DIVIDEND POLICY IN TIMES OF RECESSION :

AN EMPIRICAL STUDY OF DIVIDEND POLICY AND FIRM PERFORMANCE

IN VIETNAM 2012-2014

INTRODUCTION
Dividend la mot moi quan tam rat lon etc..
Tinh hinh kinh te Viet Nam trong nhung nam 2012-2014co the se co nhieu tac
dong den dividend
Bai nghien cuu nay duoc viet voi muc dich tra loi cac cau hoi :
-

Tinh hinh tra co tuc cac nganh trong giai doan 2012-2014
Bien doi ve co tuc (fluctuation) trong giai doan 2012-2014
Moi lien he ve co tuc voi cac yeu to nhu loi nhuan, don bay tc.

1. Literature review
Dividend or profit allocation decision is one of the four major decision areas in finance.
The other three are financing, investment, and working capital management decisions. For
a corporation, when it generates free cash flow, it must decide how to use that cash. It can
reinvest in new investment opportunities, therefore increase the firms future value or it
can attribute the funds to its owners. Dividend is defined by Ross (1982) as the payment
either in cash or other forms that corporations pay to their own shareholders. Ross,
Westerfield and Jaffe (2002) also noted that this figure is very important since it not only
determines what funds flow to investors and what funds are retained for investment but
also provide information to stakeholders concerning a firms performance.

Theories on Dividend policy

There has been many studies conducted in the relevance or irrelevance of dividend
decisions, with many lines of thought shown and supported, as well as criticized by
others. In their research, Miller and Modighani (1961) - known as the theory of M & M,
suggested that the change in dividend policy does not affect the value of a share of stock,
therefore irrelevant to investors. Miller and Modiglian have supported their theory, based
on some assumptions: (1) Firms are operating in perfect markets, which means that there
are neither taxes nor brokerage fees, and no single participant can affect the market price
of the security through his or her trades; (2) All individuals have the same beliefs
concerning future investments, profits, and dividends, i.e., these individuals have
homogeneous expectations; (3) The investment policy of the firm is set ahead of time, and
is not altered by changes in dividend policy. Basing on these assumptions, M&M argued
that a firms value is affected only by its investment decisions, its earning power and
business risk. Dividend policy made by managers can be offset by investor by either
selling off stock or reinvesting the dividend for the purpose of achieving the desired
dividend stream. Some researchers who are in support of this theory are Black &
Scholes (1974), Merton & Rock (1985) and Peter (1996).
However, there are also many professionals that largely criticize M&M theory, pointing
out that many assumptions in M&M do not hold true in reality, and important market
imperfections such as asymmetric information, agency cost, taxes, transaction costs,
floatation expenses should be taken into consideration when assessing the importance of
dividend policy to the firm value. In that case, the dividend policy is seen as relevant.
The first two significant supporters of this idea were Lintner (1956) and Gordon (1963).
They suggest that investors would prefer current dividends to potential future profit from
capital gains since they have risk aversion. Therefore, a high rate of retained earnings paid
out as dividends would increase the value of their respective shares of the corporation.

Another theory that support positive effect of dividend payments on firm value is the
agency cost theory first mentioned by Jensen (1992) and Rozeff (1982). According to
them, dividend payout policy could be used as a method to reduce the agency problems. If
dividends are not paid to investors, the managers can use those resources for misleading
purposes, their own benefits, for example. Stouraitis and Wu (2004) revealed that
dividend could be used to squeeze the overinvestment problems of corporations by
limiting the number of investments with lower expected return. In their study, Agrawal
and Jayaraman (2004) observed that dividend policy and leverage policy are two method
for controlling the agency cost of free cash flow that can be substituted. A company that
have a stable dividend policy tend to have a higher level of activity to obtain more income
and have excess retained earnings to pay shareholders.
The theory of signals (which was discussed in Bhattacharya (1979, 1980), Ross (1977),
Miller and Rock (1985)) also recognize the relevance of dividend policy. The theory
based on the condition of asymmetric information, that is the managers have more
information about the prospect of future operation and earnings of the company than the
shareholders. Therefore, the declaration of a dividend higher than anticipated by the
market can be interpreted as a signal for a positive perspective of the company. For
investors, its logical to think that the managers wouldnt increase the dividend if this
trend can not be maintained in the future. In other words, it shows the confident of the
corporation on its growth and prosper, therefore the stock price can increase. In the other
hand, cutting down on dividends can be seen as a bad signal. It might reflect that the
company is having difficulty in its operation and the stock price may fall.
On the contrary, there are two theory that supports the idea that investors prefer a low
dividend. The first one is the transaction cost theory by Fama (1974) and Higgins (1972).
It argues that firm with high transaction costs of equity or debt issuance should pay less
dividends, otherwise it will become very costly for the firm to raise sufficient funds for
investment need. The second theory the pecking-order theory (see Myers (1984), and
Myers and Majluf (1984)) asserts that firms with more investment opportunities pay less
dividends, since those firms prefer internal financing to issuing securities and they try to
adapt their target dividend payout ratios to their investment opportunities, while trying to
avoid sudden changes in dividends.

