Tunneling effect and dividend policy of listed companies on vietnamese securities market

中
原
大
學
國
際
商
學
碩
士
學
位
學
程
碩
士
學
位
論
文
股
利
政
策
之
利
益
輸
送
效
果

中原大學
國際商學碩士學位學程
碩士學位論文

股利政策之利益輸送效果—以越南股票市
場為例
Tunneling Effect and Dividend policy of listed companies on
Vietnamese securities market

—
以
越
南
股
票
市
場
為
例
鄧
中
堅
中
華
民
國
105
年
7

月

指導教授：陳怡珮
研究生：鄧中堅(Dang Trung Kien)
中華民國 105 年 7 月



摘要
本研究中，利益輸送效果(Tunneling effect)被認為是一種控股股東可以藉由高股利
政策將公司資本轉為私有利益的現象，這種現象可能會為公司的未來發展和少數股東之利
益帶來風險。
利益輸送(Tunneling) 在新興市場中頗為普遍，尤其是政府常扮演著控制股東的重要
角色。越南的股票市場發展至今二十餘年，已成為新興市場代表之一。股票市場已經成為
顯著的資本籌資渠道，有助於推動國民經濟和發展。
本研究的主要目的是要探討在越南上市公司股利政策的利益輸送效果。實證研究結
果證明，政府控制的公司、所有權集中較高的公司、近期進行新股發行或認購權發行的公
司，皆會有較高的股息收益率。這些結果表明，控制股東可以使用股利來達到利益輸送效
果。
此外，國有企業往往喜歡在越南市場投資，因為這對經濟增長有好處。這項本研究
也試圖檢測政府控制公司是否會犧牲投資機會，並藉由高股利政策來達到賺取私有利益的
目的。研究結果顯示政府似乎想要控制利益輸送效果在一定水準，亦即在不影響公司成長
性及企業長期利益之下，控制股東可藉由高股利政策來達到賺取私有利益。

關鍵字：利益輸送效果、股利政策、越南股票市場

i


ABSTRACT

In this research, tunneling effect is identified as a phenomenon that the controlling
shareholders may extract the firm’s capital into their own pocket through high dividend payout
policy, which may risk the company future growth as well as the benefit of minority shareholders.
Tunneling has been revealed as a common practice in those Emerging markets where the
government plays an important role on controlling the business. Today, Vietnam is the emerging
market, with the securities market has been introduced to public for almost two decades. As
expectation, securities market has become remarkable capital mobilization channel to push up
their national economic and maintain a high development speed.
This research aims to investigate the existence of tunneling practice on the dividend
payout policy of Vietnamese listed companies. The empirical findings show that the governmentcontrolled companies, the companies with high concentrated ownership or with recent IPO or
right issues activity will have higher dividend yield. These findings indicate that the dividends
may be used by controlling shareholders as a means of tunneling.
In addition, as recognition the advantage on investment and growth which state-owned
organizations often enjoy in Vietnam market, this study also tries to find out if the governmentcontrolled companies may sacrifice their investment opportunities by using the high-dividend
policy to earn cash which then serves for other purposes. The outcome documents that the
government seems to keep their tunneling practice under the control, in order to avoid the
harmful effect on company’s growth as well as their long-term benefits from the business.

Keywords: Tunneling effect, dividend policy, Vietnamese securities market, governmentcontrolled.

ii


ACKNOWLEDGMENT

This study would not have been possible without the generosity; patience and guidance
extended by these research oriented individuals who derive great satisfaction in helping others
attain success:
My advisor, Dr. Yi-Pei Chen, the researchers’ adviser, shares her knowledge, shows a
greatly concern and support to the researcher;

Dr. Han-Ching Huang, Chairman of the panel, for all the help, support and assistance;
Dr. Tsui-Jung Lin, committee member, for giving valuable suggestions to further prove
the research study;
Dr. Li-Mei Lin, English editing, for her kindly help to improve the academic language
quality;
The Vietstock Company, provides the research data bank to accomplish the study;
The researchers’ family for their undying support, emotionally, spiritually and financially;
The researcher’ friends and classmates who have provided warm-hearted support along
the way.

