Foreign ownership and firm level chacracteristics in the Vietnamese stock market.pdf

1. UNIVERSITY OF ECONOMICS
HO CID MINH CITY
VIETNAM
INSTITUTE OF SOCIAL STUDIES
THE HAGUE
THE NETHERLANDS
VIETNAM- NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS
FOREIGN OWNERSHIP AND FIRM-LEVEL CHARACTERISTICS
IN THE VIETNAMESE STOCK MARKET
Case study: Ho Chi Minh Stock Exchange (HOSE)
A thesis submitted in partial fulfilment ofthe requirements for the degree of
MASTER OF ARTS IN DEVELOPMENT ECONOMICS
By
NGUYEN THI KIM CUC
Academic Supervisor:
Dr. PHAM HOANG VAN
Dr. NGUYEN TRONG HOAI
HOCHI MINH CITY, NOVEMBER 2011

2. Acknowledgments
First of all, I want to express my thanks to the Vietnam Netherlands Program for create
opportunities and help me to pursue and complete an academic course of the Master of
Art in Development Economic. I would like to send my sincere thank to Dr. Nguyen
Trong Hoai who has devote all of his efforts to develop this program and help many
students have more knowledge on development economic- a new economic major in
Vietnam. Next, I also want to say thanks to my supervisor professor Dr. Pham Hoang
Van for his enthusiasm, his helpful comments and suggestions during my thesis. In the
process of collecting data, I also received helps from the Market Information
department, Hochiminh Stock Exchange. Finally, I would like to send my sincere
thanks to all ofyou.
Wish the Program more and more develop.
HCMC, NOVEMBER 2011
NGUYEN THI KIM CUC

3. TABLE OF CONTENTS
Abstract ........................................................................................................................................... 1
CHAPTER 1...................................................................................................................................2
1.1 Introduction ...............................................................................................................................2
1.2 Research objectives ...................................................................................................................4
1.3 Research questions ....................................................................................................................4
1.4 Structure ofthe thesis ................................................................................................................ 5
CHAPTER 2...................................................................................................................................6
2.1 Background................................................................................................................................6
2.2 Achievements ............................................................................................................................7
2.3 Foreign investors in the Vietnamese stock market....................................................................9
2.4 Chapter remark ........................................................................................................................ 12
CHAPTER 3.................................................................................................................................13
2.1 Key concepts ........................................................................................................................... 13
2.2 Theoreticalliterature................................................................................................................ 14
2.2.1 Financial development and economic growth ...................................................................... 14
2.2.2 Stock market and economic growth ..................................................................................... 14
2.2.3 Foreign ownership and firm-level characteristics ................................................................ 15
2.3 Empirical literature .................................................................................................................. 18
2.4 Chapter remark ........................................................................................................................21
CHAPTER 4.................................................................................................................................22
4.1 Research methodology ............................................................................................................22
4.2 Data description.......................................................................................................................24
4.3 Steps to analyzing data ............................................................................................................27
CHAPTER S................t················································································································29
5.1. Estimation results ....................................................................................................................29
5.2 Correlation in pattern growth between VN Index and some other indices .............................36
CHAPTER 6.................................................................................................................................40
6, I Conclusion...............................................................................................................................40
6.2 Policy recommendations .........................................................................................................42
6.3 Limitations and suggested studies ...........................................................................................43
6.3.1 Limitations............................................................................................................................43
6.3.2 Suggested studies..................................................................................................................43
References.....................................................................................................................................45
Appendix. Tables .........................................................................................................................49

4. Abstract
This paper investigates foreign ownership and firm-level characteristics of firms listed
on the Hochiminh Stock Exchange - the formal and biggest stock exchange in
Vietnam. Applying fixed-effects and random-effects models to quarterly data from
2006-2010 for 30 companies, the findings show that foreign investors often invest into
large firms - firms with high market capitalization and in firms with high leverage -
firms with high debt over equity ratio. Furthermore, the results also show that returns
on equity have significance on foreign ownership ratio of foreign investors at listed
firms. The results show no effect of Earnings per Share (EPS) and Price to Earnings
ratio (PIE) on foreign ownership. The paper also checks the pattern growth between
VN Index with Shanghai, and Dow Jones indices and answers why foreign investors
invest in the Vietnamese stock market.
Keywords: foreign ownership, firm-level characteristics, Hochiminh Stock Exchange,
VN Index, ShangHai Index, Dow Jones Index
1

5. CHAPTER 1
Introduction
1.1 Introduction
Vietnam's equity market has benefited from the country's high economic growth of
around 7% of gross domestic product (GDP) per year over the past decade, especially
in 2007 at 8.5% as well as rapid equitization of state-owned enterprises (SOEs).
Passing more than 10 years of dev~lopment, Vietnamese stock market has developed
quickly and attracted more and more foreign capital, adding a large capital source for
listed companies to produce and helping the stock market to develop strongly.
Before 2005, the role of foreign investors in the Vietnamese stock market was very
blurred. This can be explained by new establishment, not yet strong growth of the
market to attract both domestic and foreign investors. However, 2006 is an important
transitional year of foreign investors to the stock market. Foreign ownership in 2006
increased three-fold, from 6% to 17%, and up to end of 2007 this number is 30%. And
from 2007, the foreign ownership is always at high level.
The Vietnamese stock market is an emerging market that attracts more and more
foreign investors who play a very important role in development of the market as well
as the economy.
Over the past 10 years of working of Vietnamese stock market, foreign investors play
an important role not only in Vietnamese capital markets but also Vietnamese
economic growth. In fact, foreign investors help listed companies gain more capital to
produce as well as to innovate their technologies. Foreign investors also help listed
companies to enhance their reliability. Moreover, foreign investors bring experiences
in management and investment even corporate governance into Vietnam. Douma,
2

