Instrument ……….…….… 32

Data Gathering Procedure ……….…… 32

Statistical Treatment ……….… …….…… 33

IV RESULTS AND DISCUSSION ………… ……… 42

vi

RECOMMENDATION

Summary ……….……….……… 71

Findings ……… 72

Conclusions ……… 73

Recommendations ……… 74

REFERENCES ……… ……… ……….…….…… 77

APPENDICES ……….…… 83

A Computations ……….….… 84

B Plagiarism Check: Originality Report ……… 90

CURRICULUM VITAE ……….…… 91

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TABLE PAGE

4 The Results of Static Panel Estimations ……… 58

5 The results of LM test ……… 59

6 The results of Hausman test ……… 60

7 Test for heteroskedasticity ……… 60

8 Test for serially correlated ……… 61

9 Results of re-estimations ……… 61

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FIGURE PAGE

1 The Conceptual Paradigm of the Study ……… 27

2 Unemployment rate from 2011 to 2017 ……… 42

3 Inflation rate from 2011 to 2017 ……… 43

4 Interest rate from 2011 to 2017 ……… 45

5 Money Supply from 2011 to 2017 ……… 45

6 Profit of Companies Listed on HNX and HOSE (2011- 2017) 46 7 The debt of financing on HNX and HOSE from 2011 to 2017 47 8 The growth of company on HNX and HOSE from 2011 to 2017 ……… 49

9 Asset structure of company on HNX and HOSE (2011 to 2017) ……… 50

10 Dividend payout ratio of company on HNX and HOSE (2011-2017) ……… 50

11 The firm size on HNX and HOSE from 2011 to 2017 ……… 51

12 The trend of stock prices from 2011-2017 ……… 52

13 The Framework for the Stock Prices Determinant in Vietnam 66 14 The simulator screen ……… 69

15 The demo result ……… 69

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Title of Research : ECONOMIC FACTORS AS DETERMINANTS OF

STOCK PRICES IN VIET NAM

Name and Address

of Institution

: Southern Luzon State University, Lucban, Quezon, Philippines and Thai Nguyen University, Socialist Republic of Vietnam

Keywords : Macroeconomic factors, Stock prices, Ho Chi Minh stock

exchange, pooled OLS, fixed effects model, random effects model, GMM

This study was conducted to determine the relationship between

selected macroeconomic factors, microeconomic factors, past prices and stock

prices in Vietnamese companies as a target as well analyzing the trend of stock

prices for the period 2011-2017 The research analyses, also, the status of Viet

Nam in terms of macroeconomic factors such as unemployment rate, inflation

rate money supply and interest rate In addition The thesis develops a

framework for stock prices determinant For the purpose, 798 companies listed

in the Ho Chi Minh and Ha Noi stock exchange for the period 2011-2017 were

used as surrogate variables The quantitative methodology is used in this study

to analyze More details, the static panels estimation techniques, as results,

there are two macroeconomics variables (money supply, inflation) and five

microeconomic variables (roe, size of company, assets structure, growth of

company, dividend payout ratio) which influence over the stock prices whereas,

in the dynamic panels estimation

x

techniques, there are two macro economic variable and two microeconomic

variables impacting to the stock prices Interestingly, this study indicates that

previous stock prices influence on the current stock prices This study

contributes to literature by providing more clarification of relationship between

stock prices and macroeconomic variables in a developing country

xi

1

Chapter I INTRODUCTION

In the process of advancement, the stock market plays a vital role in the

modern economy because it is regarded as a mediator between lenders and

borrowers It is generally agreed that a well-functioning stock market may help

the development process in an economy through the two important channels

which are boosting the savings and allowing for a more efficient allocation of

resources Leigh (2012) pinpointed that savings are presumed to increase as

the stock market provides households with assets that may satisfy their risk

preferences and liquidity needs

Nowadays, the capital market is a key role in market economy It helps

to move the capital from people who have the excess capital to lack of one in

long run This is a one of necessary factors to develop economy So, to gain

the thrive economy, capital market has to operate efficiently Mysami, Howe

and Hamzah (2004) state that stock market will fastly adjust via the significant

information Thus, stock market will reflect almost information related on the

market It means that the investors is not easy to get profits from various

information, and, to predict trend of the stock price According to Efficient

Market Hypothesis (EMH), stock prices reflect all available information and also

profit expectation of companies and investors Clearly, if the hypotheses are

satisfied in practice, they are applied as benchmark index for operation of

economy Therefore, the nexus stock price and the macroeconomic variables

which are used to create the policies in the nation

The existing literature provides a number of theories illustrating the link

between stock market behavior and economic activity as proxied by different

macroeconomic variables Among these theories are the efficient market

hypothesis (EMH) and asset pricing theory The EMH implies that stock market

prices fully and rationally incorporate all relevant information Thus, past

information is useless in predicting future asset prices For that reason, only

new, relevant information is used to explain stock market movements Asset

pricing theory such as the arbitrage price theory (APT), and the Present Value

Model (PVM), illustrates the dynamic relationship between the stock market and

economic activities (Ahmed, 2008)