The Researcher

iii


TABLE OF CONTENT
摘 要 ................................................................................................................................................. i
ABSTRACT ................................................................................................................................... ii
ACKNOWLEDGMENT .............................................................................................................. iii
TABLE OF CONTENT ............................................................................................................... iv
TABLE LIST ................................................................................................................................ vi
FIGURE LIST .............................................................................................................................. vi
CHAPTER 1: INTRODUCTION ................................................................................................ 1
CHAPTER 2: LITERATURE REVIEW .................................................................................... 7
2.1. Financial Development in Vietnam ..................................................................................... 7
2.2. School of thought ............................................................................................................... 10
2.3. Dividend policy comparison between the Developed and the Emerging market, from the
view of the US and China market. ............................................................................................ 11
2.4. Hypotheses Development .................................................................................................. 14
CHAPTER 3: METHODOLOGY AND DATA ....................................................................... 19

3.1. Methodology ...................................................................................................................... 19
3.1.1 Determinants of dividend payout. ............................................................................... 19
3.1.2. Empirical proxies for Investment Opportunity Set (IOS) .......................................... 19
3.1.3. Definition of variables ................................................................................................ 20
3.2. Data Collection .................................................................................................................. 21
CHAPTER 4: RESULTS AND ANALYSES ............................................................................ 24
4.1. General Statistic ................................................................................................................. 24
iv


4.2. Empirical Results ............................................................................................................... 30
CHAPTER 5: CONCLUSION ................................................................................................... 38
REFERENCES ............................................................................................................................ 40

v


TABLE LIST
Table 2–1: Overview of Vietnamese market. .................................................................................. 8
Table 3–1 Definitions of Variables ............................................................................................... 21
Table 4–1: Descriptive Statistic - HANOI STOCK EXCHANCE (HNX) .................................. 24
Table 4–2: Descriptive Statistic - HO CHI MINH STOCK EXCHANCE (HOSE) .................... 26
Table 4–3: Correlation analysis - HA NOI STOCK EXCHANCE (HNX) ................................. 28
Table 4–4: Correlation analysis - HO CHI MINH STOCK EXCHANCE (HOSE) ..................... 29
Table 4–5 Determinants of Dividend payout policy _ HA NOI STOCK EXCHANCE (HNX) .. 31
Table 4–6 Determinants of Dividend payout policy _ HO CHI MINH STOCK EXCHANCE
(HOSE) .......................................................................................................................................... 32
Table 4–7 Determinants of Dividend payout policy _ HA NOI STOCK EXCHANCE (HNX) .. 34
Table 4–8 Determinants of Dividend payout policy _ HO CHI MINH STOCK EXCHANCE
(HOSE) .......................................................................................................................................... 36

FIGURE LIST
Figure 1: Number of Vietnamese Listed Companies from 2000 - 2014 ....................................... 22

vi


CHAPTER 1: INTRODUCTION
Dividend-payout policy is always considered as one of the most important decisions in
financial management of company. The dividend payment may affect directly the interests of
shareholders and the future development of a Joint-stock company. As the profit after tax will be
divided into two parts: The earmarked profit using to pay for dividends to shareholders and the
retained earnings for reinvestment. Especially, in a new security market as Vietnam, due to the
information asymmetry, investors often rely on the dividend payment as a viewpoint to predict
the company’s future prospects. Therefore, understanding how the function of dividend-payout
policy is, its impact and reflection to the economic is absolutely necessary for governance,
market controller, firm manager, as well as any investors and stock traders in the market.
Vietnamese security market is a very new market, with only near 2 decades of founding.
It started with the establishment of the State Securities Commission - the regulator over the
securities market in 1997. It became an indispensable premise to bring securities market to
Vietnam, with the opening of the two currently national stock exchanges, Ho Chi Minh City
Stock Exchange in July 2000 - a trading platform for relatively large corporations' stock, and
Hanoi Stock Exchange in March 2005 for relatively SMEs’ stocks.
The Vietnamese security market, as the founders’ expectation, has worked well to push
up their national economic and maintain a high development speed. The establishment of market,
at the same time, is a necessary requirement for making a reasonable and stable ―equitization1‖
process, the transformation of all State-owned enterprise (the key role of the Vietnamese
economic sectors) to be joint-stock companies, in order to create an opening and flexible market.
For the fulfillment of Vietnam’s accession to WTO on July 11th, 2006, the official remark that
the country entered the process of regional and international economic integration.

The stock market has grown significantly — only two stocks were traded in the
beginning, compared with 657 today on both the Ho Chi Minh Exchange and the Hanoi
Exchange — and is attracting a growing number of domestic investors. Securities market is now
1

Equitization is a Vietnamese English term that denotes the conversion of a state-owned enterprise in Vietnam into
a public limited company or a corporation.

1


becoming the important capital mobilization channel for Vietnam economy 2 . According to a
report of British Reuters, the Vietnamese stock market today is the most attractive market in
South East Asia with the VN Index growth rate at 13.4 percent, the sharpest in the region. With
the government target is making Vietnam become the new world’s factory with the presence of
giant technology groups such as Samsung, Microsoft, etc. At the same time, the new policy of
lifted the foreign ownership ratio ceiling in unconditional business fields cause a breakthrough in
market. It brings the prediction of a brilliant economic growth in the time not so far, a good sign
for any investors. In addition, the Vietnamese stock market also attract foreign investors are
believed to be the second cheapest in South East Asia, just after Singapore3. Foreigners now
want to learn more about this new emerging security market to secure and maximize the benefit
of their investment. It may be the chance and also the challenge for domestic business.
Through the development process, there is period, stock market was a very attractive
investment channel for stockholders in Vietnam due to the guarantee of stable capital gain and
high dividend-payout from listed companies. However, the trend changed. Recently, enterprises
in general, particularly the listed companies, are going through a difficult period, due to the
suffering from negative impact of both international and domestic economy fluctuations. It
makes dividend payments problem becomes more thorny for every single company.
In the previous stage with rapid growth and optimistic investors, the majority of the listed
companies, with satisfactory results business, were easily selecting to make high payout policy.