6. Pallathiatta and Kabir (2006) investigated the impact of foreign institutional investment
on the performance of emerging market firms and found that there is positive effect of
foreign ownership on firm performance. So, finding indicators affecting foreign
investors' holding decisions is important to attracting even greater levels of foreign
investment in the future.
According to the article International Investing on the website of the U.S. Securities
and Exchange Commission, there are two main reasons why people invest
internationally.
The first is a diversification strategy or to spread investment risk among foreign
companies and markets that are different from the United States economy; and second
is growth strategy, exploiting the potential for growth in some foreign economies,
particularly in emerging markets.
Obviously, foreign investors invest into another country in order to diversify their
investment portfolios. Moreover they pay more attention to emerging markets which
usually have faster and higher growth. However they first consider whether
Government's monetary policies affecting interest rate, exchange rate, inflation rate
and the political environment are stable or not to ensure that they will not meet
potential risks when withdrawing their profits. Foreign investors also consider
characteristics oflisted companies will help them to choose which kinds of stocks or
which kinds of portfolios to invest in. These characteristics include ownership
structure, financial structure, stock structure, and stock performance. Investors do
indeed hold fewer shares in firms with ownership structures that are more conducive to
expropriation by controlling insiders. Finally, some foreign investors have ethical,
moral, strategic, national, or cultural criteria that lead them to invest in certain
countries and companies, and to avoid others. Determining which of these criteria are
3

7. the most significant for listed firms at Hochiminh stock exchange will provide valuable
information aiming at attracting more capital for the Vietnamese equity.
1.2 Research objectives
Knowing the role of foreign investors for Vietnamese stock market and economy, the
objectives ofthis research are:
- To identify, rank, and test the significance of which main listed firms' financial
indicators affect to foreign investors' holding decisions with respect to the Hochiminh
stock exchange;
- Examine the pattern growth between VN Index and some indices such as ShangHai
Index and Dow Jones Index to understand why foreign investors invest into Vietnam
stock market ifthere is correlation.
- To generate practical recommendations for listed firms to attract more foreign
investors into Vietnamese stock market.
The research limits its research scope to the Hochiminh Stock Exchange which is the
largest stock exchange in Vietnam.
1.3 Research questions
To attain above objectives, the study will answer following questions:
Is there any relationship between foreign investors' holding at listed firms with
their financial indictors?
Do foreign investors invest into the firm's value or just speculate?
Is there a correlation in pattern growth between VN Index and other indices?
4

8. Answering the above questions permits listed firms to have suitable policies in their
business process to attract even more foreign investors, contributing for development
ofthe Vietnamese equity.
1.4 Structure of the thesis
The paper is organized as follows. Chapter 2 presents an overview of development of
the Vietnam stock market, Hochiminh stock exchange and foreign investors in the
market. A brief literature review is provided in Chapter 3. Chapter 4 describes the
panel data model used to estimate the hypothesis, the research methodologies and a
description of the data set. Research results are given in Chapter 5. Conclusions and
policy implications complete the thesis.
5

9. CHAPTER2
VIETNAMESE STOCK MARKET DEVELOPMENT
(Case study: Hochiminh Stock Exchange)
The process of industrialization and modernization of Vietnam requires a large source
of capital both local and foreign. Hence, establishing a stock market in Vietnam to
mobilize capital for companies to operate and develop is essential. Knowing this, in
1998, the Prime Minister decided to establish Hanoi and Hochiminh City Securities
Trading Centers. Passing more than 10 years of establishment and development, the
Vietnamese stock market has developed quickly. In this process, equitization of state-
owned enterprises (SOEs) has been important to create a more open and healthier
economy.
2.1 Background
The establishment of the Vietnam Securities Market is marked by official operation of
Hochiminh City Securities Trading Center (HoSTC) on July 20th, 2000 and its first
trading session on July 28th, 2000.
In 2007, HoSTC was transferred into Hochiminh Stock Exchange (HOSE). HOSE is
regulated by Securities Law, Business Law, the Charter of HOSE and other relevant
regulations. The event was a milestone in HOSE development and helped it to have an
appropriate position in the regional and international Stock Exchanges.
Development of HOSE is accompanied by the ups and downs of the economy; its
quick development has benefited from high growth rate of GDP of around 7% per year.
Moreover, there are many specific events that made the stock market develop quickly
including joining the World Trade Organization (WTO) and the official visit to
Vietnam of the American President George W. Bush in late 2006. In 2007 we saw a
6

