UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CID MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM- NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS FOREIGN OWNERSHIP AND FIRM-LEVEL CHARACTERISTICS IN THE VIETNAMESE STOCK MARKET Case study: Ho Chi Minh Stock Exchange (HOSE) A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYEN THI KIM CUC Academic Supervisor: Dr. PHAM HOANG VAN Dr. NGUYEN TRONG HOAI HOCHI MINH CITY, NOVEMBER 2011 UAN VAN CHAT LUONG download : add luanvanchat@agmail.co Acknowledgments First of all, I want to express my thanks to the Vietnam Netherlands Program for create opportunities and help me to pursue and complete an academic course of the Master of Art in Development Economic. I would like to send my sincere thank to Dr.
Nguyen Trong Hoai who has devote all of his efforts to develop this program and help many students have more knowledge on development economic- a new economic major in Vietnam. Next, I also want to say thanks to my supervisor professor Dr. Pham Hoang Van for his enthusiasm, his helpful comments and suggestions during my thesis. In the process of collecting data, I also received helps from the Market Information department, Hochiminh Stock Exchange.
Finally, I would like to send my sincere thanks to all of you. Wish the Program more and more develop. HCMC, NOVEMBER 2011 NGUYEN THI KIM CUC UAN VAN CHAT LUONG download : add luanvanchat@agmail.co TABLE OF CONTENTS Abstract .4 Structure of the thesis .3 Foreign investors in the Vietnamese stock market.1 Financial development and economic growth .2 Stock market and economic growth .3 Foreign ownership and firm-level characteristics .3 Steps to analyzing data .2 Correlation in pattern growth between VN Index and some other indices .3 Limitations and suggested studies. 49 UAN VAN CHAT LUONG download : add luanvanchat@agmail.co Abstract This paper investigates foreign ownership and firm-level characteristics of firms listed on the Hochiminh Stock Exchange - the formal and biggest stock exchange in Vietnam.
Applying fixed-effects and random-effects models to quarterly data from 2006-2010 for 30 companies, the findings show that foreign investors often invest into large firms - firms with high market capitalization and in firms with high leverage - firms with high debt over equity ratio. Furthermore, the results also show that returns on equity have significance on foreign ownership ratio of foreign investors at listed firms. The results show no effect of Earnings per Share (EPS) and Price to Earnings ratio (PIE) on foreign ownership. The paper also checks the pattern growth between VN Index with Shanghai, and Dow Jones indices and answers why foreign investors invest in the Vietnamese stock market.
Keywords: foreign ownership, firm-level characteristics, Hochiminh Stock Exchange, VN Index, ShangHai Index, Dow Jones Index 1 UAN VAN CHAT LUONG download : add luanvanchat@agmail.co CHAPTER 1 Introduction 1.1 Introduction Vietnam's equity market has benefited from the country's high economic growth of around 7% of gross domestic product (GDP) per year over the past decade, especially in 2007 at 8.5% as well as rapid equitization of state-owned enterprises (SOEs). Passing more than 10 years of dev~lopment, Vietnamese stock market has developed quickly and attracted more and more foreign capital, adding a large capital source for listed companies to produce and helping the stock market to develop strongly. Before 2005, the role of foreign investors in the Vietnamese stock market was very blurred. This can be explained by new establishment, not yet strong growth of the market to attract both domestic and foreign investors.
However, 2006 is an important transitional year of foreign investors to the stock market. Foreign ownership in 2006 increased three-fold, from 6% to 17%, and up to end of 2007 this number is 30%. And from 2007, the foreign ownership is always at high level. The Vietnamese stock market is an emerging market that attracts more and more foreign investors who play a very important role in development of the market as well as the economy.
Over the past 10 years of working of Vietnamese stock market, foreign investors play an important role not only in Vietnamese capital markets but also Vietnamese economic growth. In fact, foreign investors help listed companies gain more capital to produce as well as to innovate their technologies. Foreign investors also help listed companies to enhance their reliability. Moreover, foreign investors bring experiences in management and investment even corporate governance into Vietnam.
Douma, 2 UAN VAN CHAT LUONG download : add luanvanchat@agmail.co Pallathiatta and Kabir (2006) investigated the impact of foreign institutional investment on the performance of emerging market firms and found that there is positive effect of foreign ownership on firm performance. So, finding indicators affecting foreign investors' holding decisions is important to attracting even greater levels of foreign investment in the future. According to the article International Investing on the website of the U. Securities and Exchange Commission, there are two main reasons why people invest internationally.
The first is a diversification strategy or to spread investment risk among foreign companies and markets that are different from the United States economy; and second is growth strategy, exploiting the potential for growth in some foreign economies, particularly in emerging markets. Obviously, foreign investors invest into another country in order to diversify their investment portfolios. Moreover they pay more attention to emerging markets which usually have faster and higher growth. However they first consider whether Government's monetary policies affecting interest rate, exchange rate, inflation rate and the political environment are stable or not to ensure that they will not meet potential risks when withdrawing their profits.
Foreign investors also consider characteristics of listed companies will help them to choose which kinds of stocks or which kinds of portfolios to invest in. These characteristics include ownership structure, financial structure, stock structure, and stock performance. Investors do indeed hold fewer shares in firms with ownership structures that are more conducive to expropriation by controlling insiders. Finally, some foreign investors have ethical, moral, strategic, national, or cultural criteria that lead them to invest in certain countries and companies, and to avoid others.
