DIVIDEND POLICY IN TIMES OF RECESSION : AN EMPIRICAL STUDY OF DIVIDEND POLICY AND FIRM PERFORMANCE

IN VIETNAM 2012-2014

INTRODUCTION

Dividend la mot moi quan tam rat lon etc..

Tinh hinh kinh te Viet Nam trong nhung nam 2012-2014…co the se co nhieu tac dong den dividend

Bai nghien cuu nay duoc viet voi muc dich tra loi cac cau hoi :

- Tinh hinh tra co tuc cac nganh trong giai doan 2012-2014- Bien doi ve co tuc (fluctuation) trong giai doan 2012-2014- Moi lien he ve co tuc voi cac yeu to nhu loi nhuan, don bay tc….

1. Literature review

Dividend or profit allocation decision is one of the four major decision areas in finance. The other three are financing, investment, and working capital management decisions. For a corporation, when it generates free cash flow, it must decide how to use that cash. It can reinvest in new investment opportunities, therefore increase the firm’s future value or it can attribute the funds to its owners. Dividend is defined by Ross (1982) as the payment either in cash or other forms that corporations pay to their own shareholders. Ross, Westerfield and Jaffe (2002) also noted that this figure is very important since it not only determines what funds flow to investors and what funds are retained for investment but also provide information to stakeholders concerning a firm’s performance.

Theories on Dividend policy

There has been many studies conducted in the relevance or irrelevance of dividend decisions, with many lines of thought shown and supported, as well as criticized by others. In their research, Miller and Modighani (1961) - known as the theory of M & M, suggested that the change in dividend policy does not affect the value of a share of stock, therefore irrelevant to investors. Miller and Modiglian have supported their theory, based on some assumptions: (1) Firms are operating in perfect markets, which means that there are neither taxes nor brokerage fees, and no single participant can affect the market price of the security through his or her trades; (2) All individuals have the same beliefs concerning future investments, profits, and dividends, i.e., these individuals have homogeneous expectations; (3) The investment policy of the firm is set ahead of time, and is not altered by changes in dividend policy. Basing on these assumptions, M&M argued that a firm’s value is affected only by its investment decisions, its earning power and business risk. Dividend policy made by managers can be offset by investor by either selling off stock or reinvesting the dividend for the purpose of achieving the desired dividend stream. Some researchers who are in support of this theory are Black & Scholes (1974), Merton & Rock (1985) and Peter (1996).

However, there are also many professionals that largely criticize M&M theory, pointing out that many assumptions in M&M do not hold true in reality, and important market imperfections such as asymmetric information, agency cost, taxes, transaction costs, floatation expenses should be taken into consideration when assessing the importance of dividend policy to the firm value. In that case, the dividend policy is seen as relevant.

The first two significant supporters of this idea were Lintner (1956) and Gordon (1963). They suggest that investors would prefer current dividends to potential future profit from capital gains since they have risk aversion. Therefore, a high rate of retained earnings paid out as dividends would increase the value of their respective shares of the corporation.

Another theory that support positive effect of dividend payments on firm value is the agency cost theory first mentioned by Jensen (1992) and Rozeff (1982). According to them, dividend payout policy could be used as a method to reduce the agency problems. If dividends are not paid to investors, the managers can use those resources for misleading purposes, their own benefits, for example. Stouraitis and Wu (2004) revealed that dividend could be used to squeeze the overinvestment problems of corporations by limiting the number of investments with lower expected return. In their study, Agrawal and Jayaraman (2004) observed that dividend policy and leverage policy are two method for controlling the agency cost of free cash flow that can be substituted. A company that have a stable dividend policy tend to have a higher level of activity to obtain more income and have excess retained earnings to pay shareholders.

The theory of signals (which was discussed in Bhattacharya (1979, 1980), Ross (1977), Miller and Rock (1985)) also recognize the relevance of dividend policy. The theory based on the condition of asymmetric information, that is the managers have more information about the prospect of future operation and earnings of the company than the shareholders. Therefore, the declaration of a dividend higher than anticipated by the market can be interpreted as a signal for a positive perspective of the company. For investors, it’s logical to think that the managers wouldn’t increase the dividend if this trend can not be maintained in the future. In other words, it shows the confident of the corporation on its growth and prosper, therefore the stock price can increase. In the other hand, cutting down on dividends can be seen as a bad signal. It might reflect that the company is having difficulty in its operation and the stock price may fall.

