Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance FINANCE DISSERTATION ON HOW FIRM PERFORMANCE AFFECT THE DIVIDEND PAYOUT RATIO. EVIDENCE FROM VIETNAM LISTED FIRMS NGUYEN HUYEN TRANG ID No: 22080914 Intake 6 Supervisor: Asso. Nguyen Thi Phuong Hoa September 2022 DECLARATION This dissertation has been checked and verified for quality and completion by my appointed supervisor, Asso. Nguyen Thi Phuong Hoa Signature of Supervisor Asso.
Nguyen Thi Phuong Hoa Date: September 10th, 2023 EXECUTIVE SUMMARY Dividend payout ratio is always a controversial and complex topic. For each company, there will be different factors that affect the decision of what percentage of profit after tax to distribute to shareholders. Many researchers have conducted experimentations on the relationship between firm performance and dividend payout ratio, but the number of articles on emerging markets is very small. This research was conducted to study the impact of firm performance on the dividend payout ratio at 107 enterprises listed on the Vietnam stock exchange from many different industries in five years from 2018 to 2022.
The research uses a quantitative approach with the application of linear regression model using random effect model to find the influence of 6 dependent variables: return on equity (ROE), firm growth (FG), liquidity rate (LDR), financial leverage (LEV), firm size (SIZE) and equity growth (EG) to dividend payout ratio (DPR). The study found that ROE, firm growth and liquidity have a positive effect on dividend payout ratio. The financial leverage, firm size and equity growth variables have an inverse relationship with the dividend payout ratio. Liquidity ratios have a positive relationship with dividend payout ratio but the degree of influence is insignificant.
Among them, financial leverage and return on equity have the greatest influence on the dividend payout ratio. The conclusions of this study are consistent with hypotheses from signaling theory, agency cost and bird-in-hand theory. This research article can contribute in providing more information about the impact of firm performance on the dividend payout ratio in Vietnam. From there, it helps domestic and foreign investors to choose companies with large return on equity or i low debt utilization ratio to invest because these companies have high dividend payout ratios.
For businesses, they can offer dividend payment policies consistent with their financial indicators to attract more investors. Furthermore, this article can become a foundation for further research on dividend payout ratio in Vietnam with relation to macro factors. ii ACKNOWLEDGEMENT First of all, I would like to express my deepest gratuities to Banking Academy and the University of the West of England for giving me the chance to conduct this research. I am grateful for the prolonged support from my supervisor Assoc.
Nguyen Thi Phuong Hoa who made this work possible. Whenever I had problems or questions in my research, she was always ready to answer my questions. She continuously let me complete this paper on my own, but she also guided me when she felt I needed it. I must express my sincere gratitude to my parents and friends for their unwavering support and never-ending motivation during my years of study as well as during the process of conducting the research and writing this thesis.
Without them, this achievement would not have been possible. iii TABLE OF CONTENTS EXECUTIVE SUMMARY. iii TABLE OF CONTENTS. iv LIST OF TABLES.
vii CHAPTER I: INTRODUCTION. 8 CHAPTER II: LITERATURE REVIEW. Concepts and role of dividend payout ratio .1 Agency cost and the free cash flow hypothesis .2 Dividend clientele effect. The effect of profitability on dividend payout ratio.
The effect of firm size on dividend payout ratio. The effect of financial leverage on dividend payout ratio. The effect of firm growth on dividend payout ratio. The effect of firm liquidity on dividend payout ratio.
The effect of equity growth on dividend payout ratio. 21 CHAPTER III: METHODOLOGY. 26 CHAPTER IV: RESULTS .1 Breusch-Pagan test. 34 CHAPTER V: DISCUSSION AND CONCLUSION.
59 vi LIST OF TABLES Table 1: Data descriptives. 28 Table 2: Pearson correlations. 30 Table 3: Multi-collinearity problems using the VIF indicator. 32 Table 4: Breusch-Pagan test.
32 Table 5: Hausman test. 33 Table 6: Regression results for dependent variable. 34 vii CHAPTER I: INTRODUCTION 1. Research rationales A dividend is the payment of a company's profits to qualified shareholders.
A dividend is a payment made to shareholders as compensation for their ownership stakes in a firm, and it typically came from the latter's net earnings (Allen & Michaely, 1995). Although profits can be retained by the firm to be used for current and future business operations, a portion can be distributed to the shareholders as a dividend. There are many factors affecting the dividend policy of firms. For each company, they will have their own policy to allocate the dividend, and the dividend payout ratio can be called the measurement of that policy.
Asquith and Mullins (1983) showed that one of the main objectives of firms was to enhance the wealth of shareholders and the reflection of this is through dividend payment. They assumed that a positive impact on dividend payments is also likely to convey valuable information to investors. High dividend payment was important for investors because they could show some part about the company's financial well-being (Watts, 1973). Firm performance can be understood as how the company operates to fulfill the above objective through the growth in the business period.