However, from 2009 to present, when production and business activity slumped, the access to
external funds is limited by the high cost of capital, the selection has been re-considered.
Nowadays, taking advantage of internal capital is the top priority of most listed companies. It
also means the listed companies may choose to cut the cash dividend payments, even to no
dividend payment. This decision certainly has caused negative effects to the investors’
psychology, whom already quite pessimistic because of the downturn of the entire securities
market, thereby affecting the stock price and the value of company.

2

Mobilized VND 1,000,000 trillion (≈USD 47.6 billion) for the Government; mobilized VND 700 trillion (≈USD
33.3 billion) for the enterprises via auctions for equitization and issuing shares, fund units, make the securities
market capitalization reach nearly 40% GDP (as of July 2014).
3
/>
2


Therefore, the study of dividend-payout policy of the listed companies is now an urgent
requirement. The practical recommendations of this study will help the listed companies come up
with a reasonable dividend policy, making an assurance to reinvest the capital for business
production, as well as not cause of losing investors’ confidence. At the same time, the study may
help to recognize the reality of how Vietnamese listed company payout their dividends, how the
corporate dividend policy affects and reflects the real business situation. This is very important
for the market development. Seriously, I must admit the existence of many problems on the way
Vietnamese manage their economic. Especially for those firms are state-owned (SOEs) or have
the contribution of the government investment. According to Nguyen&Dijk (2012), they find that
there is positive relation between the Vietnamese SOEs’ growth and the corruption experienced
by SOEs. This problem can be harmful as the government-controlled firms play an important
role on our national economic strength. If corruption exists in SOEs, it can become how

practicable on the securities market, where many listed companies are current of former SOEs.
Can the dividend be used as a tool beneficial for some specific individuals or groups, instead of
the whole?
In specific, this research might narrow the gaps of previous research by using the data set up
to 2014 with the most update information. Based on expected findings, the listed companies can
build a long term dividend policy, improvise with the volatile ups and downs of the market in the
future. The research results of this project are expected to include:
(1) Develop model that helps explaining the decision on dividend payment of the listed
companies in Vietnamese securities market; to answer the question of ―In an emerging market
like Vietnam, besides positive signaling of a business, can dividend be used for another purpose?‖
(2) Identify the effect of the identity of majority shareholders as the government and
corporate dividend policy.
(3) Give some specific proposed dividend policies to the listed companies in concern
with the benefit of company, investors and authority state.
In fact, Vietnamese currently face to the urgency for studying the dividend policy of their
listed firms. However, most of the research projects in the Vietnam still contain major research
gaps.
3


Firstly, international study published made for the case of Vietnam is not yet available.
Even the research regarding this topic in other developing countries are quite common, such as
Chen (2009) for the case of China, Ramli (2010) in Malaysia, Aivazian, Booth & Cleary (2011)
in eight developing countries. The research in the those developing countries showed that
companies in emerging markets have certain rules of dividend-payout less predictable than the
companies in the US. Also, there are differences existing in dividend payment policy between
countries. Specially, in an emerging and new security market like Vietnam with limited and inimprovement process of legal rights, there are variety factors can affect management decisions.
Does the dividend-payout in Vietnam market fully follow the signal theory to predict movements,
or it contains some problems behind? It is a question that needs to be considered. On top of that,
I may say there is a need of having an in-depth and specific study about dividend policy in

Vietnam.
Secondly, a system of dividend policy research has been built in Vietnam, but the results
are very limited. For instance, the most viewed study by Dao (2004), Nguyen (2006), Pham
(2007), Vu (2008) all used old data (2000-2007). As result of the new trend, the proposed
solution of those studies would not be feasible in a new era of stock market decrease phase (from
2009-present).
Thirdly, quantitative studies have not been normally conducted for the study of dividend
policy in Vietnam. Comparing these studies have been conducted in Vietnam with other
international empirical researches, it can clearly see the world’s empirical study already creates a
huge and critical system of quantitative research. As Gill et al. (2010), Chen &Dhiensiri (2009),
Gustavo (2002), Healy & Palepu (1988); Michaely et al (1995).In Vietnam, there is rarely
quantitative research. Even it now appears some researchers are moving to the quantitative
approach as Alphonse &Quoc Trung (2014), Thu Ha (2014) with more updated data. However,
these new studies still are in its infancy level with general methodology. In other words, to
answer those questions such as the important content of dividend policy, the factors affecting the
dividend payout, or the impact of the dividend-payout notification to the stock price, researchers
in Vietnam mostly come up with suggestions based on qualitative analysis. Consequently, the
leader of the Vietnamese listed companies usually offer quite subjective decision on dividendpayout, instead of relying on a quantitative model built with the inputs data is enterprise
4


