MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY -----o0o----- EÂ1 BÙI HỒNG THU LIQUIDITY AND FIRM PERFORMANCE: THE CASE OF VIETNAM MASTER OF BUSINESS ADMINISTRATION HO CHI MINH CITY, 2012 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY -----o0o----- EÂ1 BÙI HỒNG THU LIQUIDITY AND FIRM PERFORMANCE : THE CASE OF VIETNAM MAJOR: BUSINESS ADMINISTRATION MAJOR CODE: 60.05 MASTER THESIS SUPERVISOR : Dr. VÕ XUÂN VINH HO CHI MINH CITY, 2012 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com i ________________________________________________________________________ ACKNOWLEDGEMENT I owe my deepest gratitude to my supervisor, Dr. Vo Xuan Vinh, who with his wide research experience, suggested this topic to me. Without his continuous support, encouragement, and enthusiasm, this research would hardly have been completed.
I am indebted to Dr. Tran Ha Minh Quan for his immeasurable amount of support and guidance during MBA course and this thesis. I would like to thank M. Nguyen Thanh Trung who willingly provided me with much assistance and encouragement during MBA course.
I would like to thank Assistant Professor Nguyen Dinh Tho, Dr. Tran Ha Minh Quan, Dr. Pham Quoc Hung, Dr. Nguyen Thi Mai Trang, Dr.
Nguyen Thi Nguyet Que for their valuable time as members of examination committee. Their comments and advices are precious instruction for me to complete this thesis. I also express my warmest gratitude to my professors at Faculty of Business Administration and Postgraduate Faculty, University of Economics Hochiminh City for their teaching and guidance during my MBA course I wish to thank warmly my classmates who show their teamwork spirit and willingness to help each other to complete our theses. Finally, this thesis is dedicated to my beloved wife who understands, encourages, and is patient especially in the difficult period of taking care of our newborn baby during my working.
LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ii ________________________________________________________________________ ABSTRACT This thesis aims to investigate the relation between liquidity and firm performance in Vietnam stock market. The debate on this topic is still open when many papers point out that there is a positive correlation and many researches show the opposite. The number of researches that support for result of positive correlation is likely to be dominant. This paper shows the negative correlation between liquidity and firm performance in Vietnam stock market; however, the result is not consistent over time.
The paper also finds that liquidity has a negative correlation with financial leverage and this implies that highly liquid firm tends to seek capital from the banks or bond issues. Besides, there is a negative correlation between liquidity and operating income on assets indicating that illiquid firm tends to focus more on corporate monitoring and has more profitability. When examining the correlation further on each industry separately, we find that this correlation is only on five industries. Keywords: Liquidity, firm performance, operating income to price, financial leverage, operating income on assets, Vietnam.
LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com iii ________________________________________________________________________ CONTENTS ACKNOWLEDGEMENT. ii LIST OF TABLES .vi CHAPTER 1: INTRODUCTION .4 RESEARCH METHODOLOGY AND SCOPE .4 STRUCTURE OF RESEARCH. 4 CHAPTER 2: LITERATURE REVIEW .1 Bid-ask spread .4 Daily zero return .5 Amihud illiquidity ratio .4 LIQUIDITY AND FIRM PERFORMANCE. 13 CHAPTER 3: RESEARCH MODEL.
20 LUAN VAN CHAT LUONG download : add luanvanchat@agmail. 21 CHAPTER 4: DATA AND RESEARCH METHODS. 25 CHAPTER 5: RESULTS AND DISCUSSION .1 DESCRIPTIVE STATISTICS AND CORRELATIONS .2 REGRESSION ANALYSIS RESULTS .2 Baseline specification – components of Q .3 Baseline Q specification by industry. 46 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com v ________________________________________________________________________ LIST OF TABLES Table 4.3: Ordinary least squares regressions for the model .4: Ordinary least squares regressions for the components of Q .5: Ordinary least squares regressions for Q by Industry .35 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com vi ________________________________________________________________________ ABBREVIATIONS HOSE Hochiminh Stock Exchange OIP Operating income to price LEVERAGE Financial leverage OIOA Operating income on total assets LIQ_TR Liquidity measured by turnover AGE Firm‟s age BVTA Book value of total assets IDIORISK Idiosyncratic risk CUMRET Cumulative return OLS Ordinary least squares LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 1 ____________________________________________________________________ CHAPTER 1: INTRODUCTION 1.1 BACKGROUND Liquidity is one of the important factors that investors consider when they make decision on investment.
As defined by Amihud and Mendelson (2008), liquidity is the capacity of the assets that can be traded quickly and at low cost. According to Fang et al. (2009), the stock shares are the currency which commands both cash flows and control rights, the tradability of this currency plays a central role in the governance, valuation, and performance of firms. The relation between liquidity and firm value is firstly documented by Amihud and Mendelson (1986).
After this study, this relation draws more attention from other scholars. There are many theoretical researches on this relation; most of them support the positive relation and few researches suggest negative relation. In research indicating positive relation, liquidity supports the large shareholders to invest in large stake to become more majorities in voting contests; it leads to effective corporate governance (Maug, 1998), attracts the entry of the informed investors, in turn, this makes the price more informative and improve the decision of the firm managers, especially the firm with the uncertainty of cash flow in existing and future projects (Subrahmanyam and Titman, 2001; Khanna and Sonti, 2004). Moreover, liquidity makes investors trade at higher prices than more illiquid stocks (Holmstrom and Tirole, 1993), causes investors trade at a premium because liquid stocks are overvalued due to the LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 2 ____________________________________________________________________ liquidity could be a sentiment indicator (Baker and Stein, 2004), reduces managerial opportunism because investors invest on the fundamental value of the stocks (Edmans, 2009).
