MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY --- oOo --- NGUYEN TUONG PHUONG EVIDENCE ON MARKET-TO-BOOK VALUE AND FIRM PERFORMANCE: A STUDY OF LISTED FIRMS IN VIETNAM MASTER THESIS Ho Chi Minh City – 2011 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY --- oOo --- NGUYEN TUONG PHUONG EVIDENCE ON MARKET-TO-BOOK VALUE AND FIRM PERFORMANCE: A STUDY OF LISTED FIRMS IN VIETNAM MAJOR: FINANCE & BANKING MAJOR CODE: 60.12 MASTER THESIS INSTRUCTOR : DR. TRUONG TAN THANH Ho Chi Minh City – 2011 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ACKNOWLEDGEMENT I would like to expess my sincere gratitude to my instructor, Dr. Truong Tan Thanh for guiding me throughout this thesis. My appreciation to all of my teachers at Faculty of banking and finance, University of Econimics Hochiminh City for their teaching and guidance during my MBA course.
I would like to dedicate my deepest gratitude to my parents and my uncle for their support and encouragement. i LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABSTRACT This study tries to interprete the relationship between market to book value (a proxy of growth opportunity) and firm performance based on capital structure theory, tradeoff theory and costly external financing theory, and other studies relative to this topic. The author uses cross-sectional data 2009 and 2010 of 70 listed companies in Vietnam to investigate the effect of market to book on firm‟s performance. As the results of this study, price to book value is the important determinant of firm performance.
This finding supports the argument of Xu et al (2005), Fairfield (1994), Block (1995), Frank et al (2005) and Myers et al (1984). Firm leverage has significant and negative impact on firm‟s performance, which is consistent with the results of Modigliani and Miller (1958), Robichek and Myers (1966), Jensen and Meckling (1976), Frank et al (2005). Firm size has negative and significant correlation with firm‟s performance, which contrasts with Titan & Zeitun (2007). Beta has negative influence to market to book ratio.
This finding is consistent with Damodaran (2002), Myers and Majluf (1984), Baker and Wurgler (2002), Harris and Marston (1994). Firm performance in 2009 has positive influence to growth opportunity (Pb) in 2010. This result favours Damodaran (2002), Block (1995). Industry has influence to firm‟s performance.
Keywords: Market to book value, corporate performance, Vietnam, HOSE, HNX. ii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com TABLE OF CONTENTS ACKNOWLEDGEMENT -------------------------------------------------------------------------------- i ABSTRACT ------------------------------------------------------------------------------------------------- ii TABLE OF CONTENTS---------------------------------------------------------------------------------- iii LIST OF FIGURES ---------------------------------------------------------------------------------------- iv LIST OF TABLES ----------------------------------------------------------------------------------------- v CHAPTER 1: INTRODUCTION ----------------------------------------------------------------------- 1 1.5 RESEARCH METHODOLOGY AND SCOPE---------------------------------------------------- 8 1.6 STRUCTURE OF THE STUDY --------------------------------------------------------------------- 9 CHAPTER 2: LITERATURE REVIEW -------------------------------------------------------------- 10 2.2 CASHFLOW INTO EMERGING MARKETS----------------------------------------------------- 10 2.3 PRICE TO BOOK VALUE --------------------------------------------------------------------------- 12 2.4 FIRM PERFORMANCE ------------------------------------------------------------------------------ 14 CHAPTER 3: RESEARCH METHOD ---------------------------------------------------------------- 17 3.5 VARIABLES MEASUREMENT FOR MODEL --------------------------------------------------- 19 3.6 HYPOTHESIS AND EMPIRICAL MODEL ------------------------------------------------------- 24 3.7 SUMMARY ---------------------------------------------------------------------------------------------- 29 CHAPTER 4: EMPIRICAL RESULTS OF THE RESEARCH ---------------------------------- 30 4.2 CHARACTERISTICS OF RESEARCH SAMPLES ----------------------------------------------- 30 4.1 Model 1: The firm performance model ------------------------------------------------------------- 43 4.1 ROE as Firm Performance proxy ---------------------------------------------------------------- 43 4.2 EB as Firm Performance proxy ------------------------------------------------------------------- 50 4.2 Model 2: The Market to Book model --------------------------------------------------------------- 56 CHAPTER 5: CONCLUSIONS, RECOMMENDATIONS AND LIMITATIONS ----------- 60 5.4 LIMITATIONS ------------------------------------------------------------------------------------------ 62 REFERENCES GLOSSARY APPENDIX A APPENDIX B iii LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF FIGURES Figure 1: Distribution of Sectors ------------------------------------------------------------------------ 31 Figure 2: Distribution of Market to Book and Leverage ratios ----------------------------------- 38 iv LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF TABLES Table 1: Mid-cap property and casualty companies evaluation ----------------------------- 3 Table 2: Summary of Statistics of Market to Book of other Countries in 2010 --------- 11 Table 3: Summary of Statistics of Return on equity of other Countries in 2010 --------- 11 Table 4: Summary of Variables for model ------------------------------------------------------ 24 Table 5: Summary of Statistics and Correlation of the Variables for Year 2009--------- 31 Table 6: Summary of Statistics and Correlation of the Variables for Year 2010--------- 33 Table 7: Classification by ROE in 2009 --------------------------------------------------------- 39 Table 8: Classification ROE in 2010 -------------------------------------------------------------- 40 Table 9: Classification by EB in 2009 ------------------------------------------------------------ 40 Table 10: Classification by EB in 2010 ----------------------------------------------------------- 40 Table 11: t-test for Two-Sample Assuming Unequal Variances ----------------------------- 42 Table 12: Estimate results using ROE and LTDTA in 2009 --------------------------------- 43 Table 13: Estimate results using ROE and LTDTE in 2009 ---------------------------------- 44 Table 14: Estimate results using ROE and TDTE in 2009------------------------------------ 45 Table 15: Estimate results using ROE and LTDTA in 2010 --------------------------------- 45 Table 16: Estimate results using ROE and LTDTE in 2010---------------------------------- 46 Table 17: Estimate results using ROE and TDTE in 2010------------------------------------ 47 Table 18: Estimate results using EB and LTDTA in 2009 ------------------------------------ 50 Table 19: Estimate results using EB and LTDTE in 2009 ------------------------------------ 50 Table 20: Estimate results using EB and TDTE in 2009 -------------------------------------- 51 Table 21: Estimate results using EB and LTDTA in 2010 ------------------------------------ 52 Table 22: Estimate results using EB and LTDTE in 2010 ------------------------------------ 52 Table 23: Estimate results using EB and TDTE in 2010 -------------------------------------- 53 Table 24: Estimate results for market to book using ROE ---------------------------------- 56 Table 25: Estimate results for market to book using EB ------------------------------------- 57 Table 26: Estimate results using EB excluding two dummy variables --------------------- 58 Table 27: Summary of empirical results -------------------------------------------------------- 60 v LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Market to Book and Firm Performance CHAPTER 1 : INTRODUCTION 1.1 BACKGROUND The theory of the capital structure is important framework for studies of the correlation between capital structure and firm performance. It suggests that in the determined target ratio, firm„s performance has positive correlation with debt financing ratio and reduce agency cost. In contrast, when the debt ratio exceeds a certain level, firm‟s performance has negative correlation with leverage ratio due to that fact that benefits from the increase in borrowing less than the increase in agency cost.
Tran (2008) tested the relationship between capital structure and firm performance by using data sample of 50 non-financial companies in Ho Chi Minh Stock Exchange. The results show that firm performance has negative correlation with capital structure when debt to equity ratio is more than 1.812; firm performance has positive correlation with capital structure when debt to equity ratio is less than 1. As stated that the MM theory1 is an important part in firm‟s financing policy. In addition, tradeoff theory2 and costly external financing theory3 focus on a relation that price to book ratio plays in making financing decisions.