10. sharp increase in the number of listed companies and blooming of the market, and the
Securities Law is issued and came into effect the same year. However, being affected
by global financial crisis from 2008 until now, the stock market faces many difficulties
with the sharp fall in prices of many stocks. The macro economy is faced with a tight
budget, trade deficits, and high inflation. 2008 was the year with the highest inflation
in the last 20 years and up to 23%, decreasing economy growth. All of these factors
created strong impacts to the Vietnam stock market.
2.2 Achievements
Through 10 years of establishment and growth, the Vietnam Securities market
experienced lots of ups and downs. However, the most important in the period of
conformation, establishment and development, the stock market always receives deep
interests of the Party and Government and thorough instructions from the Ministry of
Finance (MoF) and the State Securities Commission (SSC).
Although it is young, with the role of "thermometer" of the economy, the Vietnam
Securities Market, expressed by VN Index has gained significant development.
However it also shows strong fluctuations. From 307.5 in late 2005, VN Index
increased to 809.86 in the sessions on Dec 20th, 2006. The closing of2006 was 753.81,
up by 446.31 equivalents to 145.14% of increase compared to the end of 2005. In the
first few months of 2007, VN Index rapidly increased and reached 1170.67 records in
sessions on Mar 12th, 2007. The Vietnam Index then fluctuated and got under 250 in
the first sessions of Mar, 2009 and presently stays around over 500. This is also a
specific feature of emerging markets, including Vietnam market. It's very volatile.
(Source: Summarize from Hochiminh Stock Exchange)
Landmarks
7

11. 10 years of establishment and growth of HOSE means the first steps of successful
establishment ofthe Vietnam Stock Market, indispensable financial institution meeting
demands for its development and integration into international economies.
Accounting to March 28th, 2009, HOSE successfully performed 2000 sessions. Total
trading volume of securities reached over 5.7 billion, valued 482,000 billion VND,
averagely 255 billion per session.
As of Dec 31st, 2008, the market capitalization on HOSE approximately was 162,000
billion VND, or 12.28% ofGDP.
Followed by HOSE's coming into being there were a varietY of securities firms and
unit trusts. From 7 member firms in 2000, HOSE possessed 95 member firms in March
2009, with chartered capital of 16,000 billion VND in total.
The securities market, through HOSE, has become an important capital raiser for the
economy. From the first two stocks of Refrigeration Electrical Engineering
Corporation (REB) and Sacom Development and Investment Corporation (SAM), until
Mar 30th, 2009, there were 177 stocks, 4 fund certificates and 83 bonds listed on
HOSE. The total amount of issued securities up to Mar 30th, 2009 was 6,306.56 million
(in which there were 5,904.96 million stocks, 252.05 million fund certificates and
149.54 million bonds) with the total listing value of76,640 billion VND.
Up to now, Hochiminh stock exchange successfully held more than 200 auctions,
raised over 50,000 billion VND, in which there were initial public offerings of lots of
groups, corporations, and enterprises in many important fields of the economy such as
Bao Viet Holdings, Petro Vietnam Finance Joint Stock Corporation (PVFC), Petro
Vietnam Fertilizer and Chemicals Corporation, Joint Stock Commercial Bank for
Foreign Trade of Vietnam (Vietcombank), Vietnam Joint Stock Commercial Bank for
8

12. Industry and Trade (Vietinbank), so on, marking the process of privatization with big
materialistic changes.
(Source: Summarize from Hochiminh Stock Exchange)
A number of listed companies on HOSE drew attention from international investors,
have been planning to raise capital and were listed on foreign stock exchanges.
Vietnam Dairy Products Joint Stock Company (VNM) was the first Vietnamese
enterprise to hold share auctions and to be listed on a foreign stock exchange.
In 2001, registered accounts in member firms were 8,774, and then to the end of 2008
the number increased to 510,000, with average annual growth of 110%, in which,
domestic investors accounted for 97%. Foreign investors were only 3% of accounts but
14% oftotal trading volume. (Source: Summarize from Hochiminh Stock Exchange)
The stock market has promoted and supported the equitization of businesses in order to
improve competitiveness, and publicize market information.
Member firms have actively consulted for equitization, listing, issuance and auctions.
These activities have boosted cargo supplies for the stock market and the exploitation
of company potential.
The achievements and failures as well- especially in 2008, are the good experiences for
companies to evaluate their potentials, reform their activities and improve their
productivities. Besides investors both foreign and local will have lessons for
investment.
2.3 Foreign investors in the Vietnamese stock market
According to Vietnamese law, foreign investor can hold a maximum 49% of listed
shares of a listed company and this number of commercial banks is just 30%.
9

13. Foreign investors play a more and more important role for Vietnam's stock market,
including both institutional and individual foreign investors. At the end of 2010, there
are more than 13,000 accounts of individual foreign investors and about 800 accounts
of organizations opened at securities firms which are members of HOSE. Whereas, that
number at domestic investors are more than 1 million accounts for individual investors
and 3,500 accounts for organizations. However, foreign investors account for about 10
percent of trading value of the whole market. Sometimes, foreign investors' buying
pushes the market up. Foreign investors mainly come from Japan, Thailand, Taiwan,
Korea, China and others from the United States.
Besides, foreign investors' trading becomes larger both in volume 'and value.
According to the figure below, foreign investors are net buyers in all years. 2007 was a
boom year for the Vietnamese stock market with net buying of nearly 170 million
shares and 23 billion dong. Being affected by global financial crisis of 2008, 2009 and
even 2010, the stock market meets lots of difficulties with a decrease in trading of
foreign investors. Although the number of traded shares still increase but the trading
value of foreign investors has decreased due to a sharp decrease in prices of many
stocks.
10

