Relationship between ownership concentration and dividend policy evidence from listed companies in HOSE

RELATIONSHIP BETWEEN OWNERSHIP CONCENTRATION AND
DIVIDEND POLICY: EVIDENCE FROM LISTED COMPANIES IN HOSE

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

In finance

By

Ms: Tran Thu Phuong

ID: MBA04029

International University - Vietnam National University HCMC

August 2013


RELATIONSHIP BETWEEN OWNERSHIP CONCENTRATION AND
DIVIDEND POLICY: EVIDENCE FROM LISTED COMPANIES IN HOSE

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

In finance
By
Ms: Tran Thu Phuong
ID: MBA04029

International University - Vietnam National University HCMC

August 2013

Under the guidance and approval of the committee, and approved by all its members,
this thesis has been accepted in partial fulfillment of the requirements for the degree.

Approved:

---------------------------------------Chairperson

--------------------------------------Committee member

---------------------------------------Committee member

--------------------------------------Committee member

---------------------------------------Committee member

--------------------------------------Committee member


Acknowledgement
To complete this thesis, I have been benefited from the following people.
First of all, I would like to express my special thanks to my advisor – PhD.
Nguyen Kim Thu – who recommended the research idea to me and for all of her
enthusiastic instruction and encouragement during the time I do this thesis. Besides, I
would like to dedicate my gratitude to IU lecturers who communicated abstruse
knowledge to me during MBA program, and the members of the Examination
Committee for taking time and giving valuable comments to improve this study.

I also want to give my sincere thanks to my friends and my classmates who
are my inspiration and always encouraged me during the past time.
Last but not least, I want to express my loving thanks to my family who
always stand beside me. My greatest gratitude is to my mother, Trinh. My MBA
program in IU - VNU would have not been completed without her love and
encouragement.

HCM City, August 2013
TRAN THU PHUONG

i


Plagiarism Statements
I would like to declare that, apart from the acknowledged references, this
thesis either does not use language, ideas, or other original material from anyone; or
has not been previously submitted to any other educational and research programs or
institutions. I fully understand that any writings in this thesis contradicted to the
above statement will automatically lead to the rejection from the MBA program at
the International University – Vietnam National University Ho Chi Minh City.

ii


Copyright Statement
This copy of the thesis has been supplied on condition that anyone who
consults it is understood to recognize that its copyright rests with its author and that
no quotation from the thesis and no information derived from it may be published
without the author’s prior consent.
© Tran Thu Phuong / MBA04029 / 2013

iii


Table of Contents
Chapter 1 – Introduction ........................................................................................... 1
1.1.

Background of the Study ............................................................................... 1

1.2.

Problem Statement ........................................................................................ 2

1.3.

Rationale of the Research .............................................................................. 4

1.4.

Importance of the Research ........................................................................... 6

1.5.

Research Question ......................................................................................... 6

1.6.

Research Objective ........................................................................................ 7

1.6.1.

General objective ................................................................................... 7

1.6.2.

Specific objective ................................................................................... 7

1.7.

Scope and Limitation of the Research ........................................................... 7

1.8.

Research Approach ........................................................................................ 8

1.9.

Thesis Structure ............................................................................................. 9

Chapter 2 – Literature Review ............................................................................... 10
2.1.

Related Theories .......................................................................................... 10

2.1.1.

Dividend theories ................................................................................. 10

2.1.2.

Effect of Ownership concentration on dividend policy ....................... 23

2.2.

Previous empirical studies ........................................................................... 25

2.2.1.

Abroad .................................................................................................. 25

2.2.2.

Vietnam ................................................................................................ 30

Chapter 3 – Research Methodology ....................................................................... 33
3.1.

Data Collection ............................................................................................ 33

3.2.

Research Model ........................................................................................... 34

3.2.1.

Variable definition and empirical studies ............................................ 34

3.2.2.

Model and hypothesis .......................................................................... 38

Chapter 4 – Data analysis ........................................................................................ 43
4.1.

Descriptive Statistics ................................................................................... 43

4.2.

Analysis of the results ................................................................................. 45

4.2.1.

Pearson Correlation .............................................................................. 45

4.2.2.

Pooled OLS and Random Effect Model (REM) .................................. 48

4.2.3.

Model (1) and Model (2) with Pooled OLS analysis ........................... 52

4.2.4.

Model (3) and Model (4) with REM .................................................... 52

4.2.5.

Tobit analysis ....................................................................................... 53

iv


Chapter 5 – Discussion and Conclusion ................................................................. 57
5.1.

Discussion ................................................................................................... 57

5.1.1.

Ownership concentration and dividend policy..................................... 57

5.1.2.