Determining which of these criteria are 3 UAN VAN CHAT LUONG download : add luanvanchat@agmail.co the most significant for listed firms at Hochiminh stock exchange will provide valuable information aiming at attracting more capital for the Vietnamese equity.2 Research objectives Knowing the role of foreign investors for Vietnamese stock market and economy, the objectives of this research are: - To identify, rank, and test the significance of which main listed firms' financial indicators affect to foreign investors' holding decisions with respect to the Hochiminh stock exchange; - Examine the pattern growth between VN Index and some indices such as ShangHai Index and Dow Jones Index to understand why foreign investors invest into Vietnam stock market if there is correlation. - To generate practical recommendations for listed firms to attract more foreign investors into Vietnamese stock market. The research limits its research scope to the Hochiminh Stock Exchange which is the largest stock exchange in Vietnam.3 Research questions To attain above objectives, the study will answer following questions: Is there any relationship between foreign investors' holding at listed firms with their financial indictors? Do foreign investors invest into the firm's value or just speculate? Is there a correlation in pattern growth between VN Index and other indices? 4 UAN VAN CHAT LUONG download : add luanvanchat@agmail.co Answering the above questions permits listed firms to have suitable policies in their business process to attract even more foreign investors, contributing for development of the Vietnamese equity.4 Structure of the thesis The paper is organized as follows. Chapter 2 presents an overview of development of the Vietnam stock market, Hochiminh stock exchange and foreign investors in the market.
A brief literature review is provided in Chapter 3. Chapter 4 describes the panel data model used to estimate the hypothesis, the research methodologies and a description of the data set. Research results are given in Chapter 5. Conclusions and policy implications complete the thesis.
5 UAN VAN CHAT LUONG download : add luanvanchat@agmail.co CHAPTER2 VIETNAMESE STOCK MARKET DEVELOPMENT (Case study: Hochiminh Stock Exchange) The process of industrialization and modernization of Vietnam requires a large source of capital both local and foreign. Hence, establishing a stock market in Vietnam to mobilize capital for companies to operate and develop is essential. Knowing this, in 1998, the Prime Minister decided to establish Hanoi and Hochiminh City Securities Trading Centers. Passing more than 10 years of establishment and development, the Vietnamese stock market has developed quickly.
In this process, equitization of state- owned enterprises (SOEs) has been important to create a more open and healthier economy.1 Background The establishment of the Vietnam Securities Market is marked by official operation of Hochiminh City Securities Trading Center (HoSTC) on July 20th, 2000 and its first trading session on July 28th, 2000. In 2007, HoSTC was transferred into Hochiminh Stock Exchange (HOSE). HOSE is regulated by Securities Law, Business Law, the Charter of HOSE and other relevant regulations. The event was a milestone in HOSE development and helped it to have an appropriate position in the regional and international Stock Exchanges.
Development of HOSE is accompanied by the ups and downs of the economy; its quick development has benefited from high growth rate of GDP of around 7% per year. Moreover, there are many specific events that made the stock market develop quickly including joining the World Trade Organization (WTO) and the official visit to Vietnam of the American President George W. Bush in late 2006. In 2007 we saw a 6 UAN VAN CHAT LUONG download : add luanvanchat@agmail.co sharp increase in the number of listed companies and blooming of the market, and the Securities Law is issued and came into effect the same year.
However, being affected by global financial crisis from 2008 until now, the stock market faces many difficulties with the sharp fall in prices of many stocks. The macro economy is faced with a tight budget, trade deficits, and high inflation. 2008 was the year with the highest inflation in the last 20 years and up to 23%, decreasing economy growth. All of these factors created strong impacts to the Vietnam stock market.2 Achievements Through 10 years of establishment and growth, the Vietnam Securities market experienced lots of ups and downs.
However, the most important in the period of conformation, establishment and development, the stock market always receives deep interests of the Party and Government and thorough instructions from the Ministry of Finance (MoF) and the State Securities Commission (SSC). Although it is young, with the role of "thermometer" of the economy, the Vietnam Securities Market, expressed by VN Index has gained significant development. However it also shows strong fluctuations.5 in late 2005, VN Index increased to 809.86 in the sessions on Dec 20th, 2006. The closing of2006 was 753.14% of increase compared to the end of 2005.
In the first few months of 2007, VN Index rapidly increased and reached 1170.67 records in sessions on Mar 12th, 2007. The Vietnam Index then fluctuated and got under 250 in the first sessions of Mar, 2009 and presently stays around over 500. This is also a specific feature of emerging markets, including Vietnam market. It's very volatile.
(Source: Summarize from Hochiminh Stock Exchange) Landmarks 7 UAN VAN CHAT LUONG download : add luanvanchat@agmail.co 10 years of establishment and growth of HOSE means the first steps of successful establishment of the Vietnam Stock Market, indispensable financial institution meeting demands for its development and integration into international economies. Accounting to March 28th, 2009, HOSE successfully performed 2000 sessions. Total trading volume of securities reached over 5.7 billion, valued 482,000 billion VND, averagely 255 billion per session. As of Dec 31st, 2008, the market capitalization on HOSE approximately was 162,000 billion VND, or 12.
Followed by HOSE's coming into being there were a varietY of securities firms and unit trusts.