Share repurchase and cash dividend payout policy in vietnamese stock market substitute or complement

..

中
原
大
學
商
學
博
士
學
位
學
程

博
士
學
位
論
文

股
票
買
回
與
現
金
股
利

之
交
互
影
響
：
替
代
或
互
補
？
越
南
之
實
證

鄧
中
堅

中
華
民
國
109
年
6
月

中原大學
商學博士學位學程
博士學位論文

股票買回與現金股利之交互影響：
替代或互補？
越南之實證

Share Repurchase and Cash Dividend Payout Policy in Vietnamese Stock Market:
Substitute or Complement?

指導教授：陳怡珮
研究生：鄧中堅 (Dang Trung Kien)
中華民國 109 年 6 月





摘要
由於過去文獻在股票買回與現金股利政策之替代或互補關係未有一致結論，本文以越南市
場進行驗證，探討股票買回與現金股利支付政策之關係。越南是亞太地區中快速發展的新
興市場，且具有股權集中度高、國家持股比例高等特色，而相較於傳統的現金股利制度，
在越南股票買回是較為新興的現金支付方式，且越為普遍，此議題希冀能利用越南實證的
特殊性豐富公司理財議題之文獻。
實證結果發現，現金股利變動率與股票買回規模存在非線性關係，但其中兩者高度顯著的
正向關係顯示在越南市場中以互補效果為主。接下來利用分量迴歸模型分析此非線性關
係，發現主要導因於股票買回規模的大小，股票買回規模的差異導致了股票買回和現金股
利之間的關係產生變化。亦即，股票買回規模越大，股票買回和現金股利之間的替代效果

越顯著。此外，越南上市公司進行股票買回決策時會以未來成長機會為主要考量。最後，
信號假說和自由現金流假設僅顯示出邊際顯著效果。

關鍵字：越南、股票買回、股利政策

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ABSTRACT
Since the share repurchasehas become more common practice in Vietnamese market, this
research aims to investigate the relationship between share repurchase and cash dividend payout,
the popular cash distribution methods applied by Vietnamese listed firms. The substitute or
complementary relationship among these financial practices may contribution to the understanding
of financial managerial behaviour in Vietnam, a fast development emerging market in Asia Pacific
area.
The empirical results show that there is a nonlinear relationship between the change in
dividend and the repurchase yield. In addition, a significantly positive correlation reveals the
dominant of complementary effect in the whole sample. The results are consistent in robustness
tests. This study employs quantile regression to analyze the nonlinear relationship between share
repurchase and cash dividend. Empirical results indicate that the substitute or complementary
relationship between share repurchase and cash dividend varies with the scale of share repurchase
yield. The higher the share repurchase yield, the more significant the substitution effect is for the
relationship between share repurchase and cash dividend. Furthermore, the Vietnamese listed firms
seem to more carefully take their future growth into consideration regarding share repurchase
activities. However, the signaling and free cashflow hypotheses show marginally significances in
this case.

Key words: Vietnam, share repurchase, cash dividend payout policy.

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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 and Dr. Yu-Lun Chen (Chung Yuan Christian University),
committee members, for all the help, support and assistance;
Dr. Jung-Hua Hung (National Central University), Dr. Tsui-Jung Lin (Chinese Culture
University), Dr. Chi-Ping Hou (China University of Technology) and Dr. Jyun-Ji Tien (Tamkang
University), committee members, for giving valuable suggestions to further prove the research
study;
The Fiinpro, 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

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CONTENTS
摘 要 ................................................................................................................................................. i
ABSTRACT ................................................................................................................................... ii
ACKNOWLEDGMENT ............................................................................................................. iii
CONTENTS .................................................................................................................................. iv
TABLE LIST ................................................................................................................................. v
FIGURE LIST ............................................................................................................................... v
I.

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

I.

LITERATURE REVIEW ..................................................................................................... 3
1.1.

Share repurchases .......................................................................................................................... 3

1.2.

Repurchase regulations and Tax policy in Vietnam ...................................................................... 5

1.3.

The characteristics of Vietnamese listed firms .............................................................................. 7

II. DATA AND METHODOLOGY .......................................................................................... 9
2.1.

Data collection............................................................................................................................... 9

2.2.

Methodology ............................................................................................................................... 10

2.3.

Dividend change measurement ................................................................................................... 11

III. EMPIRICAL ANALYSIS ................................................................................................... 13
3.1.

General Statistic .......................................................................................................................... 13

3.2.

Substitution and Complementary effects between share repurchases and dividends .................. 17

3.3.

Robustness test ............................................................................................................................ 18

IV. CONCLUSION .................................................................................................................... 24
REFERENCE .............................................................................................................................. 25

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TABLE LIST
Table 1: Tax rate by period in Vietnam .........................................................................................................6
Table 2: Variable definitions ........................................................................................................................12
Table 3: Descriptive Statisic ........................................................................................................................14
Table 4: Correlation analysis........................................................................................................................15
Table 5: Distribution of Share repurchases by the Change in dividend (DDiv) ..........................................16
Table 6: Panel regression for the relationship between share repurchase and dividend payout. .................18
Table 7: Robustness by different conditions for the relationship between share repurchase and dividend
payout. ..........................................................................................................................................................20
Table 8: Robustness test using Repurchase ratio as explained variable .......................................................21
Table 9: Quantile regression for the relationship between share repurchase and dividend payout..............23

FIGURE LIST
Figure 1: Distribution of Share repurchases by the Change in dividend (DDiv)....................... 17

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I.

INTRODUCTION

For any organization, cash flow management is always one of the most important functions.
When firms have positive income or available free cash, normally they will be willing to distribute
the surplus to their shareholders as a response to their investment. For a long time, the world’s
listed firms have overwhelmingly preferred to pay dividends in the form of cash, or even stock.
Dividend policy becomes an important decision concerning whether profit should be distributed to
investors or reinvested for future opportunities and growth. However, over the last few decades,

share repurchase activity has experienced an extraordinary growth and has become a common
practice in developed markets such as the US or Europe since the mid-1980s, said Grullon and
Michaely (2004). For those strong economies of the Asia-Pacific region, this practice became
common later with the approval of share repurchases by Australia in 1989, Hong Kong in 1991,
Korea in 1994 and Japan in 1995. Today, share repurchases gradually have become more popular
than dividends.
For a new emerging market like Vietnam, starting with the establishment of the State
Securities Commission - the regulator over the securities market from 1997 - repurchases have
been allowed from the inital operation of its securities market in 2000: specifically, the opening of
the Ho Chi Minh City Stock Exchange in July 2000 - a trading platform for the stock of relatively
large corporations, and the Hanoi Stock Exchange in March 2005 for the stock of relatively SMEs
(Kien & Chen, 2020). The Vietnamese securities market, as the founders had expected, has worked
well to boost the national economy and maintain a high speed of development. This is especially
due to the transformation of all state-owned enterprises which play a key role in Vietnamese
economic sectors into joint-stock companies, under their “equitization”1 process (Webster & Amin,
1998). The stock market has grown significantly — only two stocks were traded in the beginning,
compared to nearly 700 listed firms in the current market. Securities markets are now becoming
the important capital mobilization channel for the Vietnamese economy.2
In general, most Vietnamese listed firms prefer using cash dividends, and a few use stock
dividends, to distribute funds to shareholders. Share repurchase has been applied only recently but
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.
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).
2

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seems to have become more acceptable after 2007. Specifically, only 5 to 7 firms practiced
buybacks in 2005 and 2006 respectively, but that number increased to 16 firms in 2007 and 18
firms in 2010. Note that 2005-2006 was a period of rapid expansion for the Vietnamese market,
while in 2007, the market faced a recession with many shares devalued and many investors losing
their invesments. Then in 2010, with the application of improvements in regulation as well as
economic support policies, Vietnamese learned how to run their securites markets in a more stable
way and bring it back to the development process.
What are the reasons for this change in the behavior of firms’ payout? Why do some firms
now prefer to spend the excess funds to buy back the shares rather than pay dividends?
Through a number of studies have been conducted and are found in the literature,
researchers mainly focus on two alternative hypotheses. They are the signaling (undervaluation)
hypotheis and the free cash flow hypothesis. The signaling hypothesis argues that when managers
think that their companies' stocks are undervalued, they will pay a premium to purchase their own
shares to send a signal to lesser-informed outside investors that the company’s future value is not
accurately reflected in its stock price, and the future prospects for any immediate investment into
their stock will be improving. Alternatively, the free cash flow hypothesis argues that firms with
excess cash but a poor porfolio of investment opportunities will face agency costs if the excess is
not distributed to shareholders. Facing these agency costs, managers have incentives to invest the
excess funds in compensation, empire building (mergers and acquisitions) or some other projects
which may lead to negative net present value. In this case, stock repurchases will be key for the
firms to distribute their excess free cash flow, hence limit the probability of any wasteful
investment.
To the best of my knowledge, there has been limited study on share repurchase using
Vietnamese database. Therefore, this study aims to go further in investigating the contribution of
share repurchase activities in the Vietnamese market. It is important because it will enhance the
understanding of corporate payout policy in the Vietnamese market, an attractive emerging market

with a recognized rapid pace of development. Furthermore, it may reveal some secrets for
predicting future trends regarding share repurchases in this market, such as if repurchases can be
used as a substitutes for dividends in the Vietnamese market. All of them are attractive trends for
investigation.

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I.

LITERATURE REVIEW

1.1.

Share repurchases

In the existing literature, there is a common motivation behind the study of repurchases,
which is to examine in the framework whether the free cash flow hypothesis or the signaling
hypothesis is correct.
The signaling hypothesis is consistent with the idea of undervaluation, in which listed
companies believe that their stocks are undervalued when compared to their real value. In this
case, firms distribute their excess funds to their shareholders by repurchasing their own stocks.
This practice reduces the number of outstanding shares, which normally may help increase the
stock price. Hence, the announcement of a repurchase therefore is expected to bring a positive
market reaction. This idea is widely accepted and is supported by many studies, such as Vermaelen
(1981); Ikenberry et al. (1995); Grullon and Michaely (2004); Chan et al. (2004); and Firth, Leung
and Rui (2010). Expanding the study, some other research reaveals that this market reaction is even
greater in the case of smaller firms’ repurchases. This finding is according to Vermaelen (1981),

and Hatakeda and Isagawa (2004). Explaining this issue, they believe that small firms face more
serious information asymmetry problems. Less information from small firms will be disclosed to
capital markets; also they are less researched by institutional investors, rating agencies often
focusing on bigger size companies. Therefore, when a share repurchase is announced, markets
should convey more undervaluation information to investors in the case of smaller firms.
Another major explanation for buyback activities is the free cash flow hypothesis. Firms
use repurchases in order to reduce agency costs, hence they will adjust their repurchase behavior
to their cash position. When there is separation of ownership and control within a firm, Easterbrook
(1984) and Jensen (1986) suggest that the payout of cash flows to shareholders through either a
share repurchase, or as dividends, can lower agency costs. Supporting this idea, Byun et al (2006)
show that firms with a high level of free cash tend to have a higher rate of repurchases.
Whether the signaling or free cash flow hypothesis is correct, it is certain that in different
cases, there are different reasons for repurchases. However, it raises another issue: Can dividend
and share repurchases be interchangeable? From the viewpoint of John and Williams (1985),
Bernheim (1991), and Allen, Bernardo, and Welch (2000), the conclusion is that management uses
dividends, as opposed to share repurchases, to signal the firm's quality. Thus, it means dividends
and repurchases are not interchangeable. While Dittmar (2000) studies the motives of repurchase
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activity, he concludes that the most relevant motives are taking advantage of share undervaluation
and distributing excess cash, hence, repurchases do not replace dividends. Also, the research of
Jagannathan and Stephens (2003) regarding the nature of repurchases, suggests that repurchases
and dividends are independently used by firms at different times in the business cycle and by
different firm characteristics.
As a new market in security trading, it will be questionable if dividends and share
repurchases are subsidiary or not in the Vietnamese market. We may find several published studies
on dividends using Vietnamese data. Yen Nguyen (2011) tested the signaling theory of dividend

announcements in Vietnamese market during 2006-2009 showing that the dividend payments have
affected stock prices. While Kim Thu et al (2013) reveals the negative significance between
dividend payout ratios and and firms’ profitability in the Ho Chi Minh stock exchange from 2007
to 2012. Also, according to Quoc Trung & Thu Ha (2014), Vietnamese listed firms have stable
dividend policy behaviors. However, in the case of repurchases, only one study has been conducted
by Byun & Bao Trung (2016) using a cumulative abnormal returns data period from 2005-2014,
their findings supports consistency between repurchases and the signaling hypothesis in Vietnam.
Most of researchers use the announcement-period abnormal returns to study the effect of
repurchases on stock prices. However, there’s also concern about the operating performance
changes surrounding the firms’ capital distribution activities. Lang and Litzenberger (1989) discuss
these two alternative hypotheses’ effect on the form of corporate payout (dividends). Using Tobin’s
q, they show that, markets react more to dividend changes of low-q firms than to those of high-q
firms. Concerning this practice in share repurchases, Tom and Vefa (1997), view operating
performance improvements in low Tobin q companies followed by repurchase activities, as the
result of efficient utilization of assets rather than improved growth opportunities which is explained
by the free cash flow hypothesis.
A typical study in the case of the substitution hypothesis by Grullon and Michaely (2002)
reveals the preference for repurchase in the US market; buyback activity seems to be a trend,
especially for young firms. While Brown et al (2015), using Australia market data, shows the effect
of tax treatment on the substitutability of repurchases and dividends.

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1.2.

Repurchase regulations and Tax policy in Vietnam

In Vietnam, regulations enabling share repurchases came into effect from the early time of
the esrablishment of the security markets (in 2000). Followed by many approval laws, amendments
and appendices such as the Securities Law of 2005, the Enterprise Law 2014, Decree 58/2012/NĐCP, and Decree 60/2015/ND-CP, in which firms are allowed to buy back their own stocks through
four methods, namely, (1) open market repurchases, (2) fixed price tender offers, (3) Dutch
auctions and (4) private negotiation repurchases. However, most Vietnamese firms chose the open
market repurchases method as their main repurchase activity.
Due to these laws, firms may repurchase a maximum of 30% of their total common stock.
But the board of directors may only decide to buy no more than 10% of outstanding shares; in
excess of this number, the decision can only be made upon the shareholders' approval in a general
shareholder meeting.
The source of funds for repurchases can be supplied only by retained earnings and/or the
share premium account; they may also be funded by other sources but only if sufficiently backed
by retained earnings and the share premium account. The repurchase cannot be held during an IPO
or right offering activity. Also, the rules stipulate that a listed firm may purchase its own shares
only at a price that is not above the market price for that security at the purchase date. The
repurchased shares may be retained as treasury shares which can be used subsequently for stock
dividend distributions or an employee share option scheme or may be resold to the market (after 6
months from the repurchase date).
In addition, due to the concern of stockholders regarding capital gains taxes when
repurchases occur, according to the law, before 2015, investors in Vietnam had two tax options
when trading stock. The first option was that they could pay 0.1% of the total value of the trade
immediately when the trade occurred. The second option was that they would be taxed at 20% at
the end of the fiscal year for their taxable income. If the investor applied for the first option,
whenever they gained or lost in trading, they still had to pay the tax. Otherwise, if they chose the
second option, they would only be taxed when they had gains. However, to simplify the tax
planning process, after 2015, Vietnamese authorities began only to accept the first tax option,
which means, anytime investors trade, they have to remit 0.1% of their total trade to fullfil their
tax responsibility.

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Similar to other emerging economies, the Vietnamese market observes a favorable number
of firms making dividend payouts, with around at 80% during the period 2006 – 2011, according
to Alphonse & Tran (2014). Recognizing this phenomenon, the authorities are encouraging more
investment in the stock market by providing very attractive dividend tax policies in Vietnam. It’s
worth noting that whether the corporate investors are foreign or domestic entities, they are all
exempted from dividend taxes in Vietnam. In the case of individual shareholders, they are currently
responsible for a 5% personal income tax for the cash dividends received; this is the flat tax rate
for both Vietnamese and foreign investors without any consideration of their tax-resident status in
Vietnam.
Table 1 shows the tax rate on dividend on different period in Vietnamese market.
Especially, government applied the 0% dividend tax of individual in some specific period to
encourage more active securities trades.
Table 1: Tax rate by period in Vietnam
Before 2009

01/2010 –
07/2011

8/2011 –
12/2012

2013-present

Individual investors

0%

5%

0%

5%

Institutional investor
(Vietnamese and foreign)

0%

0%

0%

0%

Source: Circular No. 160/2009/TT-BTC; Circular No. 134/2011/TT-BTC; Decree No. 101/2011/ND-CP
and Circular No. 111/2013/TT-BTC (Kien and Chen, 2020).

According to Jacob & Jacob (2013), dividend and capital gains taxation are first-order
determinants of the firm’s payout policy. With variety study support for the idea of possitive affect
of tax on the choice of cash distribution to shareholders in different countries such as Sarig (2004),
Moser (2007) with strong evidence from US market, especially during the period of high tax rates
on dividend from 1993 to 2002 (Jacob & Jacob, 2013). The result is constent with Rau and
Vermaelen (2002) and Oswald and Young (2004) for the United Kingdom data, or from a Asia
market with the study of Lee et al (2006) when review the Taiwanese stock market. Thus, reviewing
the the impact of different tax period to the payout for sure may broaden the view of relationship
between dividend and repurchase activity in an emerging economics likes Vietnam.

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1.3.

The characteristics of Vietnamese listed firms

Starting from an remarkable even in December of 1986, a socio-economic reforms program,
entitled "Renewal", was initiated by Vietanmese government, which is still on-going until today,
resulting in a boost to the Vietnamese economic development. Playing a key role in this program,
it has been about two decades since the Vietnamese stock market was established and developed.
The stock market has become the main channel to mobilize the middle and long-term capital for
the investment and development activites of national economic. It takes the mark with a remarkable
growth when comparing to the day when Vietnam joined the World Trade Organization in January
2007. Within 10 years, the market capitalization of Vietnamese stock market has increased about
17 times, from 22.7% of GDP in 2006 to 78.5% of GDP in the first half of 2019, which attracts a
big number of investors, both domestic and foreign ones, to enter the market. In detail, there are
around 2.28 millions accounts to bebeen opened in the stock market (Vu, 2019).
As a core of the "Renewal" movement in national economic, Vietnamese have transformed
all of their State-owned business to be the listed firms, due to the poor peformance of many SOEs
(State-owned equities). Turning the previous State-center economics to become an open market to
the world. Identical to its neighbor giant economis, China, Vietnamese government when listed
their State-firms to the private sector may expect more profit from the business while keeping
control in the essential industrial area, which may affect the national wealth and security. This
opinion leads to the concern of the contribution of government ownership into the capital
distribution decision of the firms. A number of investigations have proved the differences in payout
policies of the firms with the state element in the ownership. Chen et al. (2009) find that dividend

payouts increase as the government owns more shares. Supported by Bradford (2013), the statecontrolled firms pay higher dividend when compared to the private business in the Chinese market.
An earlier study by Brennan and Thakor (1990) also revealed that if the authorities run an effective
tax policy for personal income tax, the low ownership holders will prefer dividend payout, while
sufficiently large shareholders will encourage buyback decisions. Obviously, those firms with
government at the back will have more advanges and at the same time, more effects, due to the
legally and politically aspects and purpose.
From the views of corporate governance and ownership structure, share repurchases result
in a greater ownership concentration and strengthen controlling shareholders’ power (Ginglinger
and L’her, 2011). Managers may practice the share buybacks to reinforce their control by
increasing the number of share on hand and to fend off the takeover (Mork et al., 1988). Morever,
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the effects of majority or dominant shareholders in the determination of the firms’ financing
decision have been recognized for a long time by economist and researchers. With a fixed cost of
information and market analysis, majority shareholders will be beneficial more in a buyback
campaign, while minority shareholders are vulnerable to the expropriation, said Brennan and
Thakor (1990).
However, in case of a Socialist economic system such as Vietnam, without a doubt that
somehow the government played the role as a controller in the market. Even with a vast of stateowned firms now being equitilazatied and listed in the stock market, we still can not avoid the
dominant of state in these firms. One again, with the legal and political aspect, it is hardly to let
government to allow their firms being takeovered by other private investor. Thus, the purpose of
using share repurchase to fend off the takeover activities may be not the first priority in the decision
of initial state-owned listed companies. In other words, increasing the number of stocks on hand to
strengthen managerial power may be not a big concern for state-dominated firms, especially those
with more than half of ownership belongs to the government. Which making the repurchase less
attractive for the Board when considering about different payout channels.
The question about SOEs’ preference in distributing cash flows to the shareholders will be

interesting. Will they be loyal to the traditional distribution method, dividend, or will they prefer
flexibility to apply the alternative way, share repurchases? With a major number of listed firms
which are initially state owned and government still holding large ownership, this characteristic
makes a potential aspect to study from the point of view of payout policy, encourage researcher to
learn about the payout behaviour of State-owned sector in Vietnamese stock market.
From another point of view, recognize the creditor-oriented in governance perspective,
Sáez and Gutiérrez (2015) documented the consequence of lacking legal rules to monitor the power
of the dominant shareholders, make them use the payout policty to expropriate minority
shareholders through the lower dividend payout ratios in the firms with concentrated ownership
structure. In order to protect creditor, government may limit the cash distribution to shareholders
until the debt is repaid, means all kind of distribution chanels such as dividends, repurchases will
be covered under this provision. It is clear that a successful repurchase has impact to the financial
structure by reducing the firms available cash, results in higher leverage ratio (Bagwell and Shoven,
1988; Opler and Titman, 1996). Furthermore, Saez and Gutierrez (2015) brings an idea that the
firm’s current leverage level may affect its repurchase decision. It is consitent with the finding of
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Lie (2002), high leverage firms seem to have less buyback. However, Brown et al (2015) found
insignificance in the leverage hypothesis when retesting the influence of debt ratio to the repurchase
practice of listed firms. Therefore, the effect of capital structure was also reviewed via the
explainary variable.
Researcher wonder what is behind the screen of the relationship between the change in
firms capital redistribution policies, using a complete up-to-date data set of Vietnamese listed
firms. It will identical to the finding of Lang and Litzenberger (1989) by supporting the free cash
flow hypothesis, or it will consistent with sighnal hypothesis as of the Byun & Bao Trung (2016),
or there is special movement should be revealed. More directly, whether the substitute or
complement effect may be found?

II.

DATA AND METHODOLOGY

2.1.

Data collection

Our sample consists of all of the undertaken repurchases in Vietnamese Stock Exchange
from 2008 to 2017. Repurchase dates and other information such as cash availability, firms’ market
and book value, total asset, leverage ratio, dividend payout, the repurchase volume and payment as
well as firm ownership were collected from Vietnamese stock exchange database, the financial
platform Fiinpro and other known analysis online source for Vietnamese data such as vietstock.vn
and cophieu68.com website. As some Vietnamese firms may payout their dividend several times
each year such as year, quarter or interim dividend, so the sum of all dividends within the year was
used as its yearly dividend payout. The data will be cross-checked one more time via the firm's
financial statement, while payout amount will be rechecked carefully from business announcement.
The missing as well as some unclear data are removed from the tested sample. Thus, 174
observations are included into the study sample at the final.
This study will focus on the value of previous repurchase, its expected future buy-back and
the change of dividend value in the following period as a mean of differentiating between the
signaling hypothesis and the free cash flow hypothesis. Thus, providing the connection between
the buyback and dividend payout activities. If a firm’s intention in announcing a repurchase is to
‘signal’ to outsiders that the firm’s prospects are improving, then we should see a tangible decrease
in dividend payout, as the retained earnings that should be used for dividend distribution now be
spent on the buy-back. Alternatively, if the intention of management is to distribute free cash flow,
in lieu of investing in perquisites, entrenchment, or other losing projects, investors should react to
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the repurchase announcement but the repurchasing firms may or may not exhibit improved
performance. In short, signaling implies an improvement in performance, but a performance
improvement need not imply signaling.
2.2.

Methodology

Basically, this study will follow the up-to-date study of Brown et al (2015), by investigating
the relationship between Repurchase and the change in Dividend payout. In which, the difference
between actual dividend and its expected amount will be used to represent the change in Dividend
policy. While the repurchase yield will perform the level of buyback in firm financial actitivites.
However, as repurchase still a raising trend but young, compared to dividend activity, in
Vietnamese market, making the number of these two financial decisions have gap in different
periods, thus author decides to include those companies with completed repurchase into the sample
only. Understanding this financial payout behavior of those companies may help to draw a clearer
picture of share buyback in Vietnamese market. With several previous studies about the
relationship between repurchase and dividend payout, other researchers applied different methods,
such as multinomial logit model by Jagannathan (2000), transition probability and cross-sectional
regression by Grullon and Michaely (2004), time series vector autoregression by Lee and Rui
(2007) or the truncated regression by Brown et al. (2015). These studies revealed unidentical results
but mostly shared a similar characteristic of linear observation for payout methods. However, from
the view that payout are fund distribution from the firm’s earning after tax, we know that the annual
payout may or may not be the same each year as of its relationship to the stock returns is timevarying (nonlinear) (Kanas, 2005) and the board of director have to look for an optimal
disbursement amount, to balance between profit sharing with firm development. It raises a question
if the nonlinear relationship existed among financial payout methods. Therefore, based on the
uniqueness of Vietnamese market data but lack of consistent studies in case of repurchase
practicing, it encourages researcher to fulfill the gap of this question by applying the nonlinear
panel regression. Robustness test will also be conducted under different given conditions, to ensure

the consistent of finding results.
Furthermore, as the level of payout contains huge difference between firms, some company
may practice high level of capital distribution while other may spend a little money to maintain
their payout policy. At the same time, there are unidentical cash that firm spend for dividend and
buyback itself. The question of different groups rank among the conditional population is potential
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to review, in which quantile regression is a suitable statistical tool to answer it (Koenker & Bassett,
1978). Since the observed sample in this study included the group of completed share repurchase
only, quantile regression is useful to analyze the censored data (Lin, 2009), while the nonlinear
quantile regression is suitable for clustered data (Geraci, 2018). Thus, to answer for the concern of
whether the relationship between dividend and repurchase depends on the program size of practiced
buyback activity, the quantile regression model will be taken for further investigation to secure the
accuracy of results.
2.3.

Dividend change measurement

Follow the study of Brown et al. (2015) by comparing the different between the actual
dividend payment and its forecasted spending based on the previous dividend per share. Thus, the
change in dividend payout will be calculated as follows;
DDiv(t) = [ Div(t) – dps(t-1) * Outstanding(t) ] / MV(t-1)

(1)

In which,
DDiv(t) represents the dividend change between year t and year t-1

Div(t) is the total money that company has spent for dividend payout at year t,
dps(t-1) stands for the dividend per share in the previous year (t-1),
Outstanding(t) is the total outstanding share of the firm at year t
MV(t-1) is simply the market value of the firm in the last year.
By estimate the difference in the current and previous dividend payout, the author aims to
investigate the relationship between the Repurchase yield and the change of dividend of the
company. Since the observations were the completed repurchasing, an increase or a decrease in the
amount spending for dividend payout with significant correlation may reveal any existing
connection among these financial practices.
The following multivariate regression model was used to test the insign relationship
between capital distribution methods of listed companies in Vietnamese security market.
Ryieldt= a1+ a2 DDivt + a3 DDivt^2 + a4 Casht-1 + a5 MB t-1 + a6 Log(TA) t-1 + a7 Lev t-1 +
error term(2)

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Table 2: Variable definitions
Variable

Definition

Expected sign

Ryield

Repurchase yield, defined as the total value of
conducted repurchase divided by market value of

equity in the corresponding year;

DDiv

Change in dividend = (Current Dividend– Previous
Dividend)/Market capitalization in current year

Cash

(Cash + Cash equivalent + short-term investment)/Total
Asset

+

MB_ratio

Market to Book ratio = (Market value of Equity + Total

-

(-) : substitute
(+) : complement

Asset – Book value of Shareholder equity) / Total asset
Log(TA)

Logarithm value of Firm’s total asset

-

Lev

(Short-term debt + Long-term debt)/ Total Asset

-

Table 2 shows variable definitions. In the purpose of testing for the existence of subsitution
hypothesis between share repurchase and dividend payout, it is expected for negative correlation
between the testing variable Ryield and its main independent variable DDiv. On the other words,
with the increasing in repurchase activities, it may affect to the lower spending on dividend
distribution in the year t when comparing to its of the previous yield. Alternatively, a finding of
significant positive coefficient may reveal independent relationship between these two variables,
or the complementary effect eixisted on firm capital payout policy. While, the square DDiv will be
included into the model, to check if the nonlinear relationship may exist between dividend payout
and repurchase practice.
A positive sign of Cash variable is expected to represent the free cash flow hypothesis.
While, practicing buyback as a signal to other investors that the firm is undervalued will result in
a signifiant negative coefficient of Log(TA). As large firms often provide clearer business
information to build shareholder’s confidence, making them are less undervalued by the market.
The market to book ratio (MB_ratio) stands for the firm future growth. If firms retain more cash
for other investment plan, spending for payout should lower, which is reflected by a negative
relationship from MB_ratio to repurchase. In addition, the firm with high debt ratio in financial
structure obviously has less resource to buyback its share, reported by an expected negative sign
for Lev variable.

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In concerning with the affect of State control and Tax policy to the firms’ capital
distribution decision, the government ownership and tax will be use to identify different
comparision sub-sample. Thus, it may giving a broaden view on research findings. In specific, the
firms will be seperated into two groups as of whever government contribution as blockholder or
not. According to Vietnamese security law, shareholders with at least 5% outstanding stock will be
classified as blockholders. Blockholders are known as activists with more influential voting right.
Thus, I will create a group calls Gov5, in which government is firm’s blockholder as of it owns
more than 5% firm’s share, giving state the right to vote and effect to the business and managerial
decision. From observation, I recgonize that among 174 completed repurchases, there was over
half (92 buyback) belonged to those enterprises with government investment. Among 92 practices,
90 or 98% of them were from firms with the state as their blockholder (by holding at least 5% of
outstanding share). It is also worth to note that around 90% of state blockholder (82/90) having
more than 10% right to vote. Thus, group Gov10 which included all of state blockholders with at
least 10% outstanding stock was employed, for higher level of robustness test. In case of tax, its
affect will be observed through the different market reaction between the post and pre-period of
tax issue.
III.

EMPIRICAL ANALYSIS

3.1.

General Statistic

The general statistics of all variables are reported in Table 3. It presents an overall view of
the listed Vietnamese firms’ characteristic, those practiced the repurchase policy within the
observation period. General information is summarized in Panel A of Table 3, with high difference
between the maximum and the minimum in repurchase yield (Ryield), it seems that firms’ buyback
policies are quite fluctuant among firms. While there are firms to hold a big volume of repurchases
at nearly 27% of theirs market value, some other companies are spending very little amount to

buyback their own shares. Besides distribution purpose, the managerial intent may be the cause of
these practices. For example, the firm buys back a small number of their own shares to make it
more convenient to manage the amount of outstanding shares or to serve the employee stock option
plan. Since distribution matter is not the priority, these repurchases may be less related to other
payout method, which is related to complementary effect. While, the Change in dividends (DDiv)
gives another point of view, both of its mean and median are in negative sign. That is, on average,
firms are going to pay less dividend than expected, the difference in dividend payments is more
likely to be shifted to the other kind of payouts, such as share repurchases, resulting in expectation
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for substitute relationship between payout policies. For other explanary variables, Cash, Mb_ratio,
Ln_TA, Lev, they all have Median fluctuant around the Mean. However, their distance of
Maximum and Minium value are high from the Mean, showing a range between the financial ratio
of firms, which secure that the observed sample scope may cover the whole market. It may become
a mark for the accuracy of later finding.
Table 3: Descriptive Statisic
Panel A: General Characteristics

Variables

Mean

Median Maximum Minimum Std. Dev. Observations

Ryield
DDiv

0.026
-0.015

0.007
-0.003

0.269
0.672

0.000
-0.710

0.045
0.126

174
174

Cash(-1)
MB_ratio(-1)

0.199
1.346

0.169
0.989

0.679
6.018

0.003
0.396

0.158
0.984

174
174

Ln_TA(-1)
Lev(-1)

11.909
0.198

11.793
0.165

13.864
0.741

10.595
0.000

0.664
0.193

174
174

Panel B: Sample Distribution

Market

HNX

HOSE

Total

Basic Materials
Consumer Goods

6
4

19
44

25
48

Consumer Services

10

7

17

Industrials
Oil & Gas
Technology

0
22
0
2

11
40
2
2

11
62
2
4

Utilities

0

5

5

44

130

174

Industry Health Care

Total
Note:

- The dependent variable Ryield denotes Dividend Yield
- The key testing variable DDiv denotes Change in dividend = (Dividend t – Expected Dividend t)/Market capitalization
- The controlling variable Cash: (Cash + Cash equivalent + short-term investment)/Total asset; MB_ratio denotes
Market to Book ratio = (Market value of Equity + Total Asset – Book value of Shareholder equity) / Total asset;
Log(TA) denotes Log value of Firm’s total asset; Lev: (Short-term debt + Long-term debt)/ Total Asset

Other information such as industrial and market distribution may be observerd from Panel
B of Table 3. It can be seen that buyback are more prefered by listed firms from Ho Chi Minh stock
exchange (HOSE) with around three fourth of total share repurchase activities. Indetail, there were
130 completed repurchases conducted in HOSE while its numberwas only 44 in HNX. With the
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market characteristic where most of larger firms are listed in HOSE while SMEs go to HNX, we
can say that those firms with more advance in capital may have more incentive to conduct the
repurchasing in Vietnamese market. From the industry classification view, industrial firms are
dominant in both market in case of share buyback holding, with total of 62 over 174 observations.
For the second rank, consumer service enterprises in HNX followed up with 10 completed
campaigns, while in HOSE the firms from consumer goods industry were doing more share
repurchasing with 44 holded activities.

Table 4: Correlation analysis
Variables

RYIELD

RYIELD

1.000

CASH(-1) MB_RATIO(-1) LN_TA(-1) LEV(-1) DDIV

----CASH(-1)
MB_RATIO(-1)
LN_TA(-1)
LEV(-1)
DDIV

-0.064

1.000

(0.402)

-----

-0.269

0.166

1.000

(0.000)

(0.029)

-----

-0.096

-0.138

0.261

1.000

(0.210)

(0.069)

(0.001)

-----

0.028

-0.451

-0.299

0.381

1.000

(0.716)

(0.000)

(0.000)

(0.000)

-----

-0.046

0.095

0.080

0.072

-0.096

1.000

(0.549)

(0.211)

(0.294)

(0.346)

(0.210)

----Note:

The p-value are reported in parentheses
- The dependent variable Ryield denotes Dividend Yield
- The key testing variable DDiv denotes Change in dividend = (Dividend t – Expected Dividend t)/Market capitalization
- The controlling variable Cash: (Cash + Cash equivalent + short-term investment)/Total asset; MB_ratio denotes
Market to Book ratio = (Market value of Equity + Total Asset – Book value of Shareholder equity) / Total asset;
Log(TA) denotes Log value of Firm’s total asset; Lev: (Short-term debt + Long-term debt)/ Total Asset

Table 4 presents the correlation coefficients of the dependent variables and key testing
variables. Cash and Leverage (Lev) share a negative correlation at -0.451, the largest absolute value
correlation among variables, which shows a strong relationship between the firm’s capital and its
debt ratio. The negative correlation makes sense that increasing on leverage level causes higher
responsibility of redeeming the debt, thus lower the amount of cash on hand. For the relationship
between explained and tested variables, the market to book ratio (MB_ratio) shows a strongest
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connection to explained variable, Ryield, at -0.269. In detail, MB_ratio is negative significantly to
repurchase yield (Ryield), while it is insignificant for the main tested variable, DDiv.
Table 5 reveals the distribution of completed share repurchases under different degree of
change in dividend (DDiv). Among 174 completed buybacks, it can be clearly seen that the sample
is divided into two groups in two inverted U-shapted terms. The left side belongs to the group of

change in dividend (DDiv) less than 0, which means firms were paying less dividend than
expected. While, the right side is the group of increasing dividend payout. In detail, firms with
lower dividend strategy has highest proportion. 55% of repurchasing firms have 44.25% of
repurchase activities when dividends are decreasing by zero to 10% than before. They slow down
at 0% then move to the second inverted U-shape on the other side. In wich the firms distribute more
dividend from zero to 10% of expected value aslo get peak at 32.76% of total repurchase.
Table 5: Distribution of Share repurchases by the Change in dividend (DDiv)
DDIV

No of Repurchase

% Rep

Average Ryield

% firm

-30%
-30% to -20%
-20% to -10%
-10% to 0%

5
2
13
77

2.87%
1.15%
7.47%

44.25%

0.054
0.003
0.059
0.023

5%
2%
13%
55%

0%
0% to 10%
10% to 20%
20% to 30%
>30%

7
57
10
2
1

4.02%
32.76%
5.75%
1.15%
0.57%

0.041
0.020
0.008
0.040
0.201

5%
44%
10%
2%
1%

Note:
- The dependent variable Ryield denotes Dividend Yield
- The key testing variable DDiv denotes Change in dividend = (Dividend t – Expected Dividend t)/Market capitalization

A better imagination may be revealed through Figure 1 as belows, for a clearer overview
of their relationship. It may be a preliminary evidence of non-linear results.

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