On the contrary, there are two theory that supports the idea that investors prefer a low dividend. The first one is the transaction cost theory by Fama (1974) and Higgins (1972). It argues that firm with high transaction costs of equity or debt issuance should pay less dividends, otherwise it will become very costly for the firm to raise sufficient funds for investment need. The second theory – the pecking-order theory (see Myers (1984), and Myers and Majluf (1984)) asserts that firms with more investment opportunities pay less dividends, since those firms prefer internal financing to issuing securities and they try to adapt their target dividend payout ratios to their investment opportunities, while trying to avoid sudden changes in dividends.

Empirical research on Dividend policy

Based on various theories, a number of empirical studies have been conducted to research the determinants of dividend policy. Since the data set in those findings are panel data set, three most common and appropriate methods used for analysis were the Pooled Ordinary Least Squared (Pooled OLS) regression model, the fixed effect model (FEM) and the Random effect model (REM) (Fama (1968), Frankfurter et al. (2002), Foong et al. (2007), Ahmed et al. (2009)).

In the result of the regression, by using both Pooled OLS and FEM and checking the statistical significance of the estimated coefficients, the R2 value and the Durbin-Watson value in both, Foong et al.(2007) concluded that the Pooled OLS model distort the true picture of the relationship between dividends and other factors, therefore not preferred to FEM. In comparison between FEM and REM, the Hausman (1978) specification test was used by Frankfurter et al. (2002). The null hypothesis underlying the Hausman test is that the FEM and REM estimators do not differ substantially. In his findings, the null hypothesis was rejected, implying that FEM is more appropriate.

Many different variables were used in each research in support of the above mentioned theories, including : the dividend payout ratio, return on equity, ownership structure, free cash flow, collateralisable assets, cash flow volatility, size of the firms, risk(beta), growth, profitability, financial leverage etc. In those analysis, these variables all proved to have significant relationship to dependent variable (which is in most case dividend payout ratio).

Nevertheless, while several prior empirical studies from developed economies have shed light on the relationship between firm performance and dividend payout, the same may not be true for emerging market like Vietnam. Different political, economic situation and legal basis may change the true outcome. There have been some studies in Vietnam on the topic of Dividend policy like Dao Le Minh(2004), Nguyen Duy Luong (2007), Bui Thi Ngoc Lan (2009) etc. However, those of them are qualitative in nature. To the best knowledge of the authors, there have been no research conducted in the period of 2012-2014 that use quantitative models to analyze the relationship between dividend policy and other financial factors.

2. Empirical Analysis

In this section, we carry out an empirical research on the relationship between dividend policy and other factors that are considered to have impact on dividend as mentioned in the first section, such as profitability, size of the firm, financial leverage,.. Our focus is on the listed companies in Vietnam Stock Exchange for three year, from 2011 to 2013. Our data includes 115 firms from 16 different industries. We consider only cash dividend because it’s the most common form of dividend payment in Vietnam. Moreover, the information about stock dividend is difficult to obtain and maybe misleading, due to the inconsistency and complexity in the way of calculating the value of stock dividend in each firm.

Because of time limitation and incapability in running regression model of our group, it’s unlikely for us to run several models in data analysis. We therefore will only consider two most popular models : the FEM and REM model for our analysis, which was proved by

other authors to provide better result on this topic as mentioned. The model will be conducted on Stata software.

2.1. Research Hypotheses and Model Specification

After considering relevant theories and research models on dividend policy and because of information unavailability, we decided to include five firm-specific factors assumed to have relationship with dividend in our model. The following hypotheses were postulated in the study:

H1: There is a positive relationship between the level of collateralisable assets and DPR

H2: There is a positive relationship between firm size and DPR

H3: There is a negative relationship between growth opportunity and DPR

H4: There is a positive relationship between profitability and DPR

H5: There is a negative relationship between financial leverage and DPR

Our model can be written as :

DPRit = β0 + β1 NFAit + β2 SIZEit + β3 GROWTHit + β4 PROFit + β5LEVit + εi (1)

For Fixed Effect model, we add 5 non-dummy explanatory variables and industries dummies. The extended model can be specifically expressed as :

DPRit = β0 + β1 NFAit + β2 SIZEit + β3 GROWTHit + β4 PROFit + β5LEVit + Σ λj (INDSj)i + εi (2)

where j denotes industry dummies.