14. Figure 2.1. Trading volume of foreign investors by years
Trading activities offoreign investors by years
Tradiug volume (shares)
1000000000
900000000
800000000
700000000
600000000
500000000
400000000
300000000
200000000
100000000
0
~~
~
-..11 i
f- f-
f-
f-
. 1
Rl~
~
•.·a Buying
J.Selling j
Io Buying - Selling I
Source: Summarizefrom Annual Reports 2008, 2009, 2010 ofHOSE
Figure 2.2. Trading value of foreign investors by year
Trading activities offoreign investors by years
Trading value (Vnd mil.)
70000000
60000000
50000000
40000000
30000000
20000000
10000000
0 --In
r-
....
1
1- h
t:t, II
~~ ~<:;)<); ~~ ~r;!f> ~r!jJ n<:;)
to...(;)
tp 11) tp tp tp v
1
aBuying :
1
i• Selling
!o Buying - Selling i
Source: Summarizefrom AnnualReports 2008,2009. 2010ofHOSE
11

15. In 2008, we can see that trading percentage of foreign investors compared to the whole
market accounts for about 15 percent, but this figure in 2009 and 201 0 was only around
6 percent. However, in 2010 we have a significant net buying much more than 2009 -
the most affected year of the global financial crisis. This contributed to a recovery from
the lowest level of only 233 points to 500 points in the VN Index.
Table 2.1. Buying-Selling Percentage of Foreign Investors (HOSE)
2009 2008
Securities
Buying Selling Buying Selling
Share 6,75% 6,30% 15,50% 13,61%
IFCs 5,44% 6,59% 5,09% 5,78%
Bonds 1,58% 18,05% 47,63% 45,65%
Source: Annual Report 2009 ofHOSE
2.4 Chapter remark
In spite of difficulties, ups and downs of the economy, with endless efforts, the
Vietnam securities market in general and HOSE in particular will further grow,
meeting demands of development and integration, continue to reach the targets, raise
the Vietnamese stock market to a higher level, determine the important role of mid and
long term capital raiser for the national economy. More and more investment from
foreign investors helps listed companies to mobilize more capital as well as the stock
market to development more generally.
12

16. CHAPTER3
LITERATURE REVIEW
The Vietnamese equity market is dramatically growing. Although domestic investors
still dominate the Vietnamese stock market, the influence of foreign investors has
grown quickly. Foreign investors have contributed a substantial part in the growth of
the Vietnamese stock market in recent years. They account for around 30% in trading
value at HOSE in 2007, 2008, 2010 though this number in 2009 is only 17% due to
effects of financial global crisis, leading to capital withdrawal of foreign investors.
This chapter reviews the literature on the relationship between foreign ownership and
financial indicators of firms.
2.1 Key concepts
Foreign ownership
Foreign ownership refers to the fraction of shares of a listed company held by
foreigners. In this paper, we accept that foreign investors act as institutional investors
because they account for a large proportion of trading and holding in the Vietnam stock
market.
In Vietnam, foreigners are limited in holding shares at listed companies with a
maximum of 49% at listed companies and 30% at financial institutions (commercial
banks). This objective is aimed at protecting Vietnamese companies and avoiding
merging and acquisition of companies with low market capitalization compared to
large capital from foreign investors.
Firm-level characteristics
13

17. Firm-level characteristics are attributes of listed companies, which show a firm's scale
and health as well as operating situations of a company. In the Vietnamese stock
market these basic attributes include firm size, Earnings Per Share (EPS), Price to
Earnings (P/E), Price to Book ratio (P/B), Beta coefficient, Returns on Equity (ROE),
Returns on total Asset (ROA), Leverage ratio, Liquidity coefficient, so on.
2.2 Theoretical literature
2.2.1 Financial development and economic growth
The relationship between financial development and economic growth has attracted the
attention of many researchers throughout history. On The theory of economic
development, Schumpeter (1911) stated that development of financial sector is
important in promoting economic growth. He argued that production needs credit and
the banking system affects the allocation of savings, and then improving productivity,
as well as technical change and boosting economic growth. Many other research and
literature later studied the casual relationship between financial development and
economic growth, for example Keynes (1930), Lewis (1955), King and Levine (1993),
Demirguc and Maksimovic (1996), Levine and Zervos (1998).
2.2.2 Stock market and economic growth
Along with the establishment and development of stock markets in developing
countries in the last few decades, researchers shifted their attention to the relationship
between stock market and economic growth rather than financial sector in general, for
example research ofHabibulla (1999), Chang (2002) for China and Bhattacharyya and
Sivasubramaniam (2003), Agrawalla and Tuteja (2007), Sarkar (2007), Chakraborty
(2008) for India. Bahadur and Neupane (2006) concluded that stock markets
fluctuations predicted the future growth of an economy. Many other studies also
support the view that stock markets promote economic growth such as Spears (1991 ),
14