Empirical research on Dividend policy

Based on various theories, a number of empirical studies have been conducted to research
the determinants of dividend policy. Since the data set in those findings are panel data set,
three most common and appropriate methods used for analysis were the Pooled Ordinary
Least Squared (Pooled OLS) regression model, the fixed effect model (FEM) and the
Random effect model (REM) (Fama (1968), Frankfurter et al. (2002), Foong et al. (2007),
Ahmed et al. (2009)).

In the result of the regression, by using both Pooled OLS and FEM and checking the
statistical significance of the estimated coefficients, the R 2 value and the Durbin-Watson
value in both, Foong et al.(2007) concluded that the Pooled OLS model distort the true
picture of the relationship between dividends and other factors, therefore not preferred to
FEM. In comparison between FEM and REM, the Hausman (1978) specification test was
used by Frankfurter et al. (2002). The null hypothesis underlying the Hausman test is that
the FEM and REM estimators do not differ substantially. In his findings, the null
hypothesis was rejected, implying that FEM is more appropriate.
Many different variables were used in each research in support of the above mentioned
theories, including : the dividend payout ratio, return on equity, ownership structure, free
cash flow, collateralisable assets, cash flow volatility, size of the firms, risk(beta), growth,
profitability, financial leverage etc. In those analysis, these variables all proved to have
significant relationship to dependent variable (which is in most case dividend payout
ratio).
Nevertheless, while several prior empirical studies from developed economies have shed
light on the relationship between firm performance and dividend payout, the same may
not be true for emerging market like Vietnam. Different political, economic situation and
legal basis may change the true outcome. There have been some studies in Vietnam on the
topic of Dividend policy like Dao Le Minh(2004), Nguyen Duy Luong (2007), Bui Thi
Ngoc Lan (2009) etc. However, those of them are qualitative in nature. To the best
knowledge of the authors, there have been no research conducted in the period of 20122014 that use quantitative models to analyze the relationship between dividend policy and
other financial factors.

2. Empirical Analysis
In this section, we carry out an empirical research on the relationship between dividend
policy and other factors that are considered to have impact on dividend as mentioned in
the first section, such as profitability, size of the firm, financial leverage,.. Our focus is on
the listed companies in Vietnam Stock Exchange for three year, from 2011 to 2013. Our
data includes 115 firms from 16 different industries. We consider only cash dividend
because its the most common form of dividend payment in Vietnam. Moreover, the
information about stock dividend is difficult to obtain and maybe misleading, due to the
inconsistency and complexity in the way of calculating the value of stock dividend in
each firm.
Because of time limitation and incapability in running regression model of our group, its
unlikely for us to run several models in data analysis. We therefore will only consider two
most popular models : the FEM and REM model for our analysis, which was proved by

other authors to provide better result on this topic as mentioned. The model will be
conducted on Stata software.
2.1.