characteristics and the output is dividend policy with a critical expected in a short term, medium
term and long term. It is also a problem for almost stock trader and investors in Vietnamese
securities market which already mentioned before, making their decisions by intuition. They rely
on dividend as a signal for investment but not truly understand what its affect and what is really
going on behind these numbers.
Fourthly, some researches in Vietnam have studied from the perspective of investors
(Pham (2007); VAFI (2009)), but no studies from the perspectives of business executives, the
government, the market controllers, which have already normal applied by foreign researchers
(Litner 1956; Brav et al. 2003; Arnott&Asness, 2011). Thus, dividend studies in Vietnam have

not figured out a mechanism to consider and evaluate decision purposes behind each dividend
policy of companies. If they cannot understand this mechanism, whatever solution is given, it is
still difficult to support the business management and economic controller from both micro and
macro view.
These are reasons why this research has been planned. In particular, the companies listed
on the Ho Chi Minh City Stock Exchange (HOSE) and the Hanoi Exchange (HNX) are selected
as study subjects for the following reasons. First, the 2 main Stock exchange of Vietnam were
over decade of operation so that the subject would supply input-data long enough in terms of
time and diverse in terms of quantity for the application of quantitative research. Second, the
regulations on information disclosure for the listed companies on HOSE and HNX also quite
tight, so the quality of published information on those stock exchanges could be ensured. In
addition, the stock exchanges have officially announced criteria subsectors for the listed
companies; this will be the basic base to make accurate analysis of the dividend policy
characteristics in each sector. Third, the majority of the listed companies on the HOSE are large
enterprises4, alternatively HNX is for medium and small size companies. Thus by investigating
the data from both places, the researcher can gain briefly view about dividend policy of the
whole market at every single level. Hence, choosing the object of study is the listed companies
on HOSE and HNX will ensure sample of work typical nature and represent the whole stock
market of Vietnam.

4

Top 30 companies with the largest market capitalization in Vietnam are listed on HOSE.

5


In summary, as the context of the stock market and the economy are facing in a difficult
period, the study of dividend policy of Vietnamese in the listed companies is urgent and
necessary. This study not only supports a dividend policy of the companies listed in this current

period but also for market participants who have the right view of dividend rate, the dividend
payout ratio, the dividend yield and the signal from the dividend policy of the listed companies.
Thus, the outcomes may support the stability and development of the securities market in the
future.

6


CHAPTER 2: LITERATURE REVIEW
2.1. Financial Development in Vietnam
Vietnam, a country in the Indochinese peninsula, is bordered by China to the north, Laos
and Cambodia to the west. In 2013, Vietnam's population has reached to 90 million, with
residents mainly concentrated in two areas, the Red River delta in the north and the Mekong in
the south. Until the 80s, Vietnam is still regarded as a least developed country, with the economy
slowly lumbering the government subsidies. However, Vietnam today is considered as a new
emerging market with stable growth and rapid development rate the in region. The movement
has started since its governance decided to change the policy since late 1980s. In December of
1986, the Vietnamese government initiated a socio-economic reforms program, entitled
"Renewal"5, a landmark in the development of the country. From now on, the country has begun
to shift from a centrally planned economy to a dynamic opening economy.
During the renovation, one of the first tasks is to build the country into a market economy,
socialist orientation with the participation of many economic sectors, including the trade-state
sector which plays a key role. Through practical implementation, the economy has initially
gained encouraging achievements. An outstanding achievement that Vietnam has achieved
economic growth is relatively high and stable for several consecutive years (second in Asia).
According to the Vietnamese government’s report, within 10 years, from 1991 to 2000,
Vietnam's GDP has doubled, with an average growth rate of 7.5% annually. From 2001 to 2014,
the average GDP growth is 6-7% per year. Vietnam is rapidly shifting from a low-income
country to a middle-income country. Foreign investment environment is being more flexible.
Law on Foreign Investment in Vietnam and a variety of other legal documents gradually

establish a transparent legal system which attracts for foreign businesses. FDI enterprises
contributes nearly 15% of GDP, accounting for over 30% of total exports, contributing 4.9% of
the total State budget revenues and creating thousands of jobs. Still, there are many other
outstanding achievements.

5

Renewal is also known as ―Renovation‖ and ―Reform‖ process.