Therefore, the effect of price to book on firm performance is the focus of this thesis. Damodaran (2002) provides evidence that the most important determinant of price to book value is return on equity, and investors should focus on the mismatch between return on equity and price to book. Xu et al (2005) argue that growth opportunity has strong relation to firm‟s performance, which is measured by return on equity (ROE). 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Market to Book and Firm Performance There is a lack of empirical evidence on a relationship between market price to book value ratio and firm performance for Vietnam.
Accordingly, the first objective of this study is to examine possible correlation between firm‟s performance and market to book value. Tran (2008) finds an insignificant correlation between growth opportunity and firm‟s performance for 50 non- financial companies in Ho Chi Minh Stock Exchange in September 2008. Thus, the second objective of this study is to examine the effect of growth opportunity, which is measured by market to book ratio, on firm‟s performance.2 RATIONALE This study contributes to literature in two directions: (1) by using ordinary least square regression model and quantile analysis to investigate the relationship between firm‟s performance and market to book; (2) by using different measure of firm‟s performance such as earning to book to investigate the impact of market to book on firm‟s performance to complement one more measure to return on equity ROE, return on asset ROA, tobin‟s Q of previous studies in Vietnam. This study also finds a strong relationship between market to book and firm performance.
In practice, the mismatch between the market to book and firm performance proxied by return on equity (ROE) provides investors the market to book comparables approach. The example as bellows shows the market to book comparables approach. 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Market to Book and Firm Performance Table 1 : Mid-cap property and casualty companies evaluation Price to book value Five Current year Forcasted Year 1996 1997 1998 1999 2000 average ROE Beta AFC 1. As the table 1 shows, ORI is selling at PB of 1.2, which is 55 percent of the industry mean.
The current market to book of ORI is lower than market to book of previous years, and lower than five year average of 1. Forcasted return on equity of ORI equals industry mean, and higher than the other firms such as SAFC, AFC. Beta is lower than the others. Therefore, ORI is relatively undervalued with SAFC and AFC.
AFG is selling at PB of 1.0, which is 45 percent of the industry mean. The current market to book of AFG is lower than market to book of previous years, and lower than five year average of 1. Forcasted return on equity of AFG is higher than the industry mean, and highest in all firms. Beta is lower than the others such as SAFC, AFC.
Therefore, AFG is relatively undervalued with SAFC and AFC. 3 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Market to Book and Firm Performance When comparing AFG to ORI, market to book of AFG is lower than one of ORI by 0.2, a higher forcasted ROE than ORI, only a 0.05 higher than ORI in beta. So, we conclude that AFG is relatively undervalued with ORI, and we should choose AFG for investment. For managers, they may consider market to book as a proxy of growth opportunity to improve their firm‟s performance.
Firms with high growth opportunity have more chance to access cheap equity; accordingly, reduce leverage ratios to maximize profit. From viewpoints of investors, they tend to favor high growth companies and they are willing to finance firms‟ profitable projects. In addition, if a company has a high leverage ratio, investors incline to reduce their investment to firm‟s project because benefits to creditors exceed benefits to investors. Because of high growth opportunity, companies attract to sources of funds should gradually reduce its reliance on debt and reduce leverage.
When keeping lower current target ratios, they easily take advantages of arising future opportunities and have a good firm performance. For instance, Ho Chi Minh City Infrastructure Investment Joint Stock Company (stock code: CII) has successfully issued 40 million convertible bonds with a 5 year term for Goldman Sachs. Why does Goldman Sachs invest in a firm in Vietnam such as CII? Firstly, the construction industry in Vietnam has high potential to grow associated with the urbanization rate. Issues of infrastructure and urbanization are the challenges for Vietnam.
More than ever, to attract and to promote the efficiency of all resources in society, Vietnam needs to invest huge amounts of capital into this sector, while the ODA loans are decreasing. Therefore, developing internal resources, efficient use of indirectly invested resources in the form of BOT (build-operate-transfer), BOO (build-operate-own) is encouraged more than ever. Secondly, CII is a leading enterprise in the field of 4 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Market to Book and Firm Performance investment and development in infrastructure. Despite of good growth rate and high profitability, CII still has been evaluated as an infrastructure company with moderate level of sales, profit and potential growth.