Research Hypotheses and Model Specification

After considering relevant theories and research models on dividend policy and because
of information unavailability, we decided to include five firm-specific factors assumed to
have relationship with dividend in our model. The following hypotheses were postulated
in the study:
H1: There is a positive relationship between the level of collateralisable assets and
DPR
H2: There is a positive relationship between firm size and DPR
H3: There is a negative relationship between growth opportunity and DPR
H4: There is a positive relationship between profitability and DPR
H5: There is a negative relationship between financial leverage and DPR
Our model can be written as :

DPRit = 0 + 1 NFAit + 2 SIZEit + 3 GROWTHit + 4 PROFit + 5LEVit + i

(1)

For Fixed Effect model, we add 5 non-dummy explanatory variables and industries
dummies. The extended model can be specifically expressed as :

DPRit = 0 + 1 NFAit + 2 SIZEit + 3 GROWTHit + 4 PROFit + 5LEVit

+ j (INDSj)i + i
(2)
where j denotes industry dummies.
The variables and their explanation is shown in Appendix 1.
2.2.

Data analysis and findings

Descriptive statistics
Firstly, we summarize the data for dependent and independent variables used in the
regression and come up with the following result for 115 firms in three years, making a
total of 345 observation. The descriptive statistics for variables is shown in Appendix 2
It appears that the mean dividend payout ratio of the 115 firms is about 60.4% with a
standard deviation of 61%. In another word, on average , listed firms in HOSE and HNX
use 60.4% of their earning to distribute dividend to shareholders. The high standard
deviation can be explained by the significant difference in dividend policy of firms, with
some pay no dividend and others with ratio as high as 6.9. The independent also fluctuate

between firms and industries, but distributed normally with no sign of outliers. In our
sample, out of 16 industries, three industries with the most data are Materials &
construction, Food & Drink, Industrial services. The actual allocation is shown in
Appendix 3.
Multicollinearity test
Before conducting the model, we want to test for correlation of the independent variables.
Its very important since multicollinearity can lead to large variance of estimates, wide
confidence interval, small tob, wrong sign of the estimates,... We come up with the
following result:
. corr nfa size growth prof lev
(obs=345)

nfa

size

growth

prof

lev

-------------+--------------------------------------------nfa |

1.0000

size |

-0.0667

1.0000

growth |

0.0083

0.1629

1.0000

prof |

0.0262

-0.0300

0.1919

1.0000

lev |

-0.0951

0.1734

0.0303

-0.3950

1.0000

It can be seen that no variables are highly correlated. Therefore we have no problem of
multicollinearity.
Model selection
First we conduct both the fixed effect model and random effect model, then we run a
Hausman test to check which is more appropriate. The null hypothesis is that the preferred
model is random effects. Result is shown in Appendix 4. With the Chi-Square Statistic
and Probability as shown in Appendix 4, its safe to accept the null hypothesis at 5%
significance level. Therefore the Random effect model is chosen.
Other tests/ Diagnostics
Testing for normality of residuals: To check whether the overall error component is
normally distributed , we predict the residuals then evaluate with graph. The result is the
assumption is not significantly violated (Appendix 5).
Testing for serial correlation : A Lagram-Multiplier test for serial correlation is used to
verify the problem. The null hypothesis is no serial correlation. Again with Prob > F =
0.3264 we fail to reject the null and conclude the data does not have first-order
autocorrelation (Appendix 6).

 Testing for heteroskedasticity : To check for the problem of heteroskedasticity in the

model, we used the Modified Wald test (Appendix 7). The null is homoscedasticity (or
constant variance). With Prob>chi2 = 0.0000 we thereby reject the null hypothesis and
conclude that the model has the presence of heteroskedasticity.
Remedy: In order to correct for potential heteroskedasticity across panels, we used the
xtgls command as instructed in Stata to robust standard errors.
Final result
After conducting all the test ands diagnostics, the final result which seemingly most
appropriate and accurate, is shown as below :
Table 1. Regression final result
Cross-sectional time-series FGLS regression

Coefficients:

generalized least squares

Panels:

homoskedastic

Correlation:

no autocorrelation

Estimated covariances

Number of obs

345

Estimated autocorrelations =

Number of groups

115

Estimated coefficients

Time periods

Wald chi2(5)

13.62

Prob > chi2

0.0182

Log likelihood

= -312.1749

-----------------------------------------------------------------------------dpr |

Coef.

Std. Err.

