MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY ----oOo------- TRẦN THANH THẢO FOREIGN OWNERSHIP IN VIETNAM STOCK MARKET : AN EMPIRICAL ANALYSIS MAJOR: BANKING MAJOR CODE: 60.12 MASTER THESIS INSTRUCTOR : DR. VÕ XUÂN VINH Ho Chi Minh City – 2011 ACKNOWLEDGEMENTS Many individuals have helped improve the quality and completeness of this thesis. First and foremost, I wish to express my deepest gratitude to the instructor of my thesis, Dr. Vo Xuan Vinh, for his idea, guidance, comments and reviewing my thesis.
I would also like to express my sincere gratitude to all instructors at the Faculty of Banking and Postgraduate Faculty, University of Economics Ho Chi Minh City for their valuable knowledge and support during my master course. I also owe special thanks to my close friends for their valuable supports, encouragement during my thesis and especially, writing the soft-wares which have really help me in collecting, combining and calculating the data. I also wish to thank my course-mates, my team-mates and my friends who have helped me in statistical software and given me support as always. Last but not least, I am very grateful for the love and support of my family, especially my parents and my elder brother, who give me continuous support at all times.
Tran Thanh Thao December 2010 i Abstract This thesis investigates the foreign ownership in Vietnam stock market from 2007 to 2010 by employing a rich and detailed dataset. In view of informational asymmetry, the research examines the relationship between the foreign ownership level and attributes of Vietnamese listed firms in Ho Chi Minh City Stock Exchange. Our main findings are that foreign investors have preference for firms with large size, firms with low dividend yield, firms with low leverage and firms with low volatility of return. The foreign investors also avoid firms with dominant shareholders and prefer to invest in firms where they can have influence.
In other words, the results show that foreign investors favor to invest in firms with low informational asymmetry. i TABLE OF CONTENTS ACKNOWLEDGEMENTS. ii TABLE OF CONTENTS. iii LIST OF FIGURES.
iv LIST OF TABLES. v LIST OF TABLES. vi PART 1: INTRODUCTION.7 PART 2: LITERATURE REVIEW.11 PART 3: EMPIRICAL RESEARCH HYPOTHESES.15 PART 4: DATA DESCRIPTION.20 PART 5: RESEARCH METHODS.29 PART 6: EMPIRICAL RESULTS.68 3 LIST OF FIGURES Figure 1-1: Market Capitalization.21 4 LIST OF TABLES Table 1: Market Capitalization.21 Table 2: The Statistics of Foreign ownership on the Vietnamese stock market.22 Table 3: Data Descriptive Statistics for 2007.25 Table 4: Data Descriptive Statistics for 2008.26 Table 5: Data Descriptive Statistics for 2009.27 Table 6: Data Descriptive Statistics for the Whole.28 Table 7: Correlation Matrix for 2007.31 Table 8: Correlation Matrix for 2008.32 Table 9: Correlation Matrix for 2009.33 Table 10: Correlation Matrix for the Whole sample.34 Table 11: Regression results. 37 Table 12: Panel regression results.38 Table 13: Regression results with dummy.41 Table 14: Panel regression results with dummy.42 Table 15: Panel regression results (quarterly).45 Table 16: Panel regression results with dummy (quarterly).46 5 ABBREVIATIONS HOSE Ho Chi Minh City Stock Exchange FOWN foreign ownership SIZE market capitalization DIVY dividend yield RETU return BMAR book to market CURR current ratio LEVR leverage ratio ROE return on equity EXPR export rate TOVR turnover rate CONC concentration INDU industry VOLR volatility of return IMF International Monetary Fund IIF Institute of International Finance CAPM Capital Asset Pricing Model ADR American Depositary Receipt 6 PART 1: INTRODUCTION The flow of funds to emerging markets has increased sharply in recent years.
The IMF reports that the aggregate net capital flows to emerging markets increased exponentially from the annual average of US$124 billion during the 1990-1996 to US$285 billion during 2003-2007, reaching a peak of US$617 billion in 2007 and will reach to around US 825 billion in 2010, estimated by the IIF. Investors’ interest in these markets surged in response to their prospects for rapid economic growth, financial deregulation and the benefits of international diversification. Even though Vietnam initiates the stock market later than many other developed countries, there has been a substantial growth. The first stock exchange in Ho Chi Minh City was established in 2000 with four listed companies.
Increased foreign interest and the privatization of state-owned enterprises lead to a rapid increase in listings. At the end of 2010, there are about 290 firms listed on Hose. One of the most prominent features in Vietnam stock markets is the rapid increase in the stock ownership level and trading volume by foreign investors over time. Increases in foreign ownership are expected to result in an increase in trading volume, the number of trades, visibility and analyst coverage.
As the importance of foreign investors in Vietnam stock markets increases, both the characteristics of their investment behavior and their impact on stock prices are becoming the interesting topic for discussion. However, there is not much published research employing a detailed dataset of foreign investors’ stock ownership and firm characteristics. This paper is one of the first to attempt to fill the gap in this field. In this paper, we characterize the ownership of foreign investors in Vietnam Stock markets by using a dataset of ownership and 7 attributes of Vietnamese firms listed on Hose; and identify which types of firms that foreign investors in Vietnam stock markets invest.
It is generally accepted that foreign investors in Vietnam behave like institutional investors as foreign institutional investors account for a large proportion of foreign investment (Coval & Moskowitz 1999; Dahlquist & Robertsson 2001). Therefore, it is assumed that foreign investors in Vietnam stock markets share the same investment strategy as institutional investors. Foreign investors tend to be well capitalized foreign financial institutions with a long history of successful investment in other stock markets. This category is generally composed of mutual funds, hedge funds, and foreign investment banks.