18. Levine and Zervos (1998), Atje and Jovaovic (1993), Comincioli (1996), Filer et al
(1999), Tuncer and Alovsat (2001).
2.2.3 Foreign ownership and firm-level characteristics
Through foreign capital from foreign investors into stock markets, many countries
especially emerging markets can take advantage of this source to develop. So finding
which firm factors affect foreign investors' investment decisions is important.
There is a growing literature on foreign ownership both in developed and emerging
markets, in which a number of papers have considered the question of the foreign
investors' portfolio choice.
Merton (1987) argues that, investors typically invest in familiar securities. Foreign
investors usually meet information asymmetry, so they prefer to invest in securities
which are familiar with abroad, including large firms and firms with high export ratios.
By using the International Capital Assets Pricing Model, Solnik (1974) realized that in
the countries that foreign investors invested, they tend to hold the market portfolio.
However, due to problems of information asymmetry, investment barriers, as well as
disharmonious taxation instead of just choosing market portfolio, specific advantages
will be considered by foreign investors when selecting their foreign assets.
Kang and Stulz (1997) were the first who used firm-specific data in the Japanese
portfolio market from 1975 to 1991 to investigate the home-bias puzzle. The results
showed that foreign investors prefer more shares of firms in manufacturing industries.
They hold fewer shares at small firms, and firms with high leverage but supported firm
with good accounting performance, and low unsystematic risk.
By analyzing the French stock markets, Morin (2000) gave conclusion on foreign
institutional investors. Firstly, foreign institutional investors made France have rapid
15

19. change on its financial network economy and become a financial market economy.
Simultaneously, this made the traditional system of cross holding be broken and
encouraged more foreign investors who had new techniques and requires efficient
corporate management.
Falkenstein (1996) and Gompers and Metrick (2001) analyzed the level of ownership
of institutions and mutual funds in the U.S. market and found that one of the important
determinants to their holdings is stock market capitalization. By studying the Swedish
stock market for the period 1993-1997, Dahlquist and Robertsson (2001) also
concluded that size is more important to international investment compared to it in the
U.S market due to concerns of over liquidity and transaction costs from investors.
Dahlquist et al. (2003) studied the Swedish market for the relationship between foreign
ownership and firm characteristics. By explaining that liquidity drives firm size,
foreigners hold more shares at large firms. The findings also showed that foreign
investors invest more in firms which pays low dividends and have large cash holdings.·
Firms' international presence is measured by foreign listings and export-sales.
Leuz, Nanda and Wysocki (2003) studied on the information problems which can make
foreigners to hold fewer assets in firms. And firm level characteristics can cause the
information asymmetry problems. Family firms usually communicate its information
through private channels. Moreover, informative insiders tend to provide opaque
financial statements and managing earnings and hide their benefits from outside
investors.
Cho & Padmanabhan (2001) showed that governance of listed companies plays an
important role in foreign institutional investment decisions. Li and Jeong-Bon (2004)
found that foreign investors dislike stocks which have high cross-corporate holdings.
They concluded that foreign institutional investors seemed to be efficient processors of
16

20. public information and they like Japanese firms because of its low information
asymmetry.
Haw, Hu, Hwang and Wu, (2004) also confirmed that foreign investors face
information asymmetry problems from firm level factors. Their findings were that the
US investment is less in firms where effective control does not belong to managers.
Furthermore, foreign investors invest less in countries with poor information
framework because these companies usually engage in more earnings management.
Li (2005) mentioned on corporate governance affecting foreign investors that foreign
investors prefer foreign direct investment to indirect portfolio investment if there are
poor corporate governance.
Choe, Kho, Stulz (2005) studied United States investors and the findings showed that
they hold less shares at firms which controlling insiders get benefit from ownership
structures. They also do not like stocks of firms that information is limited to access
and less available to shareholders because adverse selection problem will happen in
these cases.
Ahmadjian and Robbins (2005) analyzed foreign portfolio investment in 1108 firms for
the period 1991-2000 in the Japan. Their analysis showed that investment returns is
more attractive to foreign investors than in long-term relationships. The results also
showed that foreign funds have weak contribution and influence in firms which have
close relationship with domestic financial institutions and corporate groups.
Douma , Rejie George and Rezaul Kabir (2006) studied the influence of foreign
institutional investment at emerging market firms. The result shows that foreign
ownership has positive effect on firm performance. Furthermore foreign investment
also has impacts on the business group affiliation of firms.
17

