UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL HO CHI MINH CITY STUDIES VIETNAM THE HAGUE NETHERLANDS VIETNAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE RELATIONSHIP BETWEEN INVESTMENT AND DIVIDEND IN CASH FLOW UNCERTAINTY CONDITION: A VIETNAM CASE By TRAN THI NHAT LINH MASTER OF ARTS IN DEVELOPMENT ECONOMICS Ho Chi Minh City, April 2017 TIEU LUAN MOI download : skknchat@gmail.com ABSTRACT This paper aims to show the relationship between investment and dividend in cash flow uncertainty condition by using data of 246 Vietnamese listed firms from 2011 to 2014. The study shows that in the relationship between investment and dividend does not significant in both two alternative measurement methods of cash flow uncertainty. However, in the case cash flow uncertainty is measured by cash flow shortfall, the relationship between investment and dividend in each level of shortage is significant at 10%. Besides, the study shows that Vietnamese firms tend to reduce liquid assets to deal with cash flow shortage and Vietnamese firms tend to invest in other firms despite of they are facing with cash flow shortfall.
Keywords: dividend, investment, cash flow shortfall, Vietnamese firms i TIEU LUAN MOI download : skknchat@gmail.com ACKNOWLEDGEMENT Firstly, I would like to sincerely thank Dr. Vu Viet Quang. I am grateful to his enthusiastic instruction crucial advice and valuable guidance during the time I worked with this thesis. In addition, I would like to thank you to all professors and staff of Vietnam-Netherlands Program as well as classmate for their help during my thesis process.
Finally, I would like to express my gratitude to my family, who have supported me with the master program and motivated me to finish this thesis. ii TIEU LUAN MOI download : skknchat@gmail.com ABBREVIATIONS HoSE: Ho Chi Minh Stock Exchange OLS: Ordinary least squares GLS: Generalized least squares FE: Fixed Effect RE: Random Effect WLS: weighted least squares iii TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENTS CHAPTER 1 : INTRODUCTION. Data and Methodology. 3 CHAPTER 2 : LITERATURE REVIEW.
The tradeoff theory between dividend and investment. Agency cost theory of free cash flow. Empirical research related to the link between investment and dividend. 12 CHAPTER 3 : DATA AND METHODOLOGY.
An overview of dividend, investment in Vietnam. An overview of dividend. An overview of investment. Sample data and collection.
Ordinary Least Square estimation. Fixed effect estimation. 21 iv TIEU LUAN MOI download : skknchat@gmail. Random Effect estimation.
OLS, FE, and RE, which one is better?. 23 CHAPTER 4 : EMPIRICAL RESULTS AND DISCUSSION. How can firms solve cash flow shortfall. Empirical results and discussion.
Cash flow uncertainty is measured by CFVol. Cash flow uncertainty is measured by cash-short .48 v TIEU LUAN MOI download : skknchat@gmail.com LIST OF TABLES Table 3.1: Description statistics of the main variables (in billions VND or times) .2: The main methods to deal with cash flow uncertainty (based on cash flow shortfall - in billions VND).3: The main methods to deal with cash flow uncertainty (based on cash flow shortfall) – with negative sample and positive sample - in billions VND .4: The main methods to deal with cash flow uncertainty (based on cash flow volatility) – with negative sample and positive sample - in billions VND .5: The correlation maxtric and variance inflating factor (VIF) (CFVol) .6: The results of Modified Wald test and Wooldridge test. 41 vi TIEU LUAN MOI download : skknchat@gmail.com LIST OF FIGURES Figure 3.1: Number of listed firms payout dividend.2: Number of Vietnamese listed firms use internal fund (retain earnings) .1: Investment – dividends sensitive with CFVol rank.2: Investment – dividends sensitive with cash short rank. 39 vii TIEU LUAN MOI download : skknchat@gmail.com CHAPTER 1 : INTRODUCTION 1.
Problem Statement Investment and dividend policy decisions are two of the most important missions fulfilled by managements. In a perfect market, investment and dividend decision are a separation because firms can raise external fund (Miller & Modigliani, 1961). In an imperfect market, firms cannot obtain funds easily because of the limit resource, thus, investment and payout policy are the most difficult decisions of manager and firms. Additionally, maximizing firm value and stockholder wealthy are the main duties of administrators; however, sometimes there is confliction between these duties, especially in cash flow uncertainty conditions.
To be specific, firms usually use profit after tax to pay out a dividend and reinvest in projects to create value in the future, but in cash flow shortfall case, the manager will take into account for cutting the dividend and investment, or raising external funds. In fact, firms can choose no payout a dividend when the director boards believe that firms will have more advantages to increase profit as well as a dividend in the next business cycle by expanding investment activities associated with shareholders’ dividend. Nevertheless, these decisions are not always right; Benjamin and Dodd (1934) gave some reasons to protest ones. Moreover, dividend payout is not only reflected shareholder wealth, but also a signal for firms’ performance (Fairchild, 2010).
Therefore, there is the tradeoff between dividend and investment decision and managers have to choose the relevant plans in order to increase shareholders’ wealth and firm value. As the results, dividends and investment decision do not separate and must be jointly determined. In particular, investment and dividend decision are affected by many factors, such as agency cost, financial market. Therefore, therearemany studies related to investment and dividend decision over the world but given different results.