Foreign investors alone tend to be momentum investors over all horizons. In Vietnam, under regulation that foreign investors are allowed to own up to 30% in commercial banks and 49% in other listed companies. Therefore, foreign ownership is more likely to reflect the investment choices of foreign investors with some firm attributes. It is theoretically argued that investors diversify their portfolio to take advantage of the gain from diversification.
The advantages of international diversification are well illustrated in the literature. French and Poterba (1991) and Tesar and Werner (1995), for example, argued that diversified international investment dramatically improves the performance of portfolios. Theories assuming under-diversification of investor portfolios, such as Levy (1978) and Merton (1987) predicts a positive relationship between idiosyncratic risk and expected return. However, investors in reality often do not hold perfectly diversified portfolios (Fu 2009).
In global markets, investors normally have strong preference for domestic equities and this is well documented as the ‘home bias’ phenomenon by Lewis (1999). In addition, global investors do not hold 8 global portfolio as predicted by International CAPM as presented by Solnik (1974) but actually consider specific advantages when selecting their foreign assets (Rhee & Wang 2009). The extent of the home bias puzzle needed to be addressed to provide an insight into factors drive the deviation from the optimal international equity portfolio. If investors more generally already hold the optimal portfolio, then the diversification gains are achieved.
However, the literature suggests that portfolios are not optimal and that the cost in terms of lower return and higher risk is large. The disproportional holding of stocks is not only evident in international investment, but also applied to domestic portfolio selection (Coval & Moskowitz 1999; Dahlquist & Robertsson 2001). The academic literature attributes the preferences in foreign investors’ firm selection to investment barriers and asymmetric information among investors. To avoid the informational asymmetry, foreign investors tend to select firms with certain characteristics.
Results from many researches show that foreign investors favor firms with certain characteristics, such as large size and low debt ratio (Dahlquist & Robertsson 2001; Kang & Stulz 1997; Lin & Shiu 2003). This paper deepens the understanding of holdings of foreign investors in general and holdings of foreign investors in emerging market like Vietnam in particular. By analyzing a rich and detailed firm level dataset of equity ownership, and studying the determinants of foreign ownership in Vietnamese firms, we identify various firm attributes that are common to foreign ownership. In particularly, the paper investigates whether foreign investors investing in firms based on some common firm attributes 9 including size, dividend payout, firm’s stock return, risk, book-to-market ratio, financial strength, financial leverage and firm performance.
The paper further analyzes the preference of foreign investors for firm’s stock liquidity and presence in international markets, measured through export sales or listings on other exchanges. The paper also considers whether a particular industry is a matter of choice for foreign investors. This paper is one of the very first research carefully investigating the characteristics of foreign ownership in Vietnam stock markets. Our main contribution to the financial literature is to provide an extensive empirical analysis on the foreign investors’ ownership and firm attributes relation over an extended time period.
The remainder of this thesis is structured as follows. Section two reviews the literature on the relationship between foreign ownership and firm attributes. Section three introduces the empirical research hypotheses. Section four presents the data description.
Section five introduces research methods. Section six reports the empirical results. Finally, section seven concludes the research. 1 PART 2: LITERATURE REVIEW This section reviews the literature on foreign ownership and firms characteristics.
There is a large and growing literature examining whether foreign investors have information disadvantages over domestic ones in developing markets. However, the empirical evidence is mixed in the literature. In the one side, foreign investors are considered to have significant global investment experience utilizing well-developed technology and high-skilled financial experts, which suggests they are in a stronger position to evaluate a firm’s prospects. Especially in developing countries, foreign investors can take advantage over local investors in selection of firms.
On the other side, foreign investors may possess inferior information due to geological, cultural, and political differences. Many authors states that foreign investors have better information than local investors (Froot & Ramadorai 2001). Seasholes (2000)’s results indicate that foreign investors have superior information over Taiwanese investors when foreign investors tend to buy prior to positive and sell prior to negative earnings surprises. On the other side, foreign investors are argued to stand at an informational disadvantage relative to domestics.
Brennan & Cao (1997) develop a model of international equity portfolio flows that relies on informational differences between foreign and domestic investors. They find out that U. investors are of informational disadvantage relative to the locals in foreign markets, and trade on new information with a lag. The findings from more recent research by Hau (2001) using German data, Dvorak (2005) using Indonesian data, and Choe et al (2005) using Korean data also support this argument.
The problem of information asymmetry and investment barriers 1 tends to be material in emerging markets. Therefore, foreign investors tend to have preference to invest in firms with specific attributes instead of holding diversified portfolios. There are many authors favor this school of thought and empirically investigate the link between foreign ownership in domestic market and firm attributes. Kang & Stulz (1997) examine stock ownership in Japanese firms by non-Japanese investors from 1975 to 1991.
Their findings are inconsistent with the other existing models predicting that foreign investors hold national market portfolios towards stocks with high expected returns. This research documents that foreign investors in Japan hold disproportionately more shares of firms in manufacturing industries, large firms, and firms with good accounting performance, low unsystematic risk, and low leverage. Controlling for size, there is evidence that foreign investors favor small firms with high export sales, firms with greater share turnover and firms with ADRs. Grinblatt and Keloharju (2000) measure the performance of foreign investors versus the local ones by comparing a group's tendency to buy future winning stocks and sell future losing stocks.