The variables and their explanation is shown in Appendix 1.

2.2. Data analysis and findings

Descriptive statistics

Firstly, we summarize the data for dependent and independent variables used in the regression and come up with the following result for 115 firms in three years, making a total of 345 observation. The descriptive statistics for variables is shown in Appendix 2

It appears that the mean dividend payout ratio of the 115 firms is about 60.4% with a standard deviation of 61%. In another word, on average , listed firms in HOSE and HNX use 60.4% of their earning to distribute dividend to shareholders. The high standard deviation can be explained by the significant difference in dividend policy of firms, with some pay no dividend and others with ratio as high as 6.9. The independent also fluctuate

between firms and industries, but distributed normally with no sign of outliers. In our sample, out of 16 industries, three industries with the most data are Materials & construction, Food & Drink, Industrial services. The actual allocation is shown in Appendix 3.

Multicollinearity test

Before conducting the model, we want to test for correlation of the independent variables. It’s very important since multicollinearity can lead to large variance of estimates, wide confidence interval, small tob, wrong sign of the estimates,... We come up with the following result:

. corr nfa size growth prof lev

(obs=345)

| nfa size growth prof lev

-------------+---------------------------------------------

nfa | 1.0000

size | -0.0667 1.0000

growth | 0.0083 0.1629 1.0000

prof | 0.0262 -0.0300 0.1919 1.0000

lev | -0.0951 0.1734 0.0303 -0.3950 1.0000

It can be seen that no variables are highly correlated. Therefore we have no problem of multicollinearity.

Model selection

First we conduct both the fixed effect model and random effect model, then we run a Hausman test to check which is more appropriate. The null hypothesis is that the preferred model is random effects. Result is shown in Appendix 4. With the Chi-Square Statistic and Probability as shown in Appendix 4, it’s safe to accept the null hypothesis at 5% significance level. Therefore the Random effect model is chosen.

Other tests/ Diagnostics

Testing for normality of residuals: To check whether the overall error component is normally distributed , we predict the residuals then evaluate with graph. The result is the assumption is not significantly violated (Appendix 5).

Testing for serial correlation : A Lagram-Multiplier test for serial correlation is used to verify the problem. The null hypothesis is no serial correlation. Again with Prob > F = 0.3264 we fail to reject the null and conclude the data does not have first-order autocorrelation (Appendix 6).

Testing for heteroskedasticity : To check for the problem of heteroskedasticity in the model, we used the Modified Wald test (Appendix 7). The null is homoscedasticity (or constant variance). With Prob>chi2 = 0.0000 we thereby reject the null hypothesis and conclude that the model has the presence of heteroskedasticity.

Remedy: In order to correct for potential heteroskedasticity across panels, we used the xtgls command as instructed in Stata to robust standard errors.

Final result

After conducting all the test ands diagnostics, the final result –which seemingly most appropriate and accurate, is shown as below :

Table 1. Regression final result

Cross-sectional time-series FGLS regression

Coefficients: generalized least squares

Panels: homoskedastic

Correlation: no autocorrelation

Estimated covariances = 1 Number of obs = 345

Estimated autocorrelations = 0 Number of groups = 115

Estimated coefficients = 6 Time periods = 3

Wald chi2(5) = 13.62

Log likelihood = -312.1749 Prob > chi2 = 0.0182

------------------------------------------------------------------------------

dpr | Coef. Std. Err. z P>|z| [95% Conf. Interval]

-------------+----------------------------------------------------------------

nfa | -.0617215 .1919054 -0.32 0.748 -.4378491 .3144061

size | -.0197645 .0525742 -0.38 0.707 -.122808 .083279

growth | .0203827 .1223334 0.17 0.868 -.2193864 .2601518

prof | -1.264846 .3599149 -3.51 0.000 -1.970267 -.5594262

lev | -.0611558 .0299884 -2.04 0.041 -.119932 -.0023797

_cons | .8960049 .1613149 5.55 0.000 .5798336 1.212176

From the result, we can conclude that the whole model is statistically significant (Prob > chi2 = 0.0182). However, only two out of five dependent variables included in the model is statistically significant at 5% significance level and therefore proved to have

relationship with the dividend payout ratio. The two mentioned variables are both negatively related to DPR.