7


Based on Indochina (Capital) Renewable Resource (2013) report 6 , Vietnam’s strong
fundamental as an attractive investment destination, including the following shown in Table 1.
Table 2–1: Overview of Vietnamese market.
Sustained Economic Growth:
Average annual GDP growth of 6% (2007– 2013)
Sovereign Safety:

Little political turmoil or threat of terrorism

Socio-Political Stability:

One party system with high degree of ethnic, linguistic
and religious homogeneity

Rich Natural Resources:

Net exporter of crude oil; abundant mineral and other
natural resources

Diversified Economy:

A global leader in agro-business and light manufacturing

Compelling Demographics:

Nearly 90 million people, of which 70% are under the
age of 35

Rapid Urbanization:

30% urbanization rate as of 2010, expected to increase to
45% by 2020

Rising Levels of Income:

Middle-class consumers emerging as household incomes
rise dramatically

High Literacy Rate:

Over 90% in total; 95% for those 15 years old and up

Strong Foreign Direct Investment:

Committed FDI totaled over US$108 billion over the past
three years (2011-2013)

An indispensable contributing to the success of the Vietnamese economy is an important

appearance of their security market. Today, share market capitalization reaches close to 40%
GDP of Vietnam, become the major channel for capital mobilization of both State-owned and
private economic sector 7 . Simultaneously, as a fact, Vietnamese government has completed
transforming all of its state-owned enterprise by the Equitization (Privatization) to the JointStock company, the better organization form to manage and gain profits in an open market. This
success is generated based on the flexible policies of the Vietnamese government in order to
control their market. This opinion can be proved by reviewing the market movement since the
World economic crisis 2008, as the majority security market in the world faced to a very difficult
period. In a reversal of fortunes, aided by proactive fiscal measures and resilient domestic
demand, Vietnam’s stock market has embarked on an impressive rally since the beginning of the
second quarter, turning Vietnam into one of the best performing stock markets in Asia.

6
7

/>Hoang Phu Cuong, deputy director of State Security Commission (2014),

8


There are a number of reasons for the extraordinary reversal of fortune for Vietnam’s
stock markets. The government’s swift and strong policies responses to the crisis allowed
Vietnam’s economy to weather the global economic crisis better than most other countries. The
government was helped by sharply lowering commodity prices which reduced inflationary
pressures. This gave the government more leeway to implement expansionary fiscal and
monetary measures sooner. From today’s standpoint it is clear that the stimulus program has
been highly promoted with Personal Income Tax exemptions allowing domestic consumption to
remain resilient and with the interest rate subsidies breathing much needed liquidity into the
operations of companies. Equally important, with investors’ sentiment turning positive and the
markets rallying, the market welcomes more companies to the board again with the listing of
blue chip companies, as the listed value approximately 55.2 billion USD as of July 2014 (State

securities commission, 2014)
To maintain the market growth and keep an attractive share trading environment, the
Vietnamese government is continuously improving their policies as well as the Law and the
market regulation, such as the 2006 Securities Law, the Amending version in 2010 and newest is
2014 Enterprise Law which has officially applied since July 2015. As a result, the current
dividend tax now is at 5% with the tax exemption for some case. Especially, by the 2014 Law,
the time for dividend distribution now is more restricted for business firms. It can be considered
as a legal protection that has been given to the shareholders. These regulations are issued as a
proof of Security commission to create a healthy and stable market. As the law makers and the
market controllers recognize that the dividend announcement is one of the most important
considerations for any stock investors in order to choose which kind of securities to buy and hold.
They try to make the companies’ dividend payout to be a reliable signal for any investment
decision.
However, as a new market, challenges remain. As the majority of Vietnamese still call it
―playing stocks‖. Those who play stocks on daily basis, trading on market rumors or the slightest
bit of news. For them, trading stock is more likely to a gamble than an investment. It can be
challenging to convince them about the merits of investment principles such as buy-and-hold, to
identify and confirm the market signal for understanding the trade-movements. Basically, before
buying stocks, investors should analyze the company's financial status, its business activities,
history and management. However, only one third of Vietnamese investors are doing so, ―about
9


30% of investors jump in based on what other investors do, and the other 40% are investing on
basic information."8
Hence, could the Vietnamese dividend payout policy be considered as a dependable
signal for investment in listed companies? It behaves identical to other stock market in the world
or else. This kind of problem also is faced by other stock markets around the world and many
experts and scholars are interested to investigate it.
2.2. School of thought