21. Covirg et al. (2007) confirmed that domestic fund managers usually have more
information on domestic stocks than foreign fund managers. Stocks which have large
size of foreign sales or foreign listing are more preferred by foreign funds. Foreign
funds also like to invest in stocks which have index memberships.
Using dataset of Japanese and Korean stock markets, Ko et al. (2007) have interesting
conclusion on preference of the foreign and institutional investors on firm attributes.
On both these stock markets, stocks which have large capitalization and low book-to-
market are more preferred by foreign investors than institutional investors. Moreover,
foreign investors tend to hold more shares at firms with high return on equity,
especially in Korea.
Ferreira and Matos (2008) find that foreign institutions in 27 countries tend to prefer
firms with good governance and those cross-listed in the U.S.
2.3 Empirical literature
Chiang, Yi-Chein, Chih-Chen (2006) studied the relationship between the foreign
ownership and firm-characteristics by using the multivariate analyses on three-year
average data and pooled cross section/time series data during the period 2001-2003 in
the Taiwan stock market. The results show that foreign investors invest more in firm
with large size, high ROE, low leverage ratio. They also prefer firms which issue
foreign securities.
Lin, C. H., and Shiu, C.Y. (2003) also studied determinants affecting to foreign
ownership using dataset for the period 1996-2000 in the Taiwan equities. The findings
are that foreign investors like to invest in large firms. Simultaneously, they tend to
choose to stocks with low book-to-market. Furthermore, firms with high export ratios
are strongly preferred by foreign investors.
18

22. Prasanna, P. K., (2008) analyzed panel data for twenty-five companies included in the
Sensex index of the Bombay Stock Exchange (India) and twenty quarters during five
years from 2001 to 2006 to understand the time series, cross sectional and random
effects of foreign institutional investment and firm specific characteristics, including
ownership structure, financial and stock performance. The results show that foreign
investors prefer companies which have high volume of publicly held shares and
holdings of foreign investors and promoters at a firm are inversely related.
Furthermore, in this study the share returns and Earning per share have more influence
than other variables on foreign investor's investment decision.
Recently, Vo Xuan Vinh (2010) in his research on foreign ownership in Vietnam stock
market investigated the characteristics of listed firms in Hochiminh Stock Exchange
that are attractive to foreign ownership. By using the multivariate linear regression
analysis for the dataset from 2007 to 2009, the findings are that foreign investors prefer
large firms, and firms with high book-to-market ratio and low leverage. Besides this
paper also examined the relationship between foreign ownership and ownership
structure, the result found that foreign investors also avoid firms with dominant
shareholders and prefer to invest in firms where they can have influence. In addition,
foreign investors favor pharmacy firms. Simultaneously, foreign investors also have a
long-term horizon in their investment and follow the buy-and-hold strategy.
This thesis adds to this literature on the determinants for foreign ownership in equity
markets. Five firm specific variables have been taken and data collected on a quarterly
basis from 2006 quarter 2 to 2010 quarter 2. These variables include market
capitalization, return on equity, earnings per share, price-to-earning ratio, and
debt/equity ratio or leverage ratio.
19

23. Figure 3.1. Conceptual Framework
Firm-level characteristics:
Vietnamese Stock Market
Emerging Market
Asymmetric Information
Low Corporate Governance
Firm Size (SIZE)
Return-on-equity (ROE)
Earning Per Shares (EPS)
Price Earnings ratio (PE)
Leverage ratio (LEV)
l----------+1 Foreign Ownership ~
• ~
% Owning ratio No. ofholding shares
I Pattern growth of VN Index l
"I I
i
I
VN Index/SSE, DOW
I
20

24. 2.4 Chapter remark
In summary, the relationship between foreign ownership and firm-level characteristics
will be examined by using either economic theories or techniques throughout the
thesis. Figure 3.1 is the framework which initially presents the characteristics of
Vietnamese stock market and overview of all inclusive variables as well as the
relationship in pattern growth between VN Index - representative for Vietnamese stock
market and Shanghai Index - another emerging market but much larger and having
longer history and Dow Jones Index - large and long developed market. Foreign
ownership could be measured by percent of shares or the number of shares that
foreigners hold at listed firms. In this thesis, percent of shares hold by foreigners at
listed firms is used to analyze. Moreover, the correlation in pattern growth between VN
Index and Shanghai and Dow Jones Index is also examined to check the relationship
between the Vietnamese stock market and other markets and partially answer why
foreign investors decide to invest into Vietnamese market.
21

25. CHAPTER4
RESEARCH METHODOLOGY AND DATA COLLECTION
This chapter describes the methodology to analyze the panel dataset. Fixed-effects and
random-effects model are used to address the panel ·data. Besides, this section also
shows data description of sources, variables and expected sign for variables. Finally the
progression ofthe analysis is described.
4.1 Research methodology
The paper studies 30 non-financial listed companies on Hochiminh Stock Exchange
(HOSE). The data will be collected from the second quarter of 2006 to the second
quarter of2010 quarterly, totalling 17 quarters, for 510 observations.
As a preliminary analysis, a simple or pooled Ordinary Least Squares (OLS) regression
is used to find those variables that are correlated to foreign ownership of companies.
With panel data as above, the paper also focus on two techniques use to analyze panel
data, fixed effects and random effects.
We will also estimate a random effects model, which is appropriate if the unobserved
variables are not correlated with the independent variables.
Fixed-effects model:
The panel data allows us to control for unobserved company specific characteristics as
well as unobserved shocks that affect all firms equally over time. A fixed-effects
model is appropriate if these unobserved variables are correlated with the independent
variables in our model. The research will consider fixed-effects at the time and
company levels separately as well as both time and company at the same time.
22