Firm’s characteristics and dividend policy .......................................... 58

5.1.3.

Ownership concentration types and dividend policy ........................... 59

5.2.

Conclusion ................................................................................................... 62

5.3.

Recommendation ......................................................................................... 62

v

List of Tables

Table 2.1 Correlation relationship results between dividend policy and independent
variables in Vietnam firms ......................................................................................... 32
Table 3.1 Definitions of variables .............................................................................. 38
Table 3.2 Empirical result of the effect of government and foreign investors on
dividend policy ........................................................................................................... 41
Table 4.1 Ownership concentration types of the sample firms. ................................. 44
Table 4.2 Descriptive statistic of the sample firms .................................................... 45
Table 4.3 Partial covariance analysis ......................................................................... 46
Table 4.4 Pearson Correlation .................................................................................... 47
Table 4.5 Pooled OLS ................................................................................................ 49
Table 4.6 Random effect model ................................................................................. 50
Table 4.7 Breusch-Pagan test ..................................................................................... 51
Table 4.8 Breusch-Godfrey Serial Correlation LM test ............................................. 52
Table 4.9 Tobit analysis ............................................................................................. 56

vi


List of Figures

Figure 1.1 Cash dividend/par value of listed companies in HOSE in 2011 and 2012 . 5
Figure 2.1 Definition of Variable. .............................................................................. 29

vii


List of Abbreviation

Abbreviation

Equivalence

FCFF

Free Cash Flow to Firm

FEM

Fixed Effect Model

LM test

Lagrange multiplier test

Obs.

Observations

OLS

Ordinary Least Square

Pooled OLS

Pooled Ordinary Least Square

REM

Random Effect Model

Std. Dev.

Standard Deviation

viii


Abstract
The main purpose of this research is to study the relationship between
ownership concentration and dividend policy in term of cash dividend of listed
companies in HOSE.
The sample consisted of 154 listed firms in HOSE in two years 2011 and
2012. The sample was divided into 5 groups of ownership concentration in order to
achieve the different relation of ownership concentration types with dividend policy.
Pooled OLS, random effect model and Tobit model were used to test the hypotheses.
The results show that ownership concentration has negative and significant
relationship with dividend policy in general. Different types of ownership
concentration have different impact on dividend policy.

Keywords: Ownership concentration, dividend policy

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MBA04029 – TRAN THU PHUONG

Chapter 1 – Introduction
In order to make clear why this study was conducted, chapter 1 brings an
overview of the research. Background of the Study generally raises the issue about
dividend policy and ownership concentration as the start point of the Problem Statement
in which the arguments about this relationship are controversial. Vietnam market reality
also is described in this section as the support reason for the researcher to choose this
topic. The Scope and Limitation of this research are also provided.
1.1. Background of the Study
Dividend policy has been one of the topical issues in financial management
because dividends are a major cash outlay for many corporations. It is the decision on
how much profits will be paid out as dividend to shareholders and how much will be
kept as retained earnings to reinvest in the company.
According to Miller and Modigliani (1961) dividend irrelevance proposition,
dividend policy does not matter in a tax-free world. The argument was that if the firm
pays dividend to their shareholders, the firm doesn’t have enough retained earnings to
reinvest, they would borrow funds, and the loss in value of existing share would be
exactly equal to the dividend paid out as a result of borrowing instead of using internal
fund (Davies, Boczko & Chen, 2008). Thus shareholders are indifferent between
dividend and capital gain. However, this argument has been challenged at present. If
dividends are irrelevant, why companies still pay dividends and why investors are aware
of dividends. In reality, there are many theories and research support to the dividend
relevant argument such as Bird-in-hand theory by Gordon and Walter (1963), Agency
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MBA04029 – TRAN THU PHUONG
theory by Jensen and Meckling (1976), Tax preference hypothesis by Brennan (1971),
Transaction cost theory. These theories showed that, a change in dividend policy will
influence the stock value, by that, affecting the market value of the firm. These theories
will be summarized in Literature Review part.