As aforementioned, dividend policy is one of the most important financial decisions of
the business. Therefore, the basic theory of dividend and dividend policy were born very early
(since the 50s of the last century). Damodaran (2001) distinguishes three schools concerns about
dividend policy. Starting from some theoretical school of thought which contains several
opposing, a variety and plentiful of empirical study system about analyzing dividend payout
policy has been developed in the world.
Firstly, according to Miller-Modigliani (1961), dividend does not affect the value of
shares (with the assumption of a perfect capital market as non-taxable dividend, and the
company may issue additional shares with free cost at any time). Some later experimental studies
which deploy some basis change of assumptions about perfect markets, also supports this view
of Miller-Modigliani. Typically, Black and Scholes (1974), studies of 25 portfolios of the listed
companies in New York’s stock market, using Capital asset pricing model (CAPM) to measure
the dividend yield. It reveals that the rate of dividend payment, even high or low, does not affect
the company's stock price. Also, a study in the Australian stock market by Ball et al. (1979) does
not find any connections between dividends and stock price.
Secondly, according to Graham and Dodd (1951), if investors prefer dividends (or in the
other words, dividend is the signal for future growth), increasing the dividend may increase the
shares value. Besides, the high dividend payments in present may reduce the volatility of future
cash flows; high payout ratio reduces the cost of capital. Thereby, making higher value of shares.
Some experimental studies of Gordon (1959) and Fisher (1961) bring results that support this
argument, the regression results show that dividend has greater impact to the share price,
8

Nguyen Quang Hai, deputy manager of the HOSE’s brokerage department (2010).

10


compared to the impact of retained earnings. However, Diamond’s study (1967) opposites the
Gordon’s conclusion (1959), about the linear regression of the stocks price with dividends and

retained earnings because the model misses considering about the differences of risk between
companies in various sectors. On top of that, dividend is more stable than the reported profit,
therefore the volatility in the short term will affect considerably the reported earnings.
Thirdly, according to Brennan (1970), if dividend tax is higher than income tax from the
sale of shares (capital gain), the higher dividend will reduce the value of shares. The company
will choose to retain the earnings, in order to increase the income of shareholders. Experimental
study of Lizenberger&Ramaswamy (1979) in the US stock market has proved this argument.
However, some later studies as Miller&Scholers (1982) argue that the study results were affected
by the asymmetric information and the use of unreasonable definition of dividend rate on stock
prices in a short term. Chetty&Saez (2005) claims that when the US government cut down taxes
on dividends in 2003, listed companies have increased dividend payments amounted up to 20%
for 6 successive quarters after that.
Above studies indicate some basic schools of thought on dividend payout policy, which
have been referred to a lot of later studies. However, in the modern business environment which
affected by many factor, can the market identically act as the scenario of those theories.
Reviewing the case of outstanding markets which are representative for the two main world
economic groups. One is the United State which presents for the developed country groups; it
has a long history and completed set-up stock market. The other is China, the candidate of the
emerging market area; it is new developing countries with recently open up capital market but
high rate of expansion and potential investment opportunities for future benefits.

2.3. Dividend policy comparison between the Developed and the Emerging market, from
the view of the US and China market.
The US is the most powerful economy in the world. Their market has massive volume
study on dividend policy from very early. Most of the basic theories of dividend policies
(introduced in the beginning) are developed based on the US stock market research. Reviewing
the US market, it can recognize some major trends of the dividend payments characteristics over
the recent periods.
11

First, the numbers of companies that pay dividends tend to decrease since early of 1980s.
Explanation for this phenomenon is, after 1978, a large number of new listed companies were
introduced to the market, which was mostly medium or small firm size. They had abundant
investment opportunities and potential growth. This characteristic often suggests these
companies choosing non-dividend payment or paying lower dividend, which let them more
choices regarding capital investment. In addition, according to research by Baker &Wurgler
(2002), companies’ director was more interested in the ―shareholders’ wishes‖ in making
decisions to pay dividends; shareholders wanted companies to retain the earnings for re-investing
in major projects to create equity surplus.
Besides paying dividend by cash, the forms of share repurchases also becomes more
popular in US (Grullon&Ikenberry, 2000), especially since 1982. Due to the acquisition of shares,
in some cases, share repurchases are considered as a dividend paid in cash, but there are
advantages to gain surplus at lower tax income. Even more, the study of Skinner (2008) also
concludes the value of annual shares repurchase surpassing the value of cash dividend in the US
market. He noted that the share repurchases has become a preferred methods for distributing cash
to investors.
However, in general, the total value (nominal and real) of cash dividend payment and
stock repurchase has increased rapidly over time; Westion&Siu (2003) indicate that the
proportion of cash dividend payments of the US business groups increased from 40% in 1971 to
nearly 60% in 1990 and increased gradually to 81% in 2001. If it counts also the value from
shares repurchase, the payout ratio could reach 105% in 1998 and 116% in 2001.
In conclusion, it can be clearly seen the economic movement in this developed marketthe US. The decreasing in cash dividend payout, the increasing in both stock repurchases and
retain earnings for future growth, they all stand for a point that the listed companies are
responding to the market power, by maximizing the profit opportunities to stockholders.
Moving to the case of China, the second largest world’s economic (based on GDP
ranking 2014), the representative for new economic force, the emerging markets. Studying about
factors impact on dividend policy in this country, there are two main points that the most
interested to the scholar: The ownership structure and the corporate governance.

