The relation between stock price volatility and firm characteristics of vietnamese listed firms on ho chi minh city stock exchange luận văn thạc sĩ

UNIVERSITY OF ECONOMICS HO CHI MINH CITY
International School of Business
------------------------------

NGUYEN HOANG MINH TRI

THE RELATION BETWEEN STOCK
PRICE VOLATILITY AND FIRM
CHARACTERISTICS OF
VIETNAMESE LISTED FIRMS ON HO
CHI MINH CITY STOCK EXCHANGE
MASTER OF BUSINESS (Honours)

Ho Chi Minh City - 2014
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UNIVERSITY OF ECONOMICS HO CHI MINH CITY
International School of Business
------------------------------

NGUYEN HOANG MINH TRI

THE RELATION BETWEEN
STOCK PRICE VOLATILITY AND
FIRM CHARACTERISTICS OF
VIETNAMESE LISTED FIRMS ON HO
CHI MINH CITY STOCK EXCHANGE

ID: 22110071

MASTER OF BUSINESS (Honours)
SUPERVISOR: Dr. PHAM PHU QUOC

Ho Chi Minh City – 2014
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ACKNOWLEDGEMENTS
Firstly, I would like to express my deep gratitude to Dr. Pham Phu Quoc,
my supervisor who has given highly support and valuable advices during the
process of my conducting the research. Especially, I am grateful for his
enthusiasm in answering, reminding as well as his feedback, guidance and
correction thank to that I can able to accomplish this thesis.
Second, I would like to thank Prof. Sarath Delpachitra of Flinders
University Australia and invited lecturer at International School of Business
(ISB) – University of Economics Ho Chi Minh City (UEH) for his review and
revision my thesis.
Third, I would like to express profound gratitude to Dr.Dinh Thai Hoang
who taught me the methodology of data analysis, and give me guidance in data
analysis of this thesis as well.
Next, I would like to express my sincere gratitude to all of my lecturers at
International School of Business (ISB) – University of Economics Ho Chi Minh
City (UEH) who have transmitted their knowledge and experience to me during
my master course.

Furthermore, the enthusiastic assistance of the ISB’s

executive board and staffs was greatly appreciated.
Last but not least, I would also want to thank my friends and classmates
who have shared their knowledge, supported, and worked with me during the

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time of my studying at ISB. Without their continual encouragement and
understanding, I would not have been able to complete this journey. It is very
fortunate for me to have such wonderful friends and supporters in my life.
With my appreciation

Nguyen Hoang Minh Tri

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STATEMENT OF AUTHORSHIP
I hereby declare that this submission is my own work and except where
due reference is made; this thesis contains no material previously published or
written by another person(s).
This thesis does not contain material extracted in whole or in part from a
thesis or report presented for another degree or diploma at University of
Economics Ho Chi Minh City (UEH), International School of Business (ISB), or
any other education institution.

Nguyen Hoang Minh Tri
May 2014

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ABSTRACT
This paper attempts to determine stock price volatility in the Vietnamese

stock market using a rich and detailed data set, including both market data and
firm characteristics. In particular, this research aim to investigate whether
firm’s characteristics affect stock price volatility and examines the relation
between stock price volatility and firm characteristics of Vietnamese listed
firms on Ho Chi Minh City Stock Exchange. A sample of 110 listed
companies in Vietnam stock market is examined for a period from 2008 to 2012.
The empirical estimation is based on panel data modeling technique. The
findings of the paper indicate that stock price volatility is negative affected by
firm leverage, positively influenced by asset growth rate and firm size firm.
Meanwhile, this study find out that dividend yield and dividend pay-out ratio
insignificant to the stock price volatility in Vietnam stock market

Keywords: Stock price volatility, firm characteristics, Vietnam stock
market, panel data

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Table of Contents
ACKNOWLEDGEMENTS .................................................................................. i
STATEMENT OF AUTHORSHIP.................................................................... iii
ABSTRACT

.................................................................................................... iv

ABBREVIATION .............................................................................................. viii
LIST OF TABLES ............................................................................................... ix
CHAPTER 1

INTRODUCTION ..................................................................... 1

1.1.

Introduction ........................................................................................... 1

1.2.

Research background ............................................................................. 3

1.3.

Research objectives and research questions .......................................... 5

1.4.

Research scope ...................................................................................... 5

1.5.

Thesis contributions ............................................................................... 6

1.6.

Structure of the thesis ............................................................................ 7

CHAPTER 2

LITERATURE REVIEW ......................................................... 8

2.1.

Introduction ........................................................................................... 8

2.2.

Stock price volatility.............................................................................. 9

2.3.

Stock price volatility and dividend policy ........................................... 10

2.4.

Stock price volatility and firm age ...................................................... 13

2.5.

Stock price volatility and trading liquidity .......................................... 13

2.6.

Other firm’s characteristics and stock price volatility......................... 14

2.7.

Developing empirical research hypotheses ......................................... 15

2.7.1.

Dividend yield and dividend payout ratio ........................................... 17

2.7.2.

Firm Leverage...................................................................................... 19
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2.7.3.

Asset growth rate ................................................................................. 21

2.7.4.

Firm size .............................................................................................. 22

2.8.

Chapter summary ................................................................................. 24

CHAPTER 3

DATA AND METHODOLOGY ............................................ 25

3.1.

Introduction ......................................................................................... 25

3.2.

Data sources ......................................................................................... 25

3.3.

Variables: ............................................................................................. 26

3.3.1.

Dependent variable -Price volatility (PV) ........................................... 26

3.3.2.

Independent variables -Firm characteristics ........................................ 27

3.4.

Methodology ........................................................................................ 28

3.4.1.

Multiple regression .............................................................................. 29

3.4.2.

Ordinary Least Square (OLS) regression ............................................ 30

3.5.

Chapter summary ................................................................................. 30

CHAPTER 4

EMPIRICAL RESULTS ........................................................ 31

4.1.

Introduction ......................................................................................... 31

4.2.

Descriptive Statistics and Correlation Analysis .................................. 31

4.2.1.

Descriptive Statistics ........................................................................... 31

4.2.2.

Correlation Analysis amongst Variables ............................................. 32

4.3.

Multiple Linear Regressions Analysis................................................. 34

4.3.1.

Regression analysis.............................................................................. 34

4.3.2.

Hypothesis test ..................................................................................... 36

4.4.

Chapter Summary ................................................................................ 41

CHAPTER 5
5.1.

CONCLUSION ........................................................................ 42

Reviews of findings ............................................................................. 42
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5.2.

Contributions ....................................................................................... 43

5.3.

Implications ......................................................................................... 44

5.4.

Limitations and recommendations for future researches .................... 45

References

................................................................................................... 47

APPENDIX A: LIST OF SAMPLE COMPANIES ........................................ 54
APPENDIX B REGRESSION RESULT ........................................................ 57

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ABBREVIATION
AGE

Firm age

ASGR

Asset growth rate

CURR

Current ratio

DY

Dividend yield

EBIT

Earnings Before Interest and Tax

EV

Earning volatility

HNX

Hanoi Stock Exchange

HOSE

Ho Chi Minh City Stock Exchange

IPO

Initial Public Offer

LEVR

Firm leverage

OLS

Ordinary Least Square

POR

Payout ratio

PV

Price volatility

ROA

Return on assets

ROE

Return on equity

SIZE

Firm size

TOVR

Liquidity

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LIST OF TABLES
Table 2.1: Expected relation to stock price volatility ........................................... 16
Table 4.1: Descriptive Statistics ........................................................................... 31
Table 4.2: Correlations ......................................................................................... 33
Table 4.3: Coefficientsa ........................................................................................ 35
Table 4.4: Model Summaryb ................................................................................. 36
Table 4.5: Hypotheses summary .......................................................................... 41

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CHAPTER 1

1.1.

INTRODUCTION

Introduction
Stock prices are the most important indicators used by investors to invest

or not to invest on a particular share. The main objective of investing in the stock
market is to maximize the expected return at low level of risk. The volatility of
stock price is the systemic risk faced by investors who possess ordinary shares
investment. Investors are by nature risk averse, and the volatility of their
investments is of importance to them because it is a measure of the level of risk
they are exposed to (Hussainey,2011). Therefore, the stock price volatility gets
investors’ undivided attention.
Furthermore, stock market growth plays an important role in predicating
future economic growth in situations where the stock markets are active.
Economies without well-functioning stock markets may suffer from three types
of imperfections. First, opportunities for risk diversification are limited for
investors and entrepreneurs. Second, firms are unable to structure optimally their
financing packages. Third, countries without well-functioning markets lack
information about the prospects of firms whose shares are traded, thereby
restricting the promotion of investment and its’ efficiency (Demirguc-Kunt and
Levine, 1996).
Since the important role of the stock market plays in promoting the
economic growth, any change in the stock market always draws attention of the

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public and the society. As an emerging market, the Vietnamese Stock Market is

expected to lead to a lower cost of equity capital for firms and allow individuals
to more effectively price and hedge risk, and a place where can attract foreign
portfolio capital and increase domestic resource mobilization, expanding the
resources available for investment to develop the country. However, what has
been happening on the Vietnamese Stock Market shows an unstableness of the
Vietnamese economics. During the period from 2008 to 2012, the Vietnamese
Stock Index (VN-INDEX) changed so much. The VN-INDEX reached the
highest point of 921.10 on January 2nd 2008, and then falling to the lowest point
of 235.50 on February 24th 2009 just in around one year. On the last transaction
day of the year 2012 the VN-INDEX gained 413.70 points (abstracted from
historical data on HOSE).
As a result, stock price volatility in Vietnamese recent years becomes a
topic attracting not only investors but also firm’s managers and the government.
Therefore, determining factors affect the stock price volatility is significant. This
thesis examines the effects of some firm’s characteristics on stock price volatility
in the context of Vietnam such as dividend yield, payout ratio, leverage ratio,
asset growth rate, and firm size. The findings of the study provides implications
for investors in building up their investment portfolio, for managers in firm
management, and for law maker in giving out laws and regulations as the
solution to stable and to develop the Vietnamese Stock Market.

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Finally, the remainder of this chapter is structured as follows: section 1.2
provides the research background, section 1.3 discusses the research objectives
and the research questions, section 1.4 presents the scope of the research, section
1.5 is the thesis contributions, and section 1.6 is the structure of the thesis.
1.2.

Research background
For many decades, stock price volatility and its determinants have been

controversial topic of theoretical and empirical researches. Investigations of
share price changes appear to have presented evidences that change in
fundamental variables should jointly influence changes in share prices in both
developed and developing markets. However, the relevant actual fundamental
factors may vary between markets. It is widely agreed that a set of fundamental
variables as suggested by literature has been relevant as possible factors affecting
share price changes in the short and the long run.
Actually, there is a huge amount of researches has been conducted to
analyze the relation between stock price volatility and firm characteristics.
Among those researches investigated developed market, it can point out some
empirical findings such as Baskin (1989), Fama and French (1992), Pastor and
Veronesi (2003) in the United States context, Allen and Rachim (1996) in
Australian context, Hussainey, Mgbame, and Chijoke-Mgbame (2011) showed
evidence from United Kingdom. While Baskin (1989) reported a strongly
significant relation between dividend yield and stock price volatility, Allen
and Rachim (1996) could not find any evidence to support this hypothesis
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but found another interesting results related to payout ratio.
Even though Vietnam initiates the stock market later than many other
developed countries, there has been a substantial growth. The first stock
exchange in Ho Chi Minh City was established in 2000 with only two listed
companies, then by increasing foreign interest and the privatization of stateowned enterprises lead to a rapid increase in listings. At the end of 2012, there
were about 315 firms listed on the Ho Chi Minh Stock Exchange (HOSE) and
399 other firms on Hanoi stock exchange (HNX). At the end of Jan 2013, there
were two more firms jointed in HNX.

Most of the previous studies on determinants of stock return volatility
focus on well-developed markets such as Baskin (1989), Gallant, et al.,(1992),
Pastor and Veronesi (2003) in the context of United States, Allen and
Rachim(1996) studied factors affected stock price volatility in Australia,
Hussainey et al.,(2010) found evidence from London Stock Exchange of UK. In
the other hand, there is a less attention given to the developing markets. Ramadan
(2013) examined determinants affected stock price volatilities in Jordan, Irfan
and Nishat (2003), Khan (2011) attempted to explain the effect of dividend
policy on stock price of listed companied at Karachi Stock Exchange in Pakistan,
Hashemijoo, Ardekani and Younesi (2012) investigated the impact of

firm

attribute on share price volatilities in the Malaysian Stock Market. Whereas,
there is no or a few study address the issue of stock price volatility and
fundamental factors in the Vietnamese context. This motivates the present

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study to examine whether firm’s characteristics can affect the stock price
volatility of the Vietnamese companies and to analyze their influence. This study
focuses on the same issue for Vietnam Stock market, as a developing Asian
capital market. Apart from using the latest data, the research will incorporate
selected variables to examine the determinants of stock price volatility.
1.3.

Research objectives and research questions
The purpose of this thesis is to analyze the behavior of stock price

from a broad perspective and to determine the relations between stock price
volatility and firm characteristics. This research also examines stock price
behavior in each year in order to identify whether there is any annual differences
in stock price movement.
This research will provide answer to the following question:
Do firm’s characteristics affect firm’s stock price volatility in Vietnam
stock market?
1.4.

Research scope
There are psychological factors contributed to the price changes or

volatility such as investor’s overreactions to earnings, dividends, or other news;
waves of social optimism or pessimism; fashions or fads (Shiller, 1987).
According to the efficient market hypothesis, when new information either good
or bad news are available to the public, they will effect and change the
company’s share price. However, it is difficult to use the patterns of the stock
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returns over weekends, holidays and different calendar periods as the news about
fundamental values do not move systematically along during these periods
(Thaler, 1987). Roll (1988) found that it will be difficult to rely only on
systematic economic influences to predict the variation of the individual stock
returns. This is because there are other factors apart from fundamentals that
reflect the movement of stock prices (Cutler et al., 1989). Therefore, this research
only examines some fundamental factors belong to firm’s characteristics such as
dividend yield, payout ratio, leverage ratio, asset growth rate, and firm size to
find their effects on stock price volatility of listed companies on HOSE. Besides,
companies trade or do their transactions on Unlisted Public Company Market

(UPCOM) and Hanoi Stock Exchange (HNX) are out of the scope of this
research.
1.5.

Thesis contributions
This thesis is the very first research investigating the characteristics of

stock price volatility in Vietnam stock market. The main contribution to the
financial literature is to provide an extensive empirical analysis on the stock price
movements and firm characteristics relation over an extended period.

The

construction of stock price data, together with detailed characteristics of
listed firms in Ho Chi Minh City Stock Exchange, allows us to achieve this task.
The findings of this thesis are a confirmation of the irrelevance dividend theory
of Modigilani and Miler (1958), a verification of the hypotheses of the previous
study of Baskin (1989), and a support to Allen and Rachim (1996)’s findings in
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identifying the relation between stock price volatility and firm characteristics.
Furthermore, this research provides a useful caution for the investors in terms of
real relation between stock price volatility and firm’s characteristics.
1.6.

Structure of the thesis
This thesis consists of five chapters from chapter 1 to chapter 5. The first

chapter briefly introduces major concerns of this thesis such as the research

background, research objectives, research question, research scope, and research
contributions.
Chapter 2 is the literature review. In this part, it presents theoretical
aspects of stock price volatility focusing on impacts from fundamental. Based on
theories, initial research model and hypotheses used for the research are formed.
Next, Chapter 3 is research methodology that will show the research
process and data collection. There are 3 elements in Data collection consisting of
data sample, data size and method using in this research.
Then, Chapter 4, data analysis will reports the analysis results of data
collection.
The last chapter is the conclusions, this will summarize the findings;
discuss the managerial implications and recommendation based on the results in
chapter four; and show the research limitation as well as the suggestion for
further research.

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CHAPTER 2
2.1.

LITERATURE REVIEW

Introduction
This section provides theoretical background for the model to be

developed in the next part and reviews the literature related to stock price
volatility. In the limited scope of this thesis, the majority of this section is
focused on reviewing fundamental analyses of stock price volatility, which study
the relation between stock price movement and firm characteristics in long run.

For information purpose, reviews of value relevance study for short-term relation
between stock price behaviors with event announcements are also briefed.
Furthermore,

since

most of previous studies execute investigation on the

relation between stock price volatility and dividend policy with adding other
factors as controlling variables, this section first reviews those literature strands
and summarizes key fundamental factors in the later parts.
The structure of this chapter is as follow: Section 2.2 reviews the literature
relating to stock price volatility and overviews some fundamental factors
affecting stock price volatility. Section 2.3 discusses the relation between stock
price volatility and dividend policy in the literature. Section 2.4 overviews the
relation between stock price volatility and firm age. Next, the literature related to
stock price volatility and trading liquidity is presented in section 2.5. Section 2.6
reviews other firm’s characteristics and stock price volatility. Section 2.7 is the
development of the research hypotheses. Final, section 2.8 is the summary of the
chapter.
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2.2.

Stock price volatility
Stock price volatility is the rate of change in the price of a security over a

given time period. Consequently, the greater the volatility is the greater the risk
of substantial gain or loss. If a stock is labeled as volatile, it is more difficult to

forecast what the company’s future share price will be. Likewise, many investors
prefer stocks that support more predictable earnings and therefore carry less risk
(Profilet and Bacon, 2013)
Since the stock price is the most important indicator readily available to
investors for their decision to invest or not in a specific share. Factors influencing
stock prices are studied from different points of view. Several researchers
examined the relation between stock prices and selected factors, which could be
either internal or external. Rappoport (1986), and Downs (1991) suggested that
share price changes are associated with changes in fundamental variables which
are relevant for share valuation such as payout ratio, dividend yield, capital
structure, earnings, size of the firm and its growth.
Ball and Brown (1968) are the first to highlight the relation between stock
prices and information disclosed in the financial statements. Empirical research
on the value relevance has its roots in the theoretical framework on equity
valuation models. Ohlson (1995) depict that the value of a firm could be
expressed as a linear function of book value, earnings and other value relevant
information.
The link between fundamental factors and share price changes is

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extensively investigated over short horizons but only few studies attempt to
model it over lengthy periods. Studies over short windows commonly applied
cross- sectional tests using event-based research methodology. The models of
studies examining this relation cross-sectional or inter-temporally are few, and
one common feature, the fundamental factors used in a specific study are either
one or two although there is a long list of fundamental factors. Furthermore,
while price revisions at the time of announcements of price relevant disclosures
are valid as announcement effects shown over short horizons, it is equally

important to test the effect over a lengthier period using data over several years
as measure of the variables.
2.3.

Stock price volatility and dividend policy
The most important internal factors are related to dividend policy which

includes dividend yield and payout ratio has been widely studied and the main
subject of contention in the field of finance (e.g., Modigliani and Miller, 1958;
Miller and Rock, 1985; John and Williams, 1987; Baskin, 1989; Fama and
French,1992; Allen and Rachim,1996; Irfan

and

Nishat ,2003). Different

researchers have different views about the relation among dividend policy and
stock prices.
The relation between dividend payouts and stock price volatility,
which is firstly initiated by Modigliani and Miller (1958) , is still open for
discussion and investigation. According to Modigliani and Miller (1958), firm
value is irrelevant to dividend policy and stock price volatility is solely based

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upon its earning ability. Miller and Rock (1985), John and Williams (1987)
reported that the above statement could be only true if shareholders have
symmetric information about the company’s financial position.

However,

managers normally pass positive information to the shareholders by retaining any
negative information until any regulation or financial constraint to force them to
disclose that information.
Gordon (1963) argues that stock prices are influenced by dividend
payouts. He reports that firm with large dividends faces less risk in terms of stock
price volatility.
Friend and Puckett (1964) initiated the work on relation between dividend
and stock price volatility. They found a positive relation among dividend and
stock prices.
Jenson (1986) stated there is a positive relation between dividend and
stock price reaction. He argues that dividend payouts reduce the cost of funds
and increase the cash flows of the firm. The company after paying cash dividends
to stockholders would have less idle funds in the hands of managers to invest in
less or negative net present value (NPV) projects.
In the context of the United States, Baskin (1989) argued that there is
significant, dominating negative relation between dividends and stock price
volatility. He advanced four basic models, which relate dividends to stock price
risk: duration effect, rate of return effect, arbitrage effect and informational
effect. He suggests the use of the following control variables in testing the

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significance of the relation between dividend yield and price volatility: operating
earnings, firm size, level of debt financing, payout ratio, and asset growth rate.
According to his findings, dividend yield and payout ratio are negatively
correlated with stock price volatility. Whereas, firm size, asset growth rate and
firm leverage positively affect stock price volatility with a slight different

approach from stock returns not stock prices.
Fama and French (1992) inferred that dividend and cash flow variables
such as earning, investment and industrial production may serve as indicator of
stock returns.
Allen and Rachim (1996) failed to find any evidence that dividend yield
influence the stock price volatility in Australia. However, they find a significant
positive correlation among stock price volatility and earning volatility and
leverage, and a significant negative relation between price volatility and payout
ratio. According to their results, there is a negative correlation between size and
stock price volatility, as large companies incur more liabilities.
Regarding to emerging markets, Irfan and Nishat (2003) in a study in
Pakistan argued that both dividend payout ratio and dividend yield have
significantly negative effect on stock price volatility. Most of their findings were
similar to those of Baskin (1989). They observe a positive correlation between
debt and price volatility but its influence is less than that of dividend yield.
Following Irfan and Nishat (2003), a number of studies were conducted in
Pakistan regarding to dividend policy and stock price volatility. Asghar et al.,

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(2010) stated that stock price volatility and dividend yield have strong positive
correlation but stock price volatility is highly negative correlated with growth in
assets. Nazir et al., (2010) found that dividend yield and payout ratio have
significant impact on the share price volatility. The effect of dividend yield on
stock price volatility increases during the studying period whereas payout ratio
has only a significant impact at lower level of significance.
Rashid and Rehman (2008) found a positive but insignificant relation
among stock price volatility and dividend yield in the stock market of Dhaka.
2.4.

Stock price volatility and firm age
Pastor and Veronesi (2003) found a negative cross-sectional relation

between volatility and firm age. The median return volatility of the United States
stocks falls monotonically from 14% per month for 1-year-old firms to 11% per
month for 10-year-old firms. The authors’ model predicts higher stock volatility
for firms with more volatile profitability, firms with more uncertain average
profitability, and firms that pay no dividends.
2.5.

Stock price volatility and trading liquidity
Various studies reported that there are significant relations between

volume and stock price movement and liquidity because trading volume is a
source of risk caused by the flow of information. For example, Saatccioglu and
Starks (1998) found that volume lead stock prices changes in four out of the six
emerging markets. Jones, et al., (1994) found that the positive volatility-volume
relation documented by numerous researchers reflected a positive relation

13


between volatility and the number of transactions. Gallant, et al., (1992)
investigated the price and volume co-movement using daily data from 1928 to
1987 for New York Stock Exchange and find positive correlation between
conditional volatility and volume.
Song, et al., (2005) examined the roles of the number of trades, size of
trades, and share volume in the volatility-volume relation in the Shanghai Stock
Exchange and confirm that mainly the number of trades drives the volatility

volume relation. In addition, other studies reported that stock trading volume
represents the highest positive correlation to the emerging stock price changes;
thus represent the most predicted variables in increasing price volatility in both
emerging and developing stock markets (Sabri, 2004).
2.6.

Other firm’s characteristics and stock price volatility
Ariff et al., (1994) established the joint linear effect of these six variables

for the three markets using data relating to samples of firms over 16 or more
years in Japan, Malaysia and Singapore. In general, the six variables are
significantly related to share price volatility in the three markets although some
were not significant in particular markets. In the case of more analytically
intensive Japanese market, changes in the fundamental factors account for two
fifth of the variation in share price volatility. The same is not the case in the less
analytically intensive developing markets of Malaysia and Singapore. Obviously,
larger portions of price variation appear not to be explained by the variation in
the six firm specific fundamental variables in the less developing markets.

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