Specifically, profitability is a significant factor that affected firm dividend payout ratio as indicated by the regression equation. The p value for profitability is 0.000 showing that it is highly significant. If profitability increase by 1%, the dividend payout ratio would decrease by -1.26%. This is quite interesting because it contradicts our mentioned theory that is a more profitable firm would pay more dividend.

The model also reveals that when financial leverage increase 1%, DPR should decrease by 0.06%. This finding agrees with the pecking-order theory, the transaction cost and agency cost theory which stated that highly leveraged companies is obligated to pay lower dividend.

From our model, no clear relationship is witnessed between DPR and collateralisable assets , growth rate and size of the firm.

3. Conclusion

This study basically looked at the dividend policy of listed companies in HOSE and HNX from 2011 to 2013 – when Vietnamese economy experienced major ups and downs due to both international economic crisis and domestic economic problem. Initially, 5 independent variables was used to test for the relationship between dividend payout ratio and five other factors, based on our literature review and hypothesis. The model show that only two variable are significant and negatively related DPR in the given period : profitability and financial leverage.

The findings of this research show that the firm performance or profitability of firm does have effect on dividend policy. Hence its value is contrary to theories that view dividend policy as irrelevant. However, the result also go against our hypothesis by pointing out that an increase in the financial well being of a firm tends to reduce the dividend distributed to shareholders. Perhaps this is because in Vietnamese market, managers think that such good signal from profitability of firm can lessen the requirement for dividend by investors, therefore come up with a lower dividend rate.

The result for financial leverage supports our theoretical prediction, revealing that a company relying on debt financing would have a stricter dividend policy and reduction in dividend level.

For the three left hypothesis, our research shows no apparent link between dividend policy and collateralisable assets , growth rate and size of the firm. These does not seem to be factors that firm managers in Vietnam take into account when considering their dividend policy.

Finally, an important notation in this study is that the result may be completely reflects the true picture of Vietnamese market, due to the rarely small sample size. The sample horizon for this study is short compared to other samples in the literature. Moreover, the act of choosing firms from so many industries with different nature and structure, yet without equal allocation may lead to distortion in our result. However, because of time limitation, that might be unavoidable. To address this problem, further research can be carried out, with an increase in the sample size and specialization in choosing the industry for investigation, both could raise the accuracy of the research.

APPENDIX

Appendix 1. Variables explanation

Variable’s name

Definition Expected sign

Explanation Supporting theory

Dependent VariableDPR Dividend

payout ratio(cash dividend per share/ EPS)

Independent variablesNFA Indicator of

collateralisable assets (Net fixed assets/ Total assets)

(+) A firm with more collateralisable assets has fewer agency problems between shareholders and bondholders because these assets may serve as collateral against borrowing. The higher the collateralisable assets, the less likely bondholders will impose severe restrictions on the firm’s dividend policy, and hence, this will lead to a higher level of dividend payments.

Agency Theory

SIZE Natural logarithm of total sales (Log of sales)

(+) Larger firms tend to have easier access to capital markets, lower issuing costs and higher agency costs. Therefore, a positive relationship is expected between size and dividend payout ratio.

Transactioncost theory

Agency costtheory

GROWTH Sales growth (Percentage of change in a firm’s sales)

(-) If past or anticipated future growth is rapid, then managers tend to conserve funds for reinvestment by establishing a lower payout ratio.

TransactionCost theory

PROF Profitability (Earnings before

(+) Since it is expensive to finance investment with new risky securities, dividends are low

Pecking-order theory

interest and taxes/Total assets)

for firms with less profitability. Thus, controlling for other effects, more profitable firms pay more dividends.

LEV Financial leverage (Debt/Equity)

(-) -Firms that are highly levered tend to have high transaction costs, which then lead to a reduction in dividend payments in order to avoid the cost of external financing-When a firm obtains debt, it makes a fixed commitment to creditors, which then reduces the discretionary funds available to managers and subjects them to the scrutiny of debt-suppliers. As a result, highly leveraged companies will pay lower dividends.