Over the past a few decades, there are the range of empirical studies

which have analyzed dynamic relationships between stock market behavior and

economic activity, particularly for developed stock markets such as the U.S,

United Kingdom (UK), Germany, Japan and Australia Related studies are

different in terms of their hypotheses and the methods used Several studies

investigated the predictive power of stock returns for real economic activity

These studies stress the issues of market efficiency, or the existence of the

efficient market hypothesis

A large body of research focuses on the integration of stock markets

across economies Other previous studies have examined the short and long

run relationship between stock prices or returns and some macroeconomic and

financial variables such as inflation, interest rate, output, etc Within this group

of studies, some studies seek to examine the local and international economic

factors that affect stock prices or returns, while others examine factors that

determine the stock return volatility (Ahmed, 2008) Some other explores the

role of monetary policy in responding to or altering the stock market

Like developed stock markets on the over world, Ho Chi Minh and Hanoi

stock market is more or less influenced by above macro economic variables

However, this stock market is a young one with many distinct characters Thus,

the results of influences may be difference compared with other stock markets

In addition, majority of the studies focused essentially on developed countries,

and at a lesser extent in Viet Nam There is a lack of empirical investigations

studying the link between stock prices and macro- economic variables Due to

the fact that, the topic relationship of selected macroeconomic factors and stock

prices in Viet Nam is chosen to analysis in more depth This study is expected

to offer some insights for the Viet Nam policymakers, shareholders, and

portfolio managers

Background of the Study

Usually, stock prices are determined by fundamental macroeconomic

variables such as the interest rate, the exchange rate and the inflation Investors

believed that monetary policy and macroeconomic events have large influence

on volatility of stock prices This means that macroeconomic variables influence investors’ investment decision and motivates researchers to investigate the

relationships between the share price and macroeconomic variables There is

a need to do further econometric studies to seek out new determinants of stock

prices If we believe that stock market is efficient, then any attempt to explain

stock prices based on current and past information will be fruitless

The determinants of stock prices can be determined from different points

of view A line of researchers have found the relationships between

stock prices and few factors which could be either internal or external The

findings were different depending on the scope of the study Some authors

concluded that company fundamentals such as earning and valuation multiple

are major factors that affect the stock prices Others indicated that inflation,

economic conditions, investor behavior, the behavior of the market and liquidity,

are the most influencing factors of stock prices Moreover, the effect of

interrelated factors has been covered in some other studies This study is the

first attempt to deal with two types of factors effecting stock prices, one is

internal factors (company fundamentals), and the other is external factors

(macroeconomic) The focus of the study is on the combined analysis of both

types of factors Thus, the analysis is being done in the closed economy,

keeping constant the external impact The identification of the factors is

important for investors particularly and for policy makers and officials generally

Objectives of the Study

The general aim of this study is to analyze the economic factors as

determinants of stock prices in Viet Nam, more specifically:

1 To describe and analyze the status of Viet Nam in terms of the following

macroeconomic factors for the period 2011-2017

1.1 Unemployment Rate

1.2 Inflation Rate

1.3 Interest Rate, and

1.4 Money Supply

2 To present and analyze the following microeconomic factors on companies

listed in the Ho Chi Minh and Ha Noi stock exchange for period 2011-2017

4 To reveal any relationship between the factors and the stock prices in Viet

Nam in terms of macroeconomic factors, microeconomic factors

5 To determine if there is a relationship between the current stock prices and

previous one

6 To develop a framework for the stock prices determinant and the simulator

of stock prices in Viet Nam

Significance of the Study

With this research undertaking, it is expected to make some significant

contribution to the following concerned units:

First, it will extend the literature by examining the relationship of the stock

prices with a set of macroeconomic variables in a unique emerging market, the

Ho Chi Minh and HaNoi stock market

Second, this study will apply different econometric methods, which may

provide insight for the existing literature if the analysis is sensitive to methods

employed The model which will be developed is projected to measure

relationship between stock prices and economic factors

Third, the salient findings of the study can be considered as a reference

material to decision-making of shareholders and portfolio managers

From an empirical perspective, this is perhaps the first paper in the

Vietnamese context to apply the static panels estimation techniques and

dynamic panel estimation techniques to examine the relationship between

stock price and macroeconomic variables

Scope and Limitation of the Study

Obtaining and collating data for the research was one of the mitigating

factors for this research The data on stock prices and other macro-economics

variables were used from January 2011 to December 2017 which may not

reflect the whole effects of the macroeconomic variables on the stock prices

since the data is limited to the year 2011 and above and not from the inception

of the Ho Chi Minh and Ha Noi stock market Furthermore, there are several factors not inputted in the model such as GDP, investors’ behaviors, information