P>|z|

[95% Conf. Interval]

-------------+---------------------------------------------------------------nfa |

-.0617215

.1919054

-0.32

0.748

-.4378491

.3144061

size |

-.0197645

.0525742

-0.38

0.707

-.122808

.083279

growth |

.0203827

.1223334

0.17

0.868

-.2193864

.2601518

prof |

-1.264846

.3599149

-3.51

0.000

-1.970267

-.5594262

lev |

-.0611558

.0299884

-2.04

0.041

-.119932

-.0023797

_cons |

.8960049

.1613149

5.55

0.000

.5798336

1.212176

From the result, we can conclude that the whole model is statistically significant (Prob >
chi2 = 0.0182). However, only two out of five dependent variables included in the model

is statistically significant at 5% significance level and therefore proved to have

relationship with the dividend payout ratio. The two mentioned variables are both
negatively related to DPR.
Specifically, profitability is a significant factor that affected firm dividend payout ratio as
indicated by the regression equation. The p value for profitability is 0.000 showing that it
is highly significant. If profitability increase by 1%, the dividend payout ratio would
decrease by -1.26%. This is quite interesting because it contradicts our mentioned theory
that is a more profitable firm would pay more dividend.
The model also reveals that when financial leverage increase 1%, DPR should decrease
by 0.06%. This finding agrees with the pecking-order theory, the transaction cost and
agency cost theory which stated that highly leveraged companies is obligated to pay lower
dividend.
From our model, no clear relationship is witnessed between DPR and collateralisable
assets , growth rate and size of the firm.

3. Conclusion
This study basically looked at the dividend policy of listed companies in HOSE and HNX
from 2011 to 2013 when Vietnamese economy experienced major ups and downs due to
both international economic crisis and domestic economic problem. Initially, 5
independent variables was used to test for the relationship between dividend payout ratio
and five other factors, based on our literature review and hypothesis. The model show that
only two variable are significant and negatively related DPR in the given period :
profitability and financial leverage.
The findings of this research show that the firm performance or profitability of firm does
have effect on dividend policy. Hence its value is contrary to theories that view dividend
policy as irrelevant. However, the result also go against our hypothesis by pointing out
that an increase in the financial well being of a firm tends to reduce the dividend
distributed to shareholders. Perhaps this is because in Vietnamese market, managers think
that such good signal from profitability of firm can lessen the requirement for dividend by
investors, therefore come up with a lower dividend rate.
The result for financial leverage supports our theoretical prediction, revealing that a
company relying on debt financing would have a stricter dividend policy and reduction in
dividend level.
For the three left hypothesis, our research shows no apparent link between dividend
policy and collateralisable assets , growth rate and size of the firm. These does not seem
to be factors that firm managers in Vietnam take into account when considering their
dividend policy.

Finally, an important notation in this study is that the result may be completely reflects the
true picture of Vietnamese market, due to the rarely small sample size. The sample
horizon for this study is short compared to other samples in the literature. Moreover, the
act of choosing firms from so many industries with different nature and structure, yet
without equal allocation may lead to distortion in our result. However, because of time
limitation, that might be unavoidable. To address this problem, further research can be
carried out, with an increase in the sample size and specialization in choosing the industry
for investigation, both could raise the accuracy of the research.

APPENDIX
Appendix 1. Variables explanation
Variables
name

Definition

Expected
sign

Explanation

Supporting
theory

Dependent Variable
DPR

Dividend
payout ratio
(cash
dividend per
share/ EPS)

NFA

Indicator of
collateralisa
ble assets
(Net fixed
assets/ Total
assets)

SIZE

Natural
logarithm of
total sales
(Log of
sales)

GROWTH Sales
growth
(Percentage
of change in
a firms
sales)
PROF
Profitability

Independent variables
(+)
A
firm
with
more
Agency
collateralisable assets has fewer
Theory
agency problems between
shareholders and bondholders
because these assets may serve
as collateral against borrowing.
The higher the collateralisable
assets,
the
less
likely
bondholders will impose severe
restrictions on the firms
dividend policy, and hence, this
will lead to a higher level of
dividend payments.
(+)
Larger firms tend to have easier Transaction
access to capital markets, lower cost theory
issuing costs and higher agency
costs. Therefore, a positive Agency cost
relationship
is
expected
theory
between size and dividend
payout ratio.
(-)
If past or anticipated future Transaction
growth is rapid, then managers Cost theory
tend to conserve funds for
reinvestment by establishing a
lower payout ratio.
(+)