There are few research studies on negative relation, which conclude that liquid stocks facilitate the exit of shareholders, therefore, they do not want to monitor firm performance and leads to worse firm performance (Coffee, 1991), investors do not want to sell when the cost of monitoring is not covered and it causes the illiquidity in stock and better firm performance (Bhide, 1993), the speculators use liquidity as a mean to make profit in manipulating price down (Goldstein and Guembel, 2008). Hence, there are many papers on both positive and negative relation between liquidity and firm performance; however, most of these papers are about the theoretical models. One of the first empirical papers investigating this relation is written by Fang et al. (2009) supporting the positive relation between liquidity and firm performance in US stock market.
They use relative effective spreads as liquidity proxy and Tobin Q for measuring the firm performance. The result is robust when they use alternative liquidity proxies: Amihud (2002) mean-adjusted illiquidity measure; the Lesmond et al. (1999) percentage of zero daily returns liquidity measure; and the relative quoted spread. Their findings support the theory of stock-price feedback effect and performance-sensitive managerial compensation causality.
LUAN VAN CHAT LUONG download : add luanvanchat@agmail.2 RESEARCH PROBLEM Over the world, there are not much papers that mention the empirical research on the relation between liquidity and firm performance after the first research of Fang et al. This paper aims to fill the gap of lacking the empirical investigation in Vietnam stock market, one of the emerging stock markets in the world.3 RESEARCH OBJECTIVE The objective of this paper is to examine the relation between liquidity and firm performance on Vietnam stock market with the sample of listed firms in Hochiminh Stock Exchange during the period 2007-2010. The above objective of this thesis leads to the research question: RQ1: Does liquidity have effect on firm performance? 1.4 RESEARCH METHODOLOGY AND SCOPE The subject of this research is all listed firm in Hochiminh in the period from 2007 to 2010. The sample size is 573.
This paper uses quantitative research based on Fang et al. (2009) model to investigate the relation between liquidity and firm performance. We use various data analysis methods in conducting the research such as descriptive statistics, correlation matrix, and OLS regression with Eviews 6 for Windows. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.4 STRUCTURE OF RESEARCH Chapter 2 reviews prior work of previous researches.
Chapter 3 selects the model for this paper. Chapter 4 describes data collection and analysis methodology. Chapter 5 contains the result and discussion of empirical tests while Chapter 6 concludes. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 5 ____________________________________________________________________ CHAPTER 2: LITERATURE REVIEW 2.1 INTRODUCTION Chapter 2 is to review the theories of liquid, firm performance, and the relation between liquidity and firm performance in previous research studies.2 LIQUIDITY According to Amihud and Mendelson (2008), liquidity is the capacity of the assets that can be traded quickly and at low cost.
In recent years, investors and scholars pay more attention to liquidity, and the research on its relation with stock return is firstly documented in 1986 by Amihud and Mendelson (1986). After that, a large number of research studies have focused on it and its relation with stock returns and firm values. Among of them, Eleswarapu and Reinganum (1993), Brennan and Subrahmanyam (1996), Datar et al.(1998), Chordia et al.(2001), and Fang et al. (2009) are few well-known studies.
There are a lot of methods to measure liquidity; in this paper, some main measurements are presented.1 Bid-ask spread Suggested by Amihud and Mendelson (1986), bid-ask spread is the difference between lowest price that seller want to sell and the highest LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 6 ____________________________________________________________________ price the investors want to purchase. The higher the spread is, more transaction cost the investors must pay to complete the purchase, and this stock is considered as illiquid stock. Bid-ask spread can be measured by three formulas: The quoted spread The relative spread The effective spread The quoted spread is the simplest formula; it is the difference between the lowest selling price and the highest buying price: where QSi,t is quoted spread of asset i at time t. is ask quoted price of asset i at time t is bid quoted price of asset i at time t The shortcoming of quoted spread method is that it does not have the comparative capacity.
If the spread is the same for two firms with different prices, the firm with lower price should be low liquid than another. The relative spread is comparative method in comparing with quoted spread, its formula as bellowing: LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 7 ____________________________________________________________________ where RSi,t is relative spread of asset i at time t. is ask quoted price of asset i at time t is bid quoted price of asset i at time t is the mid price of asset i at time t The effective spread is the difference between the natural logarithm of actual price and the natural logarithm of the midpoint of the spread. It is calculated after the transaction happened.
It measures the actual execution cost of the traders: where ESi,t is effective spread of asset i at time t. is actual execution price of asset i at time t. is mid price of asset i at time t. The absolute value measures for the variance of both buying and selling prices.
LUAN VAN CHAT LUONG download : add luanvanchat@agmail.2 Turnover ratio The method measures how many times the stock changes its owners, and the higher the ratio is, the more liquid the stock has. Datar et al.(1998) suggest this method in their study, and it becomes more popular in later studies. Turnover ratio is measured by the number of trading shares in one period by the number of share outstanding. where TRi,t is turnover ratio of asset i over the period t.
is number of trading share of asset i over the period t is number of share outstanding of asset i over the period t This method has some advantages.