Businesses use different metrics to measure their performance. It may be assessed based on the company's profitable-driven earnings, some common measurements used by researchers include: revenue, return on equity, return on asset, sale growth rate, profit margin, etc. Dividend payout ratio affects how much to pay to shareholders or how much profit to keep for reinvestment. Businesses must always carefully consider this payout ratio.
This affects whether the company can generate profits in the next operating period so that it can continue 1 to increase the prosperity of shareholders. Therefore, deciding the dividend payout ratio is a very important decision in corporate finance for each company. According to Afza and Mirza (2011), the understanding about the determinants of dividend policy helped researchers to find out the impacts of particular factors on firms. As the cash dividend payment could be classified as income of investors, the decision on dividend payment is crucial for the welfare of both companies and the economy as a whole (Romus et al.
In the same study, Asquith and Mullins (1983) also showed that in a low interest rate environment, dividend payments helped investors to get higher returns than the offered rates from fixed-income investments. The dividend-related problems are very controversial. There are some research papers on the relationship between dividend payout and firm performance. According to Amidu (2007), there was a negative relationship between firm performance and dividend payout rates in Ghana.
Lintner suggested that the change in dividend payout ratio depended on data from current and estimated future firm profits (1956). There are some theory and hypothesis support for the relationship between dividends and firm value, in both irrelevance and relevance aspects. Modigliani and Miller (1961) were among the first to develop the theory of dividends. They argued that in a perfect market with rational behavior, and zero taxes, dividend payout ratio and the future growth of firms did not have any relationship.
Changing the dividend payout ratio will not cause any change to the profitability of shareholders as well. Kinkki (2001); Bernstein (1996) and Benartzi et al. (1997) also gave similar results and support for this theory. However, this theory has also been disproved by many subsequent studies because the assumption of a perfect market is almost impossible with the existence of many other expenses 2 (Black and Scholes, 1974).
Ball et al. (1979) made empirical tests of M&M theorem that the model is “difficult to design and to conduct”. Abor and Bokpin (2010) questioned the reality of a perfect market in the presence of multiple costs like transaction cost, bankruptcy cost, unpredictable inflation or the taxes. An older theory applied in this regard is the “Bird-in-hand” which holds that dividends have an effect on firm performance.
This theory also makes judgments about investors' preferences, investors generally prefer cash dividends rather than uncertain future cash flows. Researcher believes that the company should offer a high dividend payout ratio so that investors have better expectations in the business, thereby maximizing corporate profitability. High dividend payout ratio means less risk of future cash flows, lower cost of capital and increased share value. Fisher (1961) researched on the UK financial market that dividend payout ratio had a greater and more significant influence on firm performance than retained earnings.
It can be seen that this theory and the theory of Modigliani and Miller are completely opposite. Some studies by Litzenberger and Ramaswamy (1979), Baker et al. (2002) also gave the opposite result to the Bird-in-hand theory. Moreover, there is a theory called “Signaling theory”, which assumes that dividends are a predictive signal about a company's future growth prospects.
Basically, investors would have positive reactions when dividends increased and vice versa when dividends decreased, they would give negative reactions (Koch and Shenoy, 1999). In a research by Asquith and Mullins (1983), they found that over the period of the dividend announcement, there was a significant growth in stock returns. Travlos et al. (2001) reinforced this theory when studying firms listed on the Cyprus Stock Exchange, they showed a positive market reaction to the announcements of 3 dividend increased.
However, this theory does not seem to be applicable to developed markets such as the US, Japan, or Germany, through the studies of Dewenter and Warther (1998) and Amihud and Murgia (1997), stock prices did not have a notable response to the change in dividends. There are many different research papers that have been done to explain dividend- related issues but they are still controversial issues from different faucets. There were experts who study the relationship between investment opportunities and dividend payment policy (Farsio et al., 2004), there was other research on the factors affecting dividend payments of enterprises (Gill et al. The study of the relationship between dividend payout and firm performance has always been a dilemma for economists and researchers, but they have not come to any final agreements.
Jeong (2013) conducted research on the Korean market during the period 1981 to 2012, and concluded that businesses in Korea had little change in dividend payments compared to businesses in the US. He also pointed out that low- growth businesses often pay more dividends, which was opposite to US market. Abor and Bokpin (2010) conducted studies in the US to study the dividend payment behavior of firms in relation to corporate finance, and showed that a positive relationship occurred between the two factors. In the same study, they also pointed out a lack of studies on dividend payout and firm performance relation in emerging markets.
It is very clear that firms in emerging markets will have a different reflection on firm performance when compared to those in developed markets. Al- Yahyaee et al. (2010) argued that firm behavior in developed markets could not be applied to developing markets. Because for emerging markets, there are certain financial constraints leading to that dividend payout ratios may be more sensitive 4 to certain factors than others.
Therefore, it is imperative to study the relationship between dividend payout ratio and firm performance in these markets to investigate whether there is any difference compared to developed markets. Most of the research papers usually focus on analyzing the developed market, there are very few studies on Southeast Asia, especially Vietnam about the effect of firm performance on dividend payout ratio.