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According to Ferdinand A. Gul (1999), a unique feature of the listed companies on
China market is that the state owns various levels of the shares in some companies. This is partly
because many of the large listed companies are former state owned enterprises (SOEs). This
situation is also very close to the Vietnamese market, in which they also completed transforms
all of SOEs to be the Join-stock companies.
Wang, Manry&Wandler (2008) study on the impact of company ownership to dividend
policy in China. Researchers reveal the dividend payment ratios as well as decision of pay
dividends tend to rise in companies with large state ownership. The reason for this result is due to
the high dividend payout benefits for the government to use a portion of profits from the business;
it also suits to the needs of the state cash as an incentive to maintain state ownership in the business.
Bradford's, Chen & Zhu (2013), with sample are listed companies in China from 1998 to
2010, show that state-owned companies pay higher dividends than the private companies, as the
private companies often encounter restricted situations on raising capital from outside sources.
Especially, unlike the US where shareholder’s protection rights are quite complete,
giving market power to force managers to pay cash dividend to meet investors’ need. However,
in China, the minority shareholders are less likely to impact on management. Chen (2009) shows
that the government-controlled companies, highly concentrated companies, and companies after
rights issue tend to have higher dividend payout ratios. Their findings support the conjecture that
(in China) dividends are used by controlling shareholders to divert resources from their
companies to their own pockets. This makes a recent economic phenomenon in emerging market,
which I call the Tunneling effect on dividend payout policy. As we know, Vietnam is an
emerging market also, with very closely economic situation and tight relationship with China,
researcher is wondering if its stock market is under the same pressure.
It now brings us back to the main problem which given previously in broaden
understanding:
Could the current dividend payout policy, which those Vietnamese listed companies apply,
be considered as a dependable signal (of growing companies) for investment? Or their dividend

policy is under Tunneling effect?

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Gul (1999) argues that the Government ownership is positively associated with debt.
Otherwise, the Investment opportunities (IOs) are found to be negatively associated with debt
and dividends. Supported by the study of Simon Ho, Kevin Lam & Sami (2004), they realize
that a growth firm (high IOs) has less debt significantly in their capital structures and at the same
time, pay lower dividends for shareholders.
This view suggests another interesting point for the researcher about the connection
between the firm growing opportunities and its dividend policy, in the case of Vietnam. If the
capital structure and payout policy of listed companies in Vietnam’s market somehow are
identical to China situation, relatives to the Tunneling effect. Then, by reviewing the IOs can it
reveal any fact behind the screens? If a company is under Tunneling effect, they will try to
payout their dividend. At the same time, it limits company’s useable capital, bring the
consequence: Their growth opportunity (represented by IOs) is not as good as expectation. In
other words, dividend payout is not really a signal of future growth.
2.4. Hypotheses Development
In this paper, I will approach the dividend policies of the Vietnamese listed companies
using two opposing perspectives, the protection (signaling theory) perspective and the tunneling
(effect) perspective.
Supporting for the signaling perspective, many researchers have concluded in their studies
that dividend payment is an important device in reducing agency conflicts and therefore the agency
costs. The agency conflict is defined as a conflict of interest between corporate insiders (the
agents) and outside shareholders (the principals) (Porta et al, 2000), or in other words between
managers and shareholders. Even if it is the manager who determines the dividend payout policy,
the dividend payment is an important method in mitigating agency costs.
According to Manos (2001), by paying dividends which signals decent treatment of
minority shareholders, it creates reputation for managers. This idea then developed by La Porta

et al. (2000) who term it the substitute model of dividends, whether the motivation to pay
dividends is due to the need by insiders to create reputation for good treatment of minority
shareholders, or is the outcome of pressure by minority shareholders, dividends derive their
value from reducing agency problems.
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However, this declaration probably has to be reviewed in the emerging markets, especially a
new market like Vietnam, where the security regulation is still on the way of upgrading and remaining
as a weak legal protection for investors in general, and for minority shareholders in particularly.
There is a fact that major of the listed companies on Vietnamese stock markets now
account for the transformed stated-own enterprise (SOEs) and the government remains as the
controlling shareholder in many companies. Besides of government, there is also a group of
people who occupy dominant share of most companies as the consequences of an early
phenomenon since the Vietnamese capital market established. That is the phenomenon of
consolidation of shares from company’s staff and employees (whom are allowed to buy
preferential shares.) For instance, basically, in the joint stock companies which initial SOEs, the
senior labors have right to buy a number of shares at preferential prices (40% of successful bidprice). However, concerning about the lack of knowledge in share benefits and ownerships,
many workers decide to sell their share immediately and consider the extra as a reward of
company for their service, instead of enjoy it as an investment and savings. As a fact, the buyers
are often the member of companies’ former leaders or those who have financial advantages, in an
attempting to hold a certain percentage of the ownership to maintain their management right.
Finally, when the companies go listed officially, the majority shares of stock been be owned by a
number of people or organizations. Therefore, the current company dividend policy has been
depended on the decisions of these large shareholders.
These characteristics of the Vietnamese security markets tend to create the agency
problem and make the large shareholders expropriate the minority shareholders. It makes the
support for the tunneling (effect) perspective in dividend payout policy of the Vietnamese listed
companies. As a problem of dividend payments, it is used to protect the interests of the minority
shareholders or be used as a manner of tunneling by controlling shareholders. Focus on the