Peckingorder theory

Transactioncost theory

Agency costTheory

INDS Industries dummies

Appendix 2. Descriptive statistics for regression variables

Variable | Obs Mean Std. Dev. Min Max

-------------+--------------------------------------------------------

dpr | 345 .6044047 .6106224 0 6.98062

nfa | 345 .2537324 .1690616 .00459 .96406

size | 345 2.641387 .6318183 .31387 4.43181

growth | 345 .0722397 .2738136 -1.75052 .99916

prof | 345 .1213436 .1000313 -.0611 .89718

-------------+--------------------------------------------------------

lev | 345 1.172826 1.198069 0 8.55

Appendix 3. Industry allocation

Industry | Freq. Percent Cum.

------------------------------+-----------------------------------

Bat dong san | 27 7.83 7.83

Cong nghe Thong tin | 6 1.74 9.57

Dien, nuoc & xang dau khi dot | 30 8.70 18.26

Du lich va dich vu | 15 4.35 22.61

Giao duc | 18 5.22 27.83

Hang & Dich vu Cong nghiep | 66 19.13 46.96

Hang ca nhan & Gia dung | 12 3.48 50.43

Nong nghiep | 3 0.87 51.30

O to va phu tung | 9 2.61 53.91

San xuat | 3 0.87 54.78

Tai chinh | 3 0.87 55.65

Tai nguyen Co ban | 18 5.22 60.87

Thuc pham va do uong | 51 14.78 75.65

Truyen thong | 12 3.48 79.13

Xay dung va Vat lieu | 54 15.65 94.78

Y te | 18 5.22 100.00

------------------------------+-----------------------------------

Total | 345 100.00

Appendix 4. Fixed or random: Hausman test

. hausman fixed random

---- Coefficients ----

| (b) (B) (b-B) sqrt(diag(V_b-V_B))

| fixed random Difference S.E.

-------------+----------------------------------------------------------------

nfa | .0347965 -.0533981 .0881947 .5308852

size | -.2356825 -.0202833 -.2153992 .4777842

growth | -.0386656 -.0022038 -.0364618 .110068

prof | -3.183836 -1.340513 -1.843322 .8315956

lev | -.0070216 -.0613282 .0543066 .1096065

------------------------------------------------------------------------------

b = consistent under Ho and Ha; obtained from xtreg

B = inconsistent under Ha, efficient under Ho; obtained from xtreg

Test: Ho: difference in coefficients not systematic

chi2(5) = (b-B)'[(V_b-V_B)^(-1)](b-B)

= 9.46

Prob>chi2 = 0.0921

Appendix 5. Graph for Normality of Residuals

0.0

05

.01

.015

.02

Density

-50 0 50Residuals

Kernel density estimateNormal density

kernel = epanechnikov, bandwidth = 9.7596

Kernel density estimate

Appendix 6. Wooldridge test for autocorrelation

. xtserial dpr nfa size growth prof lev

Wooldridge test for autocorrelation in panel data

H0: no first-order autocorrelation

F( 1, 114) = 0.972

Prob > F = 0.3264

.Appendix 7. Modified Wald test for heteroskedasticity

. xttest3

Modified Wald test for groupwise heteroskedasticity

in fixed effect regression model

H0: sigma(i)^2 = sigma^2 for all i

chi2 (115) = 1.5e+06

Prob>chi2 = 0.0000

REFERENCES

[1] Agrawal and Jayaraman (2004): Mechanism of Dividend Payment and Leverage Policy. Journal of Accounting Research 21(2)

[2] Ahmed, H. and Javid, A. (2009), “The Determinants of Dividend Policy in Pakistan”, International Research Journal of Finance and Economics, 29(1), pp. 110-125.

[3] Bhattacharya, S. (1979), “Imperfect Information, Dividend Policy, and “the Bird in the Hand” Fallacy”, Bell Journal of Economics, 10(1), pp. 259-270.

[4] Bhattacharya, S. (1980), “Non-dissipative Signaling Structure and Dividend Policy”, Quarterly Journal of Economics, 95(1), pp. 1-24.