Consequently, if paying dividends is important for companies, then we need to
identify factors influencing the dividends policy. Following theories of dividend policy,
we can see that dividend policy has a significant effect on shareholders’ benefit, thus
they should control the dividend policy to act on their best interest. Their pressure on
managers may make them follow their willing to pay or not to pay dividend and how
much of the profit of the company should be distributed as well as how much of it
should be invested in the form of accumulated profit in the company. However, different
investors will have a different perspective about dividend. Some ask for high dividend,
some want the firm to keep retain-earning to continue invest, while others just think that
there is no difference between dividend and capital gain. Therefore, this thesis aims to
identify the relationship between dividend policy and the ownership concentration factor
with evidence from HOSE stock exchange.
1.2. Problem Statement
The ownership of a firm involves many investors, and the ownership structure is
divided to two main structures: concentrated and dispersed. According to T. X. T.
Nguyen (2010) and Ullah, Fida and Khan (2012), the number of large-block owners and
the total percentage of the company's shares that they own define ownership
concentration (large-block shareholders are investors who typically own at least five
percent (5%) of the company's shares). And the company with dispersed ownership is
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MBA04029 – TRAN THU PHUONG
defined

as

has

large

number

of

shareholders

with

smallholdings

(www.openlearningworld.com).
According to the agency cost theory, the more dispersed the ownership structure
is, the more severe the agency problem is, therefore, the need for monitoring managers
also increases. Monitoring managers’ behavior is more difficult when the ownership
structure is widely dispersed. If shareholders involve in the monitoring, they have to
incur the full cost of monitoring, while they just gain the benefit according to their
relative share of ownership, which is very small. The monitoring activity would be more
effective if there were some agents who monitored managers on shareholders’ behalf. If
dividends can act as a monitoring mechanism by reducing cash available for managers’
perquisite consumption, a positive relationship between ownership dispersion and
dividend payout ratio is expected (Chen & Dhiensiri, 2009)
However, according to Jensen and Meckling (1976), Anwar and Tabassum
(2011), large owners have stronger incentive and better opportunities to exercise control
over managers than small shareholders. In that case, they may force managers to have a
high dividend payout ratio, so as to reduce cash available to managers, and to transfer
wealth from bondholders to shareholders, especially when firms are in financial distress.
The controversial between two arguments is still unsolvable, thus the relationship
between ownership concentration and dividend policy is unpredicted.

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MBA04029 – TRAN THU PHUONG
1.3. Rationale of the Research
According to The Decision No.127/1998/QDD-TTg dated July 11th 1998, the
Securities market of Vietnam was established in 2000. Ho Chi Minh stock exchange was
implemented the first transaction on July 28th 2000.
Listed firms in Vietnam usually pay dividend 2 times per year:
-

The first time (usually in March and April): Most of firms, at this time (after the

end of financial year), already had the result of last year operating and audit report, they
will announce to distribute the profit and dividend that approved by shareholders
through general meeting of shareholders.
-

The second time (usually in July and August): Firms had result of half-year

operating usually pay dividend in advance based on target and results achieved in half a
year.
Follow D.L Nguyen (2008) in his research about dividend policy of listed
companies in Vietnam stock market from 2000 to first quarter 2008, at the time when
companies announce dividend payment, price of share tend to increase. He explained
that there were plenty of different reasons for the increase of stock price such as the
good condition of Vietnam macro economic in those years, investor’s “herd”
psychological, the rumors about achieving profitable in the stock purchase, the
information about the sale of the foreign investors to name just a few. He concluded that
dividend policy is still a factor affecting stock price in Vietnam market, although the

level of impact and how the impact is different for different stock and different market.
By the data obtained from HOSE stock exchange, we have the overall look on
the dividend payment of Vietnam companies.
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MBA04029 – TRAN THU PHUONG

Number of Companies

Cash dividend/par value of listed companies in HOSE
90
80
70
60
50
40
30
20
10
0

Year 2011
Year 2012

Cash dividend/par value

(Source: Calculated by researcher)

Figure 1.1 Cash dividend/par value of listed companies in HOSE in 2011 and 2012

More than 50 companies out of 273 listed companies in HOSE in 2011 did not
have clearly information about their dividend rate. This number increased even more in
2012, from more than 50 companies to nearly 80 companies out of 273 listed companies
in HOSE.
Besides those companies, we also see that Vietnam companies have quite
diversified dividend policies. We have companies that pay dividend from 0% to 70% on
capital. However, the ratio from 0% to 20% is preferred by most companies. There were
approximately 60% of companies in HOSE choose to pay dividend from 0% to 20% on
their capital, and only about 10% in total 273 listed companies in HOSE pay dividend
from 21% to 30%. There were very least companies pay dividend above 30%.
Why does our market have such kind of dividend policies diversification? Is
there any effect from the ownership concentration types on it? To find out, this thesis:

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MBA04029 – TRAN THU PHUONG
“THE RELATIONSHIP BETWEEN OWNERSHIP CONCENTRATION AND
DIVIDEND POLICY: EVIDENCE FROM LISTED COMPANIES IN HOSE in two
years 2011 and 2012” is conducted.
1.4. Importance of the Research
The relationship between dividend policy and firm’s ownership structure has
been researched by several studies within the agency theory framework for different
countries. In Vietnam, it is important to examined this relationship because of the variety
of owners in Vietnam companies, for example: government-controlling, foreign-holding,
equal share holding by government and foreign investor, institutions, family owners, or
mixed of institution, family, foreign and government,… These types of shareholders
may have different preferences for dividend payouts.
The importance of this thesis stems from the role of dividend policy to attract
more capitals and investment and protect the right of minority shareholders. Besides, the

lack of empirical studies to prove the relationship between ownership concentration and
dividend policy in emerging markets and particularly in Vietnam provides one of the
motivations for this thesis.
1.5. Research Question
This study seeks to answer the following questions:
-

Is there any relationship between ownership concentration and dividend policy

within the companies which are listed in HOSE? If yes then it is negative or positive
effect.

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MBA04029 – TRAN THU PHUONG
-

Does different type of ownership concentration have different impact on

dividend policy?
1.6. Research Objective
1.6.1. General objective
The general objective of this thesis is to clarify the relationship between
ownership structure and dividend policy. It will employ an ownership frame work and
compare the dividend policy of companies with different ownership concentration types
within the companies which are listed in HOSE.
1.6.2. Specific objective
-

Defining whether the effect of ownership concentration on dividend policy is

negative or positive.
-

Defining the specific correlation between government-controlling firm, foreign-

controlling firm with their dividend policies
-

Defining which relationship has negative correlation, which has positive

correlation
-

Using theories and realities of Vietnam market to explain these relationships

1.7. Scope and Limitation of the Research
This research focuses on Joint Stock Companies listed in HOSE in 2011 and
2012.

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MBA04029 – TRAN THU PHUONG
Data are collected from annual reports, financial reports, company websites or
websites of other securities companies. Those data may not show the true value due to
the lack of transparency of some company reports and the inconsistence in information
disclosed by companies and information on websites.
This research is only based on data and the fact that there was a lack of survey to

get the perspective of investors on dividend policy and number may not show every
aspect of the issue.
Only two recent years are researched, therefore, the result will not show the trend
of dividend policy through time.
One more limitation is the limited understanding of researcher about statistic
technique and statistic software.
1.8. Research Approach
The Quantitative Method is used in this study.
Theories and empirical studies are used to orient and determine variables in the
beginning.
EVIEW 6.0 is used to run model and get data analysis.
Along with theories and empirical studies, the real situation of Vietnam is also
taken into consideration when analyzing and explaining data.

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MBA04029 – TRAN THU PHUONG
1.9. Thesis Structure
The thesis is expected to cover 5 chapters as follows:
Chapter 1 – Introduction: Describes the overview of this study, why the author
chose this topic, the purpose and the benefit of the study. The scope and limitation of the
research also are shown in this section.
Chapter 2 – Literature Review: In this chapter, a literature overview of dividend
policy and ownership concentration will be provided. The section starts by summarizing
different theories supporting / ruling out the effect of dividend policy – the controversial
arguments. After this, some empirical studies will be given as support evidence of the
theories.
Chapter 3 – Research Methodology: Explains how this study is conducted,
method of collecting data, and the variables that are used to study, the tools and method

that are used to analyze data. In this part, hypothesis also is given.
Chapter 4 – Data analysis: After in put data in EVIEW 6.0, the results of Pooled
OLS, REM and Tobit regression will be given. Statistical analysis will be used to
analyze these outcomes.
Chapter 5 – Discussion and Conclusion: After have the result of regression,
empirical studies, theories and practical of Vietnam market are used to explain the
relationships between dividend and other factors, especially concentrate on the effect of
ownership concentration and ownership concentration types on dividend policy.

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MBA04029 – TRAN THU PHUONG

Chapter 2 – Literature Review
To understand the controversial in the relationship of ownership concentration
and dividend policy, the literature on dividend policy, the effect of ownership
concentration on dividend and some empirical studies over the world and Vietnam are
reviewed.
2.1. Related Theories
Dividend is the portion of company’s profit after tax, decided by the Board of
Directors, distributed to its shareholders.
Dividend policy is the policy a company uses to decide how much it will pay out
to shareholders in dividends and how much will be kept as retained earnings to reinvest
in the company.
2.1.1. Dividend theories
Over the last fifty years, dividend policy has always been a controversial issue.
Lots of theories and empirical researches have been conducted and studied to solve this
contentious puzzle. There are three main contradictory views: (1) dividend policy has no
effect on the market value of the firm, (2) an increase in dividend paid out would

increase firm’s value, and (3) a rise in dividend payment reduces firm’s value. Theories
that support to these views are briefly described below:

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MBA04029 – TRAN THU PHUONG
2.1.1.1.