although they are very significant

The major limitation of the dissertation is the use of year data as a proxy

for economic activity such as stock prices This situation is of course due to the

non-availability of variables such as money supply, inflation and unemployment

at shorter time intervals It would have been of interest to use monthly data as

such a time scale may have found the relationship significant Using monthly

statistics rather than year will give significant results

Different firms (industries) has different factor structure as the likely

source of impact in terms of the macroeconomic variables For example, the

banking industry stocks are heavily affected by interest rates because their

business is selling money Similarly, oil industry stock is largely affected by

crude oil prices However, this thesis cannot cover all variables so additional

extraneous variables could be associated with stock prices, and the inability to

measure or control the extraneous variables was a limitation for the study

This research was limited to the macroeconomic variables ranging from

January 2011 to December 2017 The limitation of 2011 and later years was

appropriate because during 2011 and earlier, i e 2008-2009 the recession

caused huge macroeconomic variables fluctuations

This quantitative study involved companies that listed in HOSE and HNX

between January 2011 to December 2017, but the sample size is relatively

small It may not present all behaviors of the companies so that performing a

study for Vietnamese stock exchange only was feasible than conducting a

research of all companies across the country including HOSE and HNX

Definitions of Terms

This section gives the key variables that were used in this study and

show how the variables were determined or calculated

Asset structure is the proportions of various types of asset held by a firm as

shown in the balance sheet Asset structure shows how the firm's asset

base is distributed in different asset categories

Debt of financing is a leverage, the higher the firm is financed with debts, the

lower the dividend payout due to debt covenants

Dividend payout ratio is the portion of income distributed among ordinary

shareholders

Firm Size relates to large firms pay more dividends as they have easy access

to capital market to raise funds and low dependence on internal funds Firm size can be determined by natural logarithm of book value of the firm’s total assets (Segarra, 2012)

Growth of company is where the more a firm has positive NPV projects to

finance, the more company retains income and pays less as dividend

Inflation is a measure that examines the weighted average of prices of the

basket of consumer goods and services

Interest rate refers to a specified amount of money paid by institutions on the

use of cash deposits over a period of time

Macroeconomic factors The macroeconomic factors are elements in the

environment that affect the stock price (Binswanger, 2000) The macro-

economic factors such as, unemployment, and inflation rate, money

supply, interest rate affect stock market (Fedorova & Pankratov, 2010)

Microeconomic variable Microeconomic variable is a third variable which

modifies an original relationship between the independent and the

dependent variables (Sekaran & Bougie, 2011) The microeconomic

variable is evident when the relationship between the independent and

the dependent variables become contingent on another variable

Money supply (M2) is a measure of total money supply including everything in

M1 and also savings and other time deposits

Profitability of firm influences share prices but a different view is found in

existing literature

Stock price in the present study, is an arithmetic means of the high and low

market prices of shares during the financial year of the firm were taken

(Sharma, 2011)

Unemployment rate measures the percentage of the individuals who are out

of the workforce and are actively looking for a job

10

Chapter II REVIEW OF RELATED LITERATURE

This chapter presents literature on theories and models about earnings

and other determinants of share prices The section also examines empirical

findings both internationally and locally and gives measures of key variables

used in the study To narrow and retrieve the relevant information, the study

involved the relevant searches, viz unemployment rates, stock prices, money

supply, profit, firm size, and macroeconomic factors, and moderating factors

Efficient Market Theory

In a perfect market, the price of a stock is the fair value of the stock

incorporating all current and available information (Ahmed, 2008; Lee, Chien-

Chiang; Tsong, Ching-Chuan; Lee, Cheng-Feng, 2014) The efficient market

theory stated that the stock price reflects all the available information and thus,