[5] Bui Thi Ngoc Lan (2009), “Developing dividend strategy for listed corporation in Ho Chi Minh stock exchange”, Master Thesis in Economics, Ho Chi Minh University of Economics, Ho Chi Minh.

[6] Dao Le Minh (2004), “Dividend policy and its impact to corporation; suggestion for Vietnam”, National Politics Publisher, Hanoi.

[7] Fama E. (1974), “The Empirical Relationship between Dividend and Investment Decisions of Firms”, The American Economic Review, 64(3), pp. 304-318.

[8] Fama E. (1974), “The Empirical Relationship between Dividend and Investment Decisions of Firms”, The American Economic Review, 64(3), pp. 304-318.

[9] Foong, S.S., Zakaria, N.B. & Tan, H.B. (2007) “Firm Performance and Dividend-Related Factors: The Case of Malaysia”, Labuan Bulletin of International Business & Finance, vol. 5: 97-111

[10] Frankfurter, G.M. & Wood, B.G. Jr. (2002) “Dividend Policy Theories and Their Empirical Tests”, International Review of Financial Analysis, vol. 11: 111-138

[11] Gordon, M. (1963). The Investment, Financing, and Valuation of the Corporation, Review of Economics and Statistics. Jensen, G., Solberg, D., and Zorn, T. (1992), “Simultaneous Determination of Insider Ownership, Debt, and Dividend Policies”, Journal of Financial and Quantitative Analysis, 27(2), pp. 247-263.

[12] Higgins, R. C. (1972), “The Corporate Dividend-saving Decisions”, Journal of Financial and Quantitative Analysis, 7(2), pp. 1527-1541.

[13] Lease, K. J., Kalay, A., Loewenstein, U. and Sarig, O. H. (2000). Dividend Policy: It impact on firm value, Harvard Business School Press, Boston.

[14] Lintner, J. (1956), “Distribution of Incomes of Corporations among Dividends, Retained Earnings, and Taxes”, The American Economic Review, 46(2), pp. 97-113.

[15] Miller, M. and Modigliani, F. (1961), “Dividend Policy, Growth, and the Valuation of Shares”, The Journal of Business, 34(4), pp. 411-433.

[16] Miller, M. and Modigliani, F. (1961), “Dividend Policy, Growth, and the Valuation of Shares”, The Journal of Business, 34(4), pp. 411-433.

[17] Miller, M. and Rock, K. (1985), “Dividend Policy under Asymmetric Information”, Journal of Finance, 40(4), pp. 1031-1051.

[18] Miller, M. and Rock, K. (1985), “Dividend Policy under Asymmetric Information”, Journal of Finance, 40(4), pp. 1031-1051.

[19] Myers, R. (1990) Classical and modern regression with applications (2nd ed.), Boston, MA: Duxbury

[20] Myers, S. (1984), “The Capital Structure Puzzle”, The Journal of Finance, 39(3), pp. 574-592.

[21] Myers, S. and Majluf, N. (1984), “Corporate Financing and Investment Decisions when Firms have Information that Investors do not have”, Journal of Financial Economics, 13(2), pp. 187-221.

[22] Nguyen Duy Luong (2007), “Dividend policy of listed companies in Vietnam Stock Exchange”, Master thesis, Ho Chi Minh University of Economics, Ho Chi Minh.

[23] Nguyen Kim Thu, Le Vinh Trien and Duong Thuy Tram Anh, “Determinants of Dividend Payments of Non-financialListed Companies in Hồ Chí Minh Stock Exchange”, VNU Journal of Economics and Business Vol. 29, No. 5E (2013), pp. 16-33

[24] Ross, S.A., Westerfield, R.W. & Jaffe, J. (2002) Corporate Finance (6th ed.),McGraw-Hill Companies

[25] Rozeff, M. (1982), “Growth, Beta and Agency Costs as Determinants of Dividend Payout Ratios”, Journal of Financial Research, 5(3), pp. 249-259.

[26] Rozeff, M. (1982), “Growth, Beta and Agency Costs as Determinants of Dividend Payout Ratios”, Journal of Financial Research.

[27] Stouraitis A. and Wu L., 2004, The Impact of Ownership Structure on the Dividend Policy of Japanese Firms with Free Cash Flow Problem, AFFI December meeting.