Dividend irrelevance theories – Dividend policy has no effect on

the market value of the firm
The most well-known argument supporting this view was published in 1961 by
Miller and Modigliani “Dividend policy, growth and the valuation of shares” (Journal of
Business). To prove their argument, an idealized world of perfect markets and rational
investors are assumed that: (1) no tax difference between dividends and capital gains, (2)
no transaction costs on securities trading, (3) investors have the equal and costless
access to the same information, (4) no transactions is large enough to affect the price.
According to MM, the value of a company is only determined by the earning power of
its assets and investments. They figure out only cash flow created by investment
decisions or its earning power and business risks affect firm’s value not by the decisions
on how to distribute that income. Therefore, shareholders are indifferent between
dividend and capital gain.
Numerous studies were conducted and had the same result of no relevant
outcomes of dividend and stock prices. In 1959, Gordon collected price, dividend and
earnings data of companies in four industries (Chemicals, Foods, Steels and Machine
Tools) and tested if there was a relationship between stock prices and dividends and
income of these firms. However, the coefficients were too low to have a real impact.
Another research by Black and Scholes (1974) extended the capital asset pricing model
(CAPM), which was developed by Sharpe (1964) and Lintner (1965) in their research of

dividend yield effects based on 25 portfolios of common stocks listed on the New York
Stock Exchange [Cited by Kinkki, 2001]. The objective of this study is to determine the
effect of dividend policy on stock price and they founded that there is no influence of
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MBA04029 – TRAN THU PHUONG
high yield or low yield pay out policy on stock price. Other evidences support for
Dividend Irrelevance Hypothesis was presented in studies of Miller and Scholes (1982),
Hess (1982), Miller (1986), Bernstein (1996). [Cited by Kinkki, 2001; Malkawi,
Rafferty & Pillai, 2010]
However, it is obvious that those assumptions are unrealistic in the world we are
living. Thus, if we apply this argument in real world, it may not reflect the true
importance of dividend policy. As a result, there are reasons to believe that dividend
policy has impact on firm’s value. Next, we will go through theories support to dividend
relevant view.
2.1.1.2.

Dividend relevance theories – Dividend policy affect the stock

price.
2.1.1.2.1.

High dividend payout increases stock value

Bird-in-hand theory
In 1963, Gordon and Walter developed their theory as a counterpoint to M&M
dividend irrelevant theory. According to the bird-in-hand theory investors prefer the
certainty of dividend payments to the possibility of substantially higher future capital
gains. They argued that investors are risk averse and they consider current dividend

payments to be more trustworthy than the promise of a higher capital gain in the future
because it contained risky. Hence dividend payments are preferred than future capital
gains due to minimizing risk. Stated another way is “bird in the hand is worth more than
two in the bush”. Lintner (1962) and Gordon (1963) have implied that return from the

12


MBA04029 – TRAN THU PHUONG
dividend is less risky than the future growth rate. As a higher current dividend reduces
uncertainty about future cash flows, a high payout ratio will reduce the cost of capital,
and hence increase share value. Studies that provide support for this theory include
Gordon and Shapiro (1956) Gordon (1959, 1963), Lintner (1962), and Walter (1963).
[Cited by Malkawi, Rafferty & Pillai, 2010].
However, M&M showed that the Bird-in-hand theory has a fallacy. M&M (1961)
argued that the firm’s risk is determined by the riskiness of its operating cash flows, not
by the way it distributes its earnings. After M&M, Bhattacharya (1979) also suggested
that the reasoning underlying this theory is fallacious. He claimed that the riskiness of a
firm’s cash flow influences its dividend payments, but not the other way (increases in
dividends will not reduce the risk of the firm). Friend and Puckett (1964) found that
firms with greater uncertainty of future cash flow (risk) tend to adopt lower payout ratios.
Rozeff (1982) also found a negative relationship between dividends and firm risk (the
higher risk, the lower dividend payment).Recently, Baker, Powell and Veit (2002)
surveyed managers of NASDAQ firms including the view of Bird-in-hand theory. The
question was that: “investors generally prefer cash dividends today to uncertain future
price appreciation”. Out of 186 responses, there was only 17.2% approving the view of
Bird-in-hand theory. [Cited by Kinkki, 2001; Malkawi, Rafferty & Pillai, 2010]
There is limited number of empirical supports for Bird-in-hand, and it has been
challenged especially by M&M (1961) with many other strong support studies.
Nevertheless, the initial reasoning of Gordon (1961), that is, dividend received today is

much preferred than highly uncertain capital gains from questionable future investments,
is still sited.

13