26. Company fixed-effects:
where:
FOit is the foreign ownership ratio for company i in quarter t
X1, it ... Xk, it represents the k independent variables for company i in quarter t
f31•.• f3k are the coefficients on the respective independent variables
F2 ... Fn are dummy variables for each ofthe n-1 firms, one firm dummy is
omitted. These dummy variables control for the firm-specific fixed-effects and
represent the different intercept ofthe n firms
y2 ••• Yn are the coefficients on the respective dummy firms
Uit: is the error term assumed independently drawn, identically distributed
normal with zero mean.
Time fixed-effects regression model:
Where:
Q2 ... Qt are dummy variables for the t-1 quarters in the data. One quarter
dummy is omitted as the reference quarter
t51 ... t5t are the coefficients on the respective dummy time
Time and company f'IXed-effects regression model:
23

27. We know that Fixed-effects seem to not work well with data which has slow changing
variables over time.
According to the summary of variables in Table Al, only ROE has low mean and
standard deviation. However due to its importance, this thesis still considers its impacts
on foreign ownership at listed companies.
Random-effects model:
In the random-effect model, it assumes that the variation between firms is random and
uncorrelated with independent variables in the model. We have random-effects model
as follows:
where uit is the error term between firms and Sit is the within-firm error. The
assumption in this setup is that uit is uncorrelated with any ofthe independent variables
xJ ... xk.
4.2 Data description
Data source
All of data are taken from Hochiminh Stock Exchange (HOSE), including HOSE
securities bulletin board, financial reports, annual reports and some variables will be
calculated based on these collected data.
24

28. Variables
Dependent variable
Foreign ownership (FO) measured as the percentage of shares owned by foreign
investors. In the Vietnamese stock market, FO can be understood as "room for
foreigners" at a listed company.
Independent variables
(1) Market capitalization (SIZE): is used to determine a company's size. It is
measured by multiplying the current market price of share of a company by its
outstanding shares. We expect that foreign investors prefer firm with large size.
(2) Return on equity (ROE): is the most important ratio to investors. It shows the
ability to make profit per each invested capital. The formula to calculate ROE:
ROE= Net Income/Shareholders' Equity
The higher ROE shows that the company uses effectively the investor's capital, and it
can balance between equity and debt in the operation process. Investors tend to like
firms with high ROE.
(3) Price-Earnings ratio (PE): is one of the most important analyzed indicators in
investors' investment decision for stocks. Earnings per share has decisive affects to the
market price of a stock. And PIE indicator shows the relationship between the market
price (P) and Earnings per share and calculated by the formula:
PIE= P/EPS
Where as:
P: market price at which a stock is buying or selling at current time.
25

29. EPS: Net income after tax that a company pays for shareholders.
We expect that foreign investors would like to own a larger share in firms with high
profitability. That is, they tend to choose stocks with a high ROE and a low PIE ratio.
(4) Earnings per Share (EPS): This is the portion of profit that a company pays for
each outstanding share. EPS is used to show the ability to make profit of a company.
This is an important indicator to calculate a stock's price. In this paper we expect EPS
has a positive significance to foreign ownership.
(5) Leverage (LEV): is the ratio of total liabilities to total equity. It shows the
ability to meet long-term payment of a company. We expect that foreign investors tend
to hold more shares of low leverage ratios in order to avoid firms at risk of financial
distress.
Due to the complication of calculating dividends of stocks, the paper will not consider
the effect of dividends on foreign ownership at listed companies. Some listed
companies pay dividend quarterly, some others pay by annually or at different times of
payment. Some pay by cash, by shares or both. So this is quite difficult to have a good
data to analyze.
All ofthese variables are summarized as table below.
26

30. Table 4.1. Variables
Variable(s) Definition Expected Source
sign
Dependent variable
HOSE Securities
FO Foreign Ownership Bulletin Board
Independent variable
SIZE Market capitalization (+) HOSE Securities
Bulletin Board
ROE Return on Equity (+) HOSE Securities
Bulletin Board
PE Price to Earnings ratio (-) HOSE Securities
Bulletin Board
EPS Earnings Per Share (+) HOSE Securities
Bulletin Board
Financial reports of
LEV Leverage ratio (-) firms
PATTERN GROWTH
Summarize monthly
VNI VN Index from HOSE
Summarize monthly
SSE Shanghai Index from Bloomberg
Summarize monthly
DOW Dow Jones Index from Bloomberg
And the suggested model includes for five main indicators determining the foreign
ownership at listed firms is as follow:
FO = f (SIZE, ROE, EPS, PE, LEV)
4.3 Steps to analyzing data
Step 1: Do OLS regression.
Step 2: Random-effects and fixed-effects regression
27

31. Step 3: Breusch-Pagan Lagrange Multiplier (LM) and Hausman test
Step 4: Do regression with change in foreign ownership (FO_change)
Besides, the research also checks the pattern growth of VN Index with Shanghai Index,
and Dow Jones Index. Whereas Shanghai Index is also considered as an emerging
market, the Dow Jones has long-run histories of development and is a big market. This
is aimed at comparing between an emerging stock market (Vietnam) and some long
developed and highly stable stock markets. Moreover, ifthere is a correlation in pattern
growth between VN Index with Shanghai and Dow Jones, it can partially answer the
reason why investors decide to invest into Vietnam market.
28