ownership concentration affect to the dividend policy, the researcher derives the first testable
Hypothesis H1 as following.
H1: Companies with high concentrated ownership are likely to pay higher dividends than
those with low concentrated ownership.

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As the major controlling of the government in those former SOEs in the Vietnamese
market. Reviewing studies in some close markets to recognize the impact of governmentcontrolled factor to the dividend policy. Chen et al. (2009) find that dividend payouts increase as
the governments owns more shares. Moreover, they suggest that the government pays high
dividends to extract the corporate resources. Identically, Bradford (2013) in case of China
concludes that compared with the privately controlled firms, the state-controlled firms pay higher
dividend. Based on the close situation of those countries as the emerging markets, I make a
developed Hypothesis based on the H1 in order to investigate the effect of government control to
the dividend policy in those Vietnamese high-concentrated companies. Hence, the developed
Hypothesis H2 is presented as below.
H2: The government controlled companies have higher dividend payments than nongovernment controlled companies.
The purpose of practicing the tunneling is to divert companies’ resources to benefit the
controlling shareholders. However, as many Join-stock companies are often lack of working
capital, if the companies try to distribute too much of dividends, automatically they will lack of
capital for future growth. Therefore, it pushes up the company to be listed one in the market
(IPO) as well as makes for new issuance (rights offering). According to Lee& Xiao (2004),
paying cash dividends with the receipts from these financial activities may harm the negotiable
(minority) shareholders. Moreover, as effect of tunneling, the dividends will be distributed more
aligned (close) to the time of fund raising from the capital market.
This phenomenon is even more essential to be considered as the Vietnamese have
experienced the ‖ bubble burst‖ stage in the stock market during 2007-2009, as well as the
serious affection of world’s economic recession in 2008. As they now overcome the hardest
situation and move to a recovering stage, there are many firms come back or new joining the

security market which create a big number of IPO and right issues after 2009. Can the recovering
of ―post-crisis effect‖ will go together with the Tunneling effect. Thus, it makes researcher to
develop the third hypothesis.
H3: Companies will pay higher dividends after IPO or rights offerings.

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On the other hand, the tunneling (effect) does have its limitations, the above developed
hypothesis can be true also if a company has a good corporate governance and potential future
development. By doing so, if tunneling is the main reason for a generous dividend payment, this
phenomenon will affect the growth opportunities of the companies based on the limited capital
for investment after diverse company’s cash by paying dividends.
Basically, it is reasonable for a high level of cash holdings in a growing economy, as
most of the firms enjoy a number of investment opportunities. According to Mueller (2006),
growing firms have a strong incentive to hold large amounts of cash to support investment
opportunities because the external financing is too costly for these firms, due to the high degree
of information asymmetry, especially in the emerging market where the regulations are not
improved equally to the development speed. This can be seen as a challenge that the listed
companies have to face to at the moment in Vietnamese market as the regulation is still be
implemented and amended by years. In detail, the Securities Law (2006), Amending articles
(2010), guiding Implementation (2012), Government sanctioning of administrative violations in
Securities market (2013) and the new addition regulation on 2015.
In addition, when firms have limited investment opportunities, high level of cash
retaining will increase the likelihood of asset expropriation by managers because excess cash
may effectively force them to over-invest, thereby damaging the interests of shareholders
(Dittmar et al., 2003). In this case, paying out dividends help decreasing both cash retained and
the agency cost of overinvestment (Jensen, Solberg & Zorn, 1992; Kalcheva&Lins, 2007).
However, as many Vietnamese listed companies are SOEs, the major purpose of going
listed was to raise funds to improve the business situation of those unprofitable SOEs. To able to

keep their impact on the firm decision making, the government maintains its large share
proportion and becomes the controlling shareholders as of Hypothesis H2.
Reviewing the research in the emerging market, S.S.M. Ho et al (2004), using Hong
Kong database, document that the growth firms have significantly less debt in their capital
structures, pay lower dividends, and director ownership tends to moderate the effects of growth
opportunities on corporate policies. The empirical studies support this relationship (Patra et al.,
2012; Kangarlouei et al., 2012). Investment opportunities affect dividend policy payout
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