Some studies claimed that dividend is priority decision (Lintner, 1956), but another one supposed that investment and dividend decision are made simultaneously and interdependently (Brav et al. To clarify the relationship between investment and dividend, some authors research this relation in a finance constrained (Holt, 2003), financial flexibility (Daniel et al., 2008) or uncertainty cash flow conditions (Deng et al. Overall, firms have to choose between investment and dividend decisions in conditions of cash flow shortfall. Firms with cash flow shortfall are often difficult to 1 TIEU LUAN MOI download : skknchat@gmail.com raise external funds and the cost of capital is higher.
Therefore, this relationship is expressed more clearly in firms with uncertainty cash flow. In Vietnam, it is difficult to clarify the relationship between financial decisions, especially the relationship between investment decisions and dividend decision. As reviewed by Lý, H. (2013), Vietnamese firms’ administrators agree on the importance of dividend policy, but they are not clear how investment policy will affect dividend policy and vice versa.
Almost previous studies related to developed countries but the effect of the financial decisions in each region is different with others; therefore, it is necessary to investigate the association between dividend and investment decision in an emerging financial market like Vietnam. In this study, the linkage between investment and dividend is the main research objective. The results show the investment – dividend-sensitive as well as the change of investment and dividend when cash flow volatility. Besides, empirical results also show the way Vietnamese firm resolve cash flow shortfall.
There are a lot of previous studies that research the connection between investment and dividend with different results. In particular, some studies show the independent relationship between dividend and investment (Morgan & Saint-Pierre, 1978), some papers illustrate the interdependence between them (Minton & Schrand, 1999; Daniel et al. However, Vietnam financial market still immature and incomplete, as well as there are few studies that link financial decisions in Vietnam, so that the results of this study maybe bring some suggestions for administrators. Research Objectives In general, this paper focuses on the link between investment and dividend of Vietnamese firms in uncertainty cash flow.
In addition, the study aims to find out the methods that Vietnamese firms use to deal with cash flow shortage. Firstly, this paper will determine variables that related to investment, dividend and cash flow based on the method of empirical study, especially, cash flow uncertainty is measured by 2 methods: cash flow shortfall and cash flow volatility. Secondly, based on the magnitude of cash flow shortfall, data is divided into 5 groups and variables are analyzed in each group or combined to others. Statistic results will provide the evidence of the main channel to solve the shortage of cash flow of Vietnamese firms.
Secondly, investment, dividend, and cash flow will be placed in relation to other factors to run the regression in each level of cash flow shortfall. The coefficient of the dividend is 2 TIEU LUAN MOI download : skknchat@gmail.com investment – dividend-sensitive. Based on the investment – dividend-sensitive in each level of shortfall, we predict the relation of investment, dividend, and cash flow uncertainty then plots the chart. Thirdly, based on the chart, dummy variables are used and included in the model then the results from regression will clarify the relationship between investment and dividend in each level of shortfall.
The objective of this study is to identify the relationship between dividends and investments in conditions of cash flow uncertainty for Vietnam listed firms. To examine this problem, the thesis will answer the question: Do investment decision and dividend decision independent when firms face with cash flow volatility? 1. Data and Methodology This study will use the panel data of non-financial companies, which are listed on Ho Chi Minh Stock Exchange (HoSE) from 2011 to 2014. Besides, the study excludes the firms which are listed after 2011 and the firms were not listed in the stock market before November 2015.
The final sample includes 984 firm-year observations. The data from the financial statement, data will be used to conduct. The descriptive statistics will be used to clarify the relation between dividends and investment at the different level of cash flow uncertainty and find out solutions to resolve cash flow uncertainty. The basic regression such as GLS, FE, RE also used to analyze the dividends - investment sensitive to investigate the link between investment and dividend.
Besides, this paper uses piecewise regression to confirm the results that were predicted in the descriptive statistics part and check the robustness of regression results. Thesis Structure This paper is organized including 5 chapters. Chapter 2 represents some definition, related literature and empirical. Chapter 3 will describe the data and methodology.
Chapter 4 shows empirical results. Finally, Chapter 5 is a conclusion and some limitation. In detail, chap two will illustrate some concepts of dividend, investment, and cash flow. After that, the relationship between investment and dividends in empirical research is divided 3 TIEU LUAN MOI download : skknchat@gmail.com into various groups depend on different results.
Finally, based on the summary of results from empirical studies, hypotheses of the study will be given. 4 TIEU LUAN MOI download : skknchat@gmail.com CHAPTER 2 : LITERATURE REVIEW In next chapter, firstly, an analytical framework is presented. After that, data and variables measurement are presented, the information of data source is given. Thirdly, a research model is launched.
This chapter will illustrate some concepts of dividend, investment, and cash flow. In next part, the literature of the relationship between investment and dividends is reviewed. In this section, the empirical studies are mentioned to clarify the relationship between investment and dividends in different conditions. Finally, a hypothesis is launched.
Literature review “If you cannot find investments that make your minimum acceptable rate, return the cash to owners of your business” (Damodaran, 2004). In fact, the dividend is an after – tax profit which pays for shareholders. In discussing the dividend decision, Damodaran (2004) view the dividend decision as an action to refund money for investors when firms do not find profitable investment projects. Dividend decision is one of the most important of firms, iteffects to available and the cost of capital.
In particular, dividend policy is decided by Board of Directors but it must be considered the desire of shareholders. Besides that investment decision took into account when firms make dividend decision. Therefore, there is confliction between shareholders’ benefit and managers.