32. CHAPTERS
RESEARCH RESULTS
This chapter presents results from analyzing collected data. From then discussions are
taken. Some listed firms are also regressed as sample case study for the results of the
whole sample. Finally pattern growth between VN Index and some indices are
examined. If there is a correlation then it will be an answer for the reason why foreign
investors invest in the Vietnamese market.
5.1. Estimation results
First, we look at Table 5.1 and Table 5.2 presenting summary statistics of the variables
and a correlation matrix between foreign ownership and other variables. At first glance,
market capitalization and foreign ownership have high mean and standard deviation
whereas return on equity has the lowest mean and standard deviation. Additionally, in
Table 5.2, it can be seen that foreign ownership positively correlates with market
capitalization, EPS and PIE and negatively correlates with ROE and Leverage.
Table 5.1. Variables Summary
Variables Mean Std. Dev.
Foreign
Ownership 28.84889 15.91868
ROE 0.0483863 0.043355
EPS 4.57727 3.687839
PIE 19.99735 60.28285
Market Cap. 2816.091 5574.516
Leverage 0.7066774 0.7066774
29

33. - - - - - - - - - - - - - - - - - - - - - - - - -
Table 5.2. Correlation Analysis
Independent variables Foreign Ownership
ROE -0.0207
EPS 0.0866
PIE 0.0272
Market Cap. 0.1639
Leverage -0.1601
Table 5.3 reports the regression results in cases of Pooled OLS, random-effects and
fixed effects. For the first regression, pooled OLS regression will be done. We can see
that ROE, Market capitalization and Leverage are statistically significant. The
coefficient on Market capitalization is positive while the coefficients on the ROE and
Leverage variables are negative. Except for ROE, Market capitalization and Leverage
are true with the expected sign. For this result, we can see that foreign ownership
increases 4% if firms are bigger by 1% but reduces their owning at these firms 3% if
leverage ratio increases by 1%. ROE is also significant to Foreign ownership, but
negative. However, there could be common effects by company and the time that could
bias this estimate.
In this paper, dataset is panel data. OLS regressiOn does not have the unknown
intercept for each company. This model assumes that this unknown intercept of all
companies is equal. This is not true in reality, and usually leads to bias and wrong
conclusions. So for a deeper understanding on the relationship and effects of the firm
characteristics on Foreign ownership, as well as calculating the unknown intercept of
30
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34. companies and coefficients for independent variables, regression techniques for panel
data are used, including fixed-effects and random-effects.
Continuously, we will look at results for random effects at the company level and the
time level respectively. At the time level, we can see a result which is quite similar
with the case of OLS regression. However in the case of the company level, there are
only two significant variables which are Market capitalization and ROE.
Table 5.3. also presents results from the fixed-effects models with company, time
separately as common effects and with year and company fixed-effects together.
In the case of the company fixed-effects specification, when company is controlled for,
Market capitalization and ROE are consistently significant. But when we control for
time fixed-effects, then even Leverage have an effect on Foreign ownership. The most
important specification in fixed-effects is two-way fixed effects model when we
control for both time and company effects. In this case, only Market capitalization and
Leverage are statistically significant. However, Leverage has positive effect on Foreign
ownership which is not true with above expected sign and this case needs to be further
considered. Whereas Market capitalization still has positive relationship with Foreign
ownership.
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35. T 3. R' I
-----------..---------------
Random-effects Fixed-effects
I
PooledOLS
Foreign
Ownenhip Company level Time level Company level Time level Both company and time
Coeff. t-Stat Prob. Coeff. t-Stat Prob. Coeff. t-Stat Prob. Coeff. t-Stat Prob. Coeff. t-Stat Prob. Coeff t-Stat Prob.
ROE -{i5.80876 -3.79 0 -38.21862 -3.14 0 -62.2057 -3.56 0 -36.0138 -2.95 0.003 -51.5028 -2.86 0.004 -9.101029 -0.77 0.442
EPS -0.0895793 -0.46 0.644 -0.0635653 -0.45 0.66 -0.08491 -0.44 0.66 -0.06572 -0.46 0.645 -0.07427 -0.38 0.702 0.012208 0.09 0.927
PIE -0.0007491 -0.07 0.946 -0.0050069 -0.71 0.48 -9.80E-05 -0.01 0.993 -0.00479 -0.68 0.499 0.002024 0.18 0.855 -0.0022064 -0.34 0.736
Marketcap. 4.639032 9.49 0 2.560102 3.28 0 4.675104 9.56 0 1.836663 2.04 0.042 4.783245 9.59 0 4.194981 3.4 0.001
Leverage -3.098772 -3.19 0.002 0.9998136 1.05 0.3 -3.10522 -3.21 0.001 1.369604 1.39 0.164 -3.13129 -3.22 0.001 2.983368 3.19 0.002
No. of 476 476 476
476 476 476
observations
0.1893
R-squared ovemll = 0.1438 overall = 0.1892 ovemll =0.1136 overall= 0.1872 0.7647
Adjusted
0.1807
0.737
R-squared
-
32
6672557