it is impossible for investor to outperform market with insider information

(Brown, 2011) According to Boonyanam (2014), the efficient market theory

emphasized that stock prices can move randomly and predicting the stock price

is not a possibility Asbell and Bacon (2010) suggested that company insiders

with non-public information outperform the market and make profits

However, Brown (2012) indicated that countless studies have reflected

that information integrates quickly in the stock market If no investor can

outperform the market, then every trader should make profits in stock market

because the available information is accessible to everyone Unfortunately,

there are winners and losers in the stock market and as a result, the science of

predicting the stock price has been on the rise Investors seek money

managers and financial analysts for investment advice, which puts efficient

market theory in question Zingales (2012) wondered why investors pay for

investment advice when in fact, the stock prices are unpredictable, and it is

impossible to outperform the market The stock prices incorporates all the public

and private information available in the market (Dritsaki, M, 2008) If the stock

market incorporates all available information, then the unemployment

information is also included in the stock price However, the information that

determines the stock price can range from a single piece of information to

combinations of information Thus, there was need to understand specifically

how unemployment information relates to the stock price

Keynesian Theory

Keynesian theory is an economic concept which suggested that the total

spending in the economy affects its output and inflation (Opuszka & Fraguas,

2014) The unemployment and inflation affects consumer spending (Gatti,

2009) Unemployment affects aggregate demand, inflation, and general

production In Keynesian economics, aggregate demand is achievable by

taking economic measures by government authorities (Bruce, 2011) Bruce

further suggested that the Keynesian economists propose that government

interventions in bad economic times can help stabilize the economy During

short runs, Keynesian theory proposed that measures such as low wages could

increase employment, which can help stabilize the economy

Higher unemployment is a result of bad recession (Mortensen, 2014) To

curb the effects of unemployment in a recession, the government may take

measures to stimulate the economy (Airaudo et al., 2015) In the 2008-2009

recession, the government issued taxpayers with stimulus checks to increase

customer spending (Blinder & Zandi, 2010) According to Bruce (2011), the

government spending increases aggregate demand reducing unemployment

and deflation Bruce further suggested that consumer spending stimulates the

economy by enhancing money circulation and enabling companies to stay in

the market Without consumer spending, companies will collapse because they

could fail to sell their goods or services hence incurring losses leading to closure

(Brinkley, 2011) Brinkley further suggested that in a bad economy, companies

manufacture products but fail to sell the products because the consumers have

no money to spend

In the 2008-2009 recession, many people were unemployed leading to reduced consumer spending which triggered the government to issue stimulus checks to boost consumer spending (Kaplan & Violante, 2014) The United States government bailed out General Motors and other companies to ensure they kept the employees at work (Klier & Rubenstein, 2013) The government bailout was a measure to halt the downturn economy that was going down into

a deeper recession Though the United States government bailed out big companies and issued the stimulus package, it took a long time before the economy stabilized Unemployment affects consumer spending which affirms the performance of company (Gatti, 2009) Companies lose their competitive advantage and closedown if consumers do not buy their products or services (Brinkley, 2011) Gatti suggested that consumers buy products or services if they have money for expenditure Because unemployment is one of the major sources of income, unemployed people could have limited resources and money to purchase what they need Gatti suggested that unemployment leads

to low consumer spending which affects the performance of a company

The performance of company plays major role to investors in predicting

the stock prices (Shamsudin et al., 2013) If a company performs poorly, the

investors will more likely predict that its shares will fall and as a result, the investors will sell the company’s stocks Alternatively, if company outperforms

the market by making more profits, more investors will buy its shares in hopes

that prices will rise In recent recessions (1929-1932; 2008-2009), investors

sold their investments as a result of poor performance of many companies

which led to low stock prices

Capital Assets Pricing Model

The Capital Asset Pricing Model (CAPM) integrates a single

macroeconomic variable, the return on the market, to return on individual stock through the value of the beta (β) It seeks to reduce systematic risk by using the

market return

Because of calculation difficulties, Habib (2008) extended Markowitzs

portfolio theory by developing a simplified portfolio selection model on second

stages of the portfolio selection process The model is also called the Market

Model or Single Index Model

Ri  i i I i (2.1) Where Ri: the return on security i, i ,i : parameters, i : random errors,

I: return on market index The benefit of this equation is that the covariance between pairs of assets can be estimated using the beta (β)

Blume and Friend (2007) examined the CAPM both theoretically and

empirically in greater depth what was done previously by the authors The

reason for this is market line theory does not adequately explain differential

returns on financial assets The empirical results cast serious doubt on the

validity of the market line theory in either its original form or as recently modified

On the other hand, their results show the linearity of the relationship for NYSE

stocks Blume and Friend (2007) concluded that the evidence in their paper

seems to require a rejection of the CAPM as an explanation of the observed

returns on all financial assets, if return generating process for common stocks

takes the general form

Arbitrage Pricing Theory

Roll and Ross (2014) provided a more intuitive explanation of the APT

and discussed its merits for portfolio management The APT is an alternative

approach to the CAPM that has become the major analytic tool for explaining

phenomena observed in capital markets

There are many multifactor assets pricing models developed in the

literature According to Sinclair (2014), all of the multifactor asset pricing models

developed in the literature can be considered as special theoretical cases of

the APT Roll and Ross (1980), Chen (2013), Chen, et al (2010), Clare and

Thomas (2013), Cheng (2014), Cheng (2007), Chen & Jordan (2013), Merville

et al (2001), Chen, et al (2012), Beenstock and Chan (2010), Cho et al

(2014), an Priestley (2011) Several empirical studies of APT using Australian

data, such as Sinclair (2014); Groenewold and Fraser (2012), Faff and Chan

(2007)

Comparison between the APT and the CAPM

The advances of the APT over the CAPM are extensively disseminated in

the literature First, in favor of the APT is that the APT makes no assumptions

about the empirical distribution of asset returns Second, the strong

assumptions made about utility theory in deriving the CAPM are not necessary

The APT also admits several risk sources and therefore can be more

operational and has a better forecasting ability than the CAPM There is no

special role for the market portfolio in the APT, whereas CAPM requires that

the market portfolio is efficient The APT is also easily extended to multiperiod

framework

Josev, et al (2001) concluded for Australian industry equity portfolios that “the results show that there is strong evidence in favor of the APT model”

In a recent study for Indian stock markets Ahmed (2008) concluded that the

“APT with multiple factors provides a better indication of asset risk and

estimates of required rate of return than the CAPM which uses beta as the single market of risk.” Boonyanam, N (2014) state that the APT remains the

newest and most promising explanation of relative returns The APT promises

to supply as with a more complete description of returns than the CAPM

General Disagreements and Contradictions of the APT

It can be disputed that the APT naturally out-performs the CAPM in a

statistical sense for two reasons: the APT permits more than a single factor and

the APT constructs the factors to best fit data whereas the CAPM uses a single

factor clearly defined by the theory If a researcher includes another

variable to explain returns, R2 can never be smaller with the added variable

(Groenewold& Fraser, 2012)

The most disappointing feature of the APT is that it does not identify the

common factors (nor even their number) Likewise, it is not justified by the theoretical foundations of the CAPM that describes the investors’ behavior

(Morel, 2001) Gilles and LeRoy (2009) state that the APT contains no useful

information about prices, because they think that the APT does not include any

clear restrictions and it can be thought as a too general asset pricing model

Nexus of Macroeconomic variables and Stock Prices

Inflation and stock prices The relationship between inflation and stock

prices is highly controversial Geske and Roll (2013) documented a negative

relationship between inflation and stock prices An increase in inflation has been

projected to increase the nominal risk-free rate, which in turn will raise the

discount rate used in valuating stocks If cash flows increase at the same rate,

the effect of a higher discount rate will be neutralized While if contracts are

nominal and cannot adjust immediately, the effect will be negative Also,

empirical evidence suggests that high and variable inflation rates increase

inflation uncertainty and lower share value Advanced research also supports

the hypothesis that stock returns are negatively related to both expected and

unexpected inflation rate However, the study conducted by Caporale and Jung

(2012) rejected the hypothesis that stock prices and inflation are negatively

correlated While other studies (Chatrath et al., 2012) and (Adrangi et al., 1999)

show only partially support to this hypothesis in developing stock

markets of India, Peru and Chile respectively Another study by Salameh (2012)

documented that there is no relationship between stock prices and inflation for

period of December 2013 to June 2011 in Jordan

Furthermore, Joo (2000) examined whether monetary policy accounts for

the negative relationship between real stock prices and inflation His evidence

suggests that about 30%of the observed negative relationship is attributed to

monetary innovations Also, Patra and Poshakwale(2006) found that short-run

and long-run equilibrium relationship exists between inflation and stock prices

for stocks listed at Athens stock exchange On the other hand, Zoicas and Fat

(2008) found that inflation rate has led to the estimation of significant

relationships to the variations of stock market The study by Suliaman et al.,

(2009) also found that whole sale price index is significantly and positively

related to stock prices Likewise, Antonio and Francisco (2009) examined the

short-run response of daily stock prices on the Spanish market to the

announcements of inflation news at the industrial level They observed a positive and significant response of stock returns in the case of “bad news” (total

inflation rate higher than expected one) in recession, and also in the case of negative inflation surprises (“good news”) in non-economic recession The

study conducted by Durai and Bhaduri (2009) tested the relationship between

stock returns, inflation and output for the post-liberalized period in India using

the wavelet methodology The findings showed that there is a strong negative

relationship between inflation and real stock return in the short and medium

term

Interest rates and stock prices The effect of nominal interest rates on

stock prices is also seen to be negative; the level of real economic activity

is expected to have a positive effect on future cash flows and thus will affect

stock prices in the same direction Lean and Smyth (2012) found that interest

rates are indicated in stock prices in the Jordanian capital market On the other

hand, Stoica e al (2014) concluded that there is a uni-directional causal

relationship between the interest rates and the general index of Athens stock

exchange, with direction from the interest rates to the general index of Athens

stock exchange

Also, Uddin and Alam (2007) examined the linear relationship between

share prices and interest rates, share prices and changes of interest rates,

changes of share prices and interest rates, and changes of share prices and

changes of interest rates on Dhaka stock exchange (DSE) They found that

interest rates have significant negative relationship with share prices and

changes of interest rates have significant negative relationship with changes of

share prices Zoicas and Fat (2008) analyzed the return series behavior of the

main index of Bucharest Stock Exchange (BSE) during different periods of time,

compared to evolution of some macroeconomic variables The results confirm

that there is a weak relation between interest rates and stock market index

Similarly, Alam and Uddin (2009) examined the impacts of interest rates on

stock exchange The stock market returns stationary is tested, and the findings

indicate that none of these stock markets follow random walk model (not

efficient in weak-form)

Money supply and stock prices The impact of the money supply on

the stock prices has been extensively disseminated in the economic literature

The money supply may affect the present value of cash flows via its effect on

the discount rate Although a strong relationship between the money supply

and the stock market prices has been determined, the effect of changes in the

money supply on stock market prices is still in argument, (Hamburger et al.,

2012; and Hashemzadeh et al., 2008) Hamburger and Kochin (2012) argue

that there is one answer to the questions of how money influences the stock

market or how the effects of money should be measured Likewise, the effect

of money supply on stock prices is explored by Mukherjee and Nake Since the

rate of inflation is positively related to money growth rate; an increase in money

supply may lead to an increase in the discount rate Therefore, the negative

effect on stock prices may be countered by the economic stimulus provided by

money growth (Mukherjee and Nake, 2014) Such stimulus often referred to as

a corporate earning effect, would likely result in increased future cash flows and

stock prices

Also, Sirucek, Martin (2012) found that short-run and long-run equilibrium

relationship exists between, money supply and the stock prices in Athens stock

exchange Other studies investigated macroeconomic factors as a source of

systematic risk, which determined expected stock market returns For instance,

Azeez and Yonezawa (2006) examined through the use of APT, the empirical

evidence of the pricing of macroeconomic factors in Japanese stock market

during the bubble economy; which enables them, first, to identify

macroeconomic factors that are a source of systematic risk, and second, to

compare the priced factors of the bubble period with the priced factors of pre-

and post-bubble periods They concluded that money supply risk factor is one

of four factors that have significant influence on expected returns Also,

Suliaman et al., (2009) showed that the money supply (M2) is significantly and

negatively related to stock prices

Another explanation advocates for the indirect channels of relationship

between changes in the money supply and share prices via real activity

According to this view, a positive money supply shock would positively affect

the aggregate economy, and hence, expected stock returns That is, higher

economic activity implies higher cash flows, which causes stock prices to rise

Also, decreasing the interest rate would cause the discount rate to fall, which

would increase the value of the stock One implication of the above ideas is that

investors could earn above normal profits by observing the behavior of money

stock (Ming-Way Li; Pi-Chu Wu, 2008) This result would contradict the EMH

since past information may be used to predict future stock prices

Unemployment and stock prices The unemployment news creates

mixed reactions on the stock market based on different phases of the economy

In a recession period, the news of high unemployment signals a reduction of interests’ rates, which attracts investors to buy more stocks (Belo et al., 2014)

Boyd et al further suggested that in economic expansion, the news of high

unemployment signals low corporate earnings that makes the investors to be

skeptical in investing, leading to a plunge of stock prices

Low unemployment could be a good sign to the economy and high unemployment could be a bad sign to the economy However, the central bank could intervene and adjust the interest rates to be able to minimize the effects

of unemployment Thus, instead of stock prices going down as a result of high unemployment, the stock prices could group because of the adjustment done

in monetary policy (Belo et al., 2014) According to Sims (2012), in recession period, central bank decreases interest rate vis-a-vis high unemployment Thus, informed investors seize the opportunity of retaining and buying more shares during high unemployment period because they are

aware that the interest rates could offset the effects of the recession The different reactions by investors to unemployment news trigger movements in the stock prices Thus, there is a need to understand the relationship between unemployment and the stock prices of companies

NEXUS OF MICROECONOMIC VARIABLES AND STOCK PRICES

Debt and stock prices While debt holders put on lesser control over

the organization, and do not influence how the business is run, they earn a fixed

rate of return and are secured by contractual obligations Contractual

responsibilities dictate what return is to be given due for the finance and when

it is unpaid Equity holders are the remaining claimants of all business returns,

knowing that most of the risk and having greater control decision making

(Kochhar, 2012)

Higher debt ratios could lead to optimistic management expectations and

is associated with future cash flows This therefore means that debt may result

to shifts in the share prices of securities in a firm and hence have a general

influence on financial performance of a firm (Miller, 2015) According to Jensen

(2010) debt has benefits for a company, for example it acts as a tax shield:

interest payments usually are not taxable; hence the debt can increase the

value of the firm which is another factor that benefits the debt disciplines

managers (Jensen, 2010) Managers use open cash flows of the company to

advance in projects, to pay dividends, or to hold on cash balance But if the firm

is not allotted to some permanent payments like interest expenses, managers

could have incentives to waste excess free cash flows That is why, to be able

to punish managers, shareholders should attract debt Besides, it is

a common practice and procedure in agreements of debt between borrowers

and banks to initiate some covenants of finance for firms Managers cannot

break these principles, and hence are bound to be more effective

Moreover, the law usually guarantees a right of partial information disclosure to the company’s debt holders, which acts as managers’ supervision

tool As a result, measures of managers become more apparent, and they have

more incentives to make higher value for the owners

Dividend payout ratio and share prices Dividend payout ratio which

is also known as revenue reserves which as opined by Kim and Suh (2010) is

the net income accumulated that is kept by an organization instead of

distributing to the shareholders as dividends, is one of the key retentions

created by organizations Retained earnings is the fraction of net profits that is

not distributed as dividends; however, the company retains to be reinvested in

its main business or to pay debt Dividend decision also involves the

determination of the percentage of the profits/earnings of a company to pay out

as dividend to stakeholders/shareholders or retained within the self- financing

firm (Onuorah & Ezeji, 2013)

Retained earnings and actual effects of monetary shocks was examined

by Doepke (2004) and submitted that another key feature of an economy is that

the business sector accumulates retained earnings and credits profits also

dividends to the customers and other stakeholders only with a delay This is

because the bottom line can only be verified at the end of the accounting year leading to proposing the arrears in year’s dividend, thus, the delay The study

concludes that retained earnings are of concern for the communication of

monetary policy because they influence overall balance

between different uses of economy and that organizational profits respond

faster to a monetary changes, while dividend payments adjust only after a

significant delay Since the shareholders own the firms, in a frictionless model,

they would consider retained earnings as equivalent to their own savings

Segal and Spivak (2010) conducted a study on maximum growth rate

and firm size through retention reinvestment and the study concluded that by

reinvesting them in the firm and retaining earnings and, the firm can amend the

parameters governing the process, reducing probability of disappearance and

increasing the probability of multiplication and Thus the decision of the firm

variable is the amount of the retained Daniel, Denis and Naveen (2007) did a

study to confirm that organizations manage earnings that is increasing when

they expect that earnings that are pre-managed will be lower than anticipated

dividend payments

They found that firms whose discretionary accruals cause the reported

earnings to go beyond expected dividend stages are significantly less likely to

hack dividends than are firms that have reported earnings that fall short of

expected dividend stages Collectively, they argue that their findings imply that

managers take care of level of expected dividend as significant earnings

threshold Thirumalaisamy (2013) studied on associations between retained

earnings and organizational growth and in India particular using correlation and

multiple regressions approach

Growth of company and share prices The growth of the company is

the change in the total assets from one year to next year (Lipson, Mortal, Schill,

2009), which is expected increase the share prices of the company

Due to fast growth of company experiencing a high level of competition, which

necessitates a fast reaction to economic changes (Harris & Mongiello, 2012)

Researchers who studies the positive relation between asset growth and

share prices include Llaboya and Agdredh (2013) from Nigeria, who found a

significant positive relationship between asset growth and share prices Also,

Ullad (2010) studied in Karachi stock exchange with the same conclusions

Size of the company and share prices The size of the company has

been one of the most commonly used factors in previous studies Various

researchers have argued that the size of the company is one of the factors that

have the largest influence on the share prices (Lloyd et.al, 2015; Holder et.al

2007; Hedensted & Raaballe 2006) Lloyd et.al (2015) and Holder et.al (2007)

used the natural logarithm of sales as a measurement of the size while

Daunfeldt et.al (2009) used the logarithm of the number of employees in order

to measure the size But in our case we would like to include a measurement

of size which includes the company’s market value

A third common measurement used to measure the size is the market

capitalization which was used by Al-Kuwari (2009) The market capitalization

incorporates the market value of the firm which is a great advantage since we

want to include both external and internal factors among the measurements of companies’ dividend policies and share prices However, market capitalization

has some drawbacks since it depends on the market value of the company’s

stock But practically all measurements of size have disadvantages For

example, previous studies have used sales as a proxy for size but some companies’ e.g banks may have billion in assets but won’t generate much

sales Consequently, nearly all measurements have some drawbacks and no

perfect way to measure size exists In this research, the size will be measured

using market capitalization even though we are aware of its potential

drawbacks According to Lloyd et.al (2015) it makes no difference whether the

size is measured in terms of sales, market value of equity since results should

be approximately the same

One of the first studies to incorporate the company size as a factor when

determining the relationship with dividends was Lloyd et.al (2015) They argued

that large firms have to pay higher dividends to reduce agency costs, because

large companies usually have more diverse shareholders Many studies have

thereafter confirmed the results (Hedensted&Raaballe 2006) Other

explanations to why larger companies tend to pay higher dividends have also

been provided Holder et.al (2007) state that larger firms have better access to

capital markets since they usually are able to provide high collateral This in

turn makes it possible to finance the company with debt at a lower cost

Consequently, they have better access to capital markets and can therefore

pay dividends more easily So that, the investors like these stocks that is the

reason for increase the stock prices

Profitability and share prices The higher the Roe, the more effective

it is for the company to use the equity capital, which means that the company

balances its equity with its borrowings to exploit its competitive advantage,

capital mobilization process, scale expansion The higher the ROE, the more

attractive the stock is The index is an accurate measure of how much money

is invested and accumulated This coefficient is often analyzed by investors for

comparison with other peers in the market, so refer to when deciding to

buy shares of a company When calculating this ratio, investors can evaluate

at specific angles as follows:

- Roe is less than or equal to bank interest, so if the company has a bank

loan equal to or higher than shareholder's equity, the profit generated is just to

pay interest on bank loans

- Roe is higher than bank interest, it must assess whether the company

has borrowed the bank and exploited all competitive advantage in the market

to be able to evaluate whether the company can increase the Roe rate in the

future or not Dung (2013) studied influence factor to stock prices of VN

Conclusion was drawn that profitability was positive factor on stock prices of

Vietnamese stock market

Assets structure on share price Thuy (2015) indicates that the asset

structure is measured by long-term assets over total assets Follow the static equilibrium model if a firm has a ratio high tangible assets will use more debt than a business high tangible fixed assets Because, enterprises have tangible fixed assets high will have lower bankruptcy costs in the event of bankruptcy

Some views and research results in the country indicate that enterprises with high proportion of fixed assets have opportunities to access with easier capital, business efficiency brings also higher than low those of fixed assets In addition, benefits from the tax shield from fixed asset depreciation This is a condition for increasing financial efficiency in enterprises

Conceptual Framework

Figure 1 The Conceptual Paradigm of the Study

In this research, researcher would like to make assumptions on how all these variables are going to contribute their effect on the Ho Chi Minh s’ stock

prices Thus, the framework spelt out the relationship between the interest and

inflation rates, money supply, unemployment as well as moderating factors

(independent variables) and stock prices (dependent variables)

From this comprehensive literature review, several key conclusions can

be drawn First, while existing theories posit a link between macroeconomic

variables and stock markets, they do not specify the type or the number of

macroeconomic factors that should be included Thus, the existing empirical

studies have shown use of vast range of macroeconomic and microeconomic

variables to examine their influence on stock prices

Second, while previous studies significantly improved the understanding

of the relationships between financial markets and real economic activity, the

findings from the literature are mixed given that they were sensitive to the

choice of countries, variable selection, and the period

Macroeconomic Variables

Interest rate Money supply Inflation Unemployment

Stock prices Moderating Variables

Profit Debt of financing Growth of company Assets structure Dividend payout Firm size

studied It is difficult to generalize the results because each market is unique in

terms of its own rules, regulations, and type of investors

Third, the panel data analysis was commonly used to examine the

relationships between stock prices and real economic activity However, there

is no definitive guideline for choosing an appropriate model

Finally, it is obvious that there is a shortage of literature concerning

emerging stock markets but is particularly lacking with regards to Vietnamese

market Therefore, this study will be the first empirical studies to consider the

relationships between the Vietnamese stock prices, especially Ho Chi Minh city

market and a set of macroeconomic variables from January 2011 to December

2017 The methods to analyze the data will be similar to the methods reviewed

in this chapter

29

Chapter III RESEARCH METHODOLOGY

This chapter contains information on the study including the research

design, the target population of the study, data collection method and analysis

techniques, sampling method applied in the research and measures of key

variables

Locale of the Study

The relationship between selected macroeconomic and microeconomic

variables on stock prices of listed companies on the HOSE (Ho Chi Minh City

stock market) and HaNoi stock market during the period of January 2011 to

December 2017 was investigated using a multiple regression approach with

strong balanced panel data

In this study, in addition to the investigation of the nexus between the

dependent and independent variables, it also examined whether the previous

stock prices influence on the current stock prices or not and how many lags in

this situation

Research Design

The primary purpose of this quantitative correlational study was to

determine the relationship between selected macroeconomic factors and stock

prices in Viet Nam The goal for a quantitative study is to collect facts and test

them to verify a theory (Leedy & Ormrod, 2010) According to Vogt (2007), the

goal of a qualitative research is to explore a behavior and develop new

knowledge or theory, which will require further testing using a quantitative