INTRODUCTION

Problem Statement

Financial integration has provided advantages for both source and host countries, particularly through increased investment This influx of capital, especially from capital-abundant regions, significantly supports the economic growth of developing nations.

To mitigate risks associated with foreign investments and address frequent global economic crises, many hedge funds have emerged to adapt to these trends In fact, the influx of portfolio investments and foreign hedge funds has been identified as a contributing factor to the crisis.

This study explores the connection between foreign investors' trading decisions and the stock market in Vietnam, focusing on stocks with significant foreign trading activity It aims to enhance the understanding of both domestic and international investors regarding the types of companies that attract foreign investment and how ownership ratios influence long-term investment strategies.

Research questions

The final purpose of this paper is to answer the following questions:

(i) Do foreign investor’s buying and selling decisions really focus on stocks of large companies with better profitability?

(ii) How do their buying and selling volume affect to their ownership ratio?

Research objectives

This paper aims to assess how various firm characteristics influence foreign investors' decisions to buy and sell, as well as their long-term ownership ratios Additionally, it will provide a detailed analysis of these factors across different industries.

Economic theories

Foreign capital primarily enters developing and emerging countries through three main channels: foreign direct investment (FDI), portfolio investment, and foreign debt FDI can occur through Greenfield investments or mergers and acquisitions, both of which have seen notable growth in emerging markets Conversely, portfolio investment encompasses various financial assets, including equity securities, debt securities like bonds, money market instruments, and financial derivatives.

Investors in country A could invest in country B or vice versa to seek for diversification in their portfolios in term of risk (balancing their portfolios) and expected (equity) return.

(b) Foreign investment in relation to stock market

Foreign Direct Investment (FDI) has been shown to significantly enhance domestic stock market development, as evidenced by various empirical studies (Adam and Tweneboah) It positively correlates with key indicators such as market capitalization and domestic value traded (Claessens et al., 2001) Additionally, the trend of increased foreign portfolio investment highlights its benefits, including high mobility in market transactions and the ability to mitigate existing limitations in the bond markets of developing and emerging economies.

Foreign investors actively seek out investment opportunities, typically channeling funds from firms with low potential to those with higher prospects However, the average returns on various investor portfolios can vary significantly Some investors prioritize ownership of stocks or companies for specific strategic objectives, such as fostering business relationships and maintaining control, rather than solely focusing on maximizing investment returns (Kim et al., 2005).

Analyzing firm characteristics through financial ratio analysis is essential for understanding a company's performance According to Ross et al (2005; 2010), ratio analysis can be categorized into several key groups: market value measures, profitability measures, short-term solvency or liquidity measures, long-term solvency measures, and asset management or turnover measures.

This paper will primarily examine four key financial metrics: market value, liquidity, profitability, and long-term solvency Additionally, it will consider dividend policy, as this aspect, along with the others, significantly influences a firm's capacity for sustained growth (Ross et al., 2005; 2010).

2.1.2 Relationship between foreign investor and firm characteristics

Foreign Direct Investment (FDI) flows are significantly influenced by stock evaluation components, which indicate mispricing, particularly in environments with capital account restrictions that hinder portfolio investors' arbitrage opportunities (Baker et al., 2009) This highlights the critical relationship between foreign investors and market value measures.

Market capitalization significantly influences the stock returns of foreign investors To manage redemption and liquidity needs while mitigating systemic risk, foreign investors tend to favor companies with large market capitalizations.

Research indicates that foreign investors generally favor firms with large market capitalizations and robust financial performance (Kang and Stulz, 1997; Lin and Shiu, 2001; Kim et al., 2005) However, contrasting findings suggest that smaller firms often yield higher stock returns compared to their larger counterparts (Banz, 1981; Keim, 1983; Basu, 1983).

Research on the relationship between price-to-book (PB) ratio and stock returns reveals mixed findings Some studies indicate a negative correlation between PB ratio and stock returns, suggesting that foreign investors can achieve higher returns by purchasing low PB stocks (Fama and French, 1992; Daniel and Tittman, 1997; Dhatt, Kim, and Mukherji, 1999) Conversely, other research highlights a preference among foreign investors for stocks with high PB ratios (Lin and Shiu, 2001; Kim et al., 2005; Bae et al., 2011).

In regard to PE ratio, this is considered to be the single most important variable in determining a share’s price As a matter of fact, Basu (1977), Breen (1978) and Dreman

Research has shown that stocks with low price-to-earnings (PE) ratios tend to yield higher average returns compared to those with high PE ratios However, recent empirical studies indicate that foreign investors often favor purchasing stocks that outperform the market while selling those that underperform This behavior highlights the complex relationship between foreign investors and profitability measures in the stock market.

Research indicates a strong positive relationship between foreign ownership and key financial metrics such as Return on Equity (ROE) and Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) Kim et al (2005) highlighted the significance of ROE for foreign investors, while Bae et al (2011) noted that foreign investors tend to favor stocks of Korean companies with high ROE and Return on Assets (ROA), leading to higher profitability in their "buy" transactions compared to "sell" transactions Additionally, Kang et al (2010) found that corporate profitability, as measured by EBITDA, is positively correlated with foreign ownership in firms listed on the Korean Stock Exchange.

According to Kang et al.(2010), liquidity ratio has positively correlated with foreign ownership into Korean Stock Exchange listed companies However, Vo Xuan Vinh

(2010) found that liquidity ratio has negatively correlated with foreign ownership for firms listed on Ho Chi Minh Stock Exchange.

Foreign investors typically adopt a buy-and-hold strategy for their long-term investments, prioritizing stability over short-term gains Additionally, their relationship with the financial leverage ratio plays a crucial role in shaping their investment decisions.

Many empirical studies revealed that foreign investors favor firms with low debt ratio (Kang and Stulz, 1997; Lin and Shiu,2001; Kang et al.,2010 and Vo Xuan Vinh,

Foreign investors tend to favor companies with a low leverage ratio, as indicated by research from 2010 However, a study by Bae et al in 2011 revealed that firm leverage does not significantly influence foreign investors' decisions to buy or sell stocks This finding aligns with the conclusions drawn by Mishra and Ratti in 2011 Additionally, the relationship between foreign investors and a company's dividend policy remains an important area of study.

Besides preferring large-size firms , foreign investors were found to prefer stocks with high dividend yield (Jeon et al., 2010; Mishra and Ratti, 2011 and Bae et al.,2011).

Meanwhile, Dahlquist and Robertsson (2001) found that foreign investors also prefer stocks of lower paid-dividend firms.

Related empirical studies

Table 2.1: Summary of related empirical studies as following table:

Panel data with random effect model

They prefer large firms with high PB ratio, low dividend yield.

2001) Stock.E foreign and institutional ownership

Firm size, PB ratio, ROE, average return

Fama–French three-factor mode

F.ownership positively correlated with firm size,

Daily purchase, and total value of foreigners

PE,PC,MKC, Price, ownership data

A standard linear model, Panel data with pooled model

Their buying, selling and net purchase have a positive relationship with firm size and negative relationship with PE ratio Vo

A standard linear model, Panel data with Pooled model

Foreigners prefer large firms, firms with low PB, or low leverage ratio.

Buying and selling among groups of investors

PE, PB, Dividend, CF⁄ Sales three reference pricing models

They buy stocks with higher ROE and ROA than their selling, prefer stocks of large firms and high dividend yield.

Conceptual framework

All expected relationships among variables could be likely summarized as the following tables:

Table 2.2: Summary of expected signs:

Expected signs Buy volume Sell volume Ownership ratio

Vietnam stock Market capitalization (%GDP)

% GDP Market capitalization of listed companies (current US$ mil.)

Research context

Since its establishment in 2000 for the Ho Chi Minh Stock Exchange (HSX) and in 2005 for the Hanoi Stock Exchange (HNX), the stock market has played a crucial role in mobilizing capital for the economy Its significant contribution is evident in the yearly percentage of total trading volume relative to GDP, highlighting its indispensable impact on economic growth.

Table 3.1: Viet Nam Market capitalization

Source: Word Bank – Global Financial Data

Source of Data and its definition

Firstly, the research will select data from 2007 to 2011 just because only from 2006 onward the total volume trading by foreign investors has significantly increased.

This study will analyze listed stocks from three key industries in HSX and HNX: Construction and Real Estate, Manufacturing, and Finance and Insurance The focus will be on firms listed before 2007 with a market capitalization exceeding VND 100 billion in the finance sector as of July 13, 2012 The sample comprises over 98 listed companies, providing more than 420 observations over a five-year period, which will facilitate a comprehensive examination of foreign trading activities.

Table 3.2: the structure of industry in dataset(as of July 13, 2012)

Source: Author’s calculate on the data set

(i)Market Capitalization (MKC): this variable is the market capitalization of each firm at the year-end.

(ii) Dividend paid (DIV): how much dividend actually paid to each shareholder.

The Price Book (PB) ratio is a financial metric that compares a company's market value to its book value, indicating how the market values a firm in relation to its actual worth This ratio is calculated by dividing the market value by the book value, providing insights into the company's valuation and investment potential.

(iv) Price Earning ratio (PE): a share price divided by earning per share

Return on Equity (ROE) is calculated by dividing net income by the book value of equity at the end of the year, serving as a key metric for assessing a company's profitability in relation to shareholders' equity Meanwhile, Return on Assets (ROA) measures a company's efficiency in generating profit from its invested capital, highlighting how effectively assets are utilized to produce earnings.

Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA) serves as a key financial metric that removes the impact of financing and accounting choices, enabling a clearer analysis and comparison of profitability across different companies.

The ownership rate (OWN) indicates the percentage of shares held by foreign investors, with Foreign Investment Laws stipulating that foreign ownership in each company cannot exceed 49% This limitation significantly influences the trading decisions of foreign investors.

(ix) Debt to Equity Ratio.(DEBT): defined by total liabilities divided total equity often at year end

(x) Current Ratio (C_Ratio): measures a company's ability to pay short-term obligations calculated by current assets divided by current liabilities

(xi) Quick Ratio (Q_Ratio): is calculated as (Current Assets - Inventories) / Current Liabilities

Research Methodology

The estimated equation is a linear regression model as follows:

- YI,t denotes buying, selling and ownership ratio for firm i at trading year t

- XJ, I, t presents the firm characteristic variables j of firm i at year t which are divided into stock characteristics including MKC, PB, P/E ratio, ROE, ROA, EBITDA , DEBT , C_Ratio, Q_Ratio or Dividend Yield

- αi are random individual-specific effects, β is a vector of our robust estimators; and ε is a error term;

This paper utilizes panel data, which offers distinct advantages compared to pooled data To identify the most suitable models for the specified samples, it will evaluate various regression models, including the Fixed-Effects Model (Least Squares Dummy Variable Model), the Random-Effects Model (Random Intercept, Partial Pooling Model), and the Pooled Model (population-averaged model).

After finalizing the appropriate model, to control for heteroskedasticity the option

The term "robust" will be utilized in the regression analysis, and to identify potential multicollinearity among the variables, the study will apply the variance inflation factor following the regression model Detailed test results can be found in the appendix of this paper.

CHAPTER 4: DATA ANALYSIS AND DISCUSSION

Descriptive Data Analysis

Table 4.1: Description of variables of the whole sampled stocks:

Source: Author’s calculate on the data set with Stata software.

The finance industry leads in market capitalization, followed by the construction and manufacturing sectors Notably, construction stocks have the highest average price-to-earnings ratio at 25 times, while finance and manufacturing stocks are priced at 15 and 11 times, respectively.

The foreign ownership ratio across surveyed firms in the finance and manufacturing industries stands at 20%, while the construction industry shows a slightly lower ratio at 17% Notably, the construction sector exhibits a significantly high mean debt ratio of 2.35 times, compared to 1.33 times in manufacturing and 0.66 times in finance.

Table 4.1: Description of variables of the whole sampled stocks (continued):

Source: Author’s calculate on the data set with Stata software.

Table 4.2: The summary of volume and value traded of the whole sample

Source: Author’s calculate on the data set with Stata software.

In 2010, Vietnam experienced a significant net inflow of portfolio equity, representing 2.24% of its GDP, as shown in Table 4.3 This influx coincided with the lowest average price-to-earnings (PE) ratio of the sample, recorded at just 10 times, as indicated in Table 4.4.

2010 were cheapest during five years.

Table 4.3: Percentage of FDI and Portfolio inflows over GDP in Viet Nam

Foreign direct investment, net inflows

Portfolio equity, net inflows (% of GDP) 8.79% -0.63% 0.13% 2.24% 0.86%

Source: World Bank - Global Financial Data

The Vietnam stock market, often perceived as undervalued, consistently attracts foreign capital, particularly in portfolio equity investments An analysis of the average variables over the past five years provides