Since it is expensive to finance

Pecking-

(Earnings
before
interest and
taxes/Total
assets)
LEV

Financial
leverage
(Debt/Equit
y)

INDS

Industries
dummies

(-)

investment with new risky order theory

securities, dividends are low
for firms with less profitability.
Thus, controlling for other
effects, more profitable firms
pay more dividends.
-Firms that are highly levered
Pecking
tend to have high transaction order theory
costs, which then lead to a
reduction in dividend payments Transaction
in order to avoid the cost of cost theory
external financing
-When a firm obtains debt, it Agency cost
makes a fixed commitment to
Theory
creditors, which then reduces
the
discretionary
funds
available to managers and
subjects them to the scrutiny of
debt-suppliers. As a result,
highly leveraged companies
will pay lower dividends.

Appendix 2. Descriptive statistics for regression variables

Variable |

Obs

Mean

Std. Dev.

Min

Max

-------------+-------------------------------------------------------dpr |

345

.6044047

.6106224

6.98062

nfa |

345

.2537324

.1690616

.00459

.96406

size |

345

2.641387

.6318183

.31387

4.43181

growth |

345

.0722397

.2738136

-1.75052

.99916

prof |

345

.1213436

.1000313

-.0611

.89718

-------------+-------------------------------------------------------lev |

345

1.172826

1.198069

Appendix 3. Industry allocation

8.55

Industry |

Freq.

Percent

Cum.

------------------------------+----------------------------------Bat dong san |

27

7.83

7.83

Cong nghe Thong tin |

1.74

9.57

Dien, nuoc & xang dau khi dot |

30

8.70

18.26

Du lich va dich vu |

15

4.35

22.61

Giao duc |

18

5.22

27.83

Hang & Dich vu Cong nghiep |

66

19.13

46.96

Hang ca nhan & Gia dung |

12

3.48

50.43

Nong nghiep |

0.87

51.30

O to va phu tung |

2.61

53.91

0.87

54.78

Tai chinh |

0.87

55.65

Tai nguyen Co ban |

18

5.22

60.87

Thuc pham va do uong |

51

14.78

75.65

Truyen thong |

12

3.48

79.13

Xay dung va Vat lieu |

54

15.65

94.78

Y te |

18

5.22

100.00

San xuat

------------------------------+----------------------------------Total |

345

100.00

Appendix 4. Fixed or random: Hausman test

. hausman fixed random

---- Coefficients ---|

(b)

(B)

(b-B)

sqrt(diag(V_b-V_B))

fixed

random

Difference

S.E.

-------------+---------------------------------------------------------------nfa |

.0347965

-.0533981

.0881947

.5308852

size |

-.2356825

-.0202833

-.2153992

.4777842

growth |

-.0386656

-.0022038

-.0364618

.110068

prof |

-3.183836

-1.340513

-1.843322

.8315956

lev |

-.0070216

-.0613282

.0543066

.1096065

-----------------------------------------------------------------------------b = consistent under Ho and Ha; obtained from xtreg

B = inconsistent under Ha, efficient under Ho; obtained from xtreg

Test:

Ho:

difference in coefficients not systematic

chi2(5) = (b-B)'[(V_b-V_B)^(-1)](b-B)
=

9.46

Prob>chi2 =

0.0921

Appendix 5. Graph for Normality of Residuals

.0 0 5

D e n s ity
.0 1
.0 1 5

.0 2

Kernel density estimate

-50

0
Residuals

50

Kernel density estimate

Normal density
kernel = epanechnikov, bandwidth = 9.7596

Appendix 6. Wooldridge test for autocorrelation

. xtserial dpr nfa size growth prof lev
Wooldridge test for autocorrelation in panel data
H0: no first-order autocorrelation
F(

1,

114) =
Prob > F =

0.972
0.3264

.Appendix 7. Modified Wald test for heteroskedasticity

. xttest3
Modified Wald test for groupwise heteroskedasticity
in fixed effect regression model
H0: sigma(i)^2 = sigma^2 for all i

chi2 (115)

1.5e+06

Prob>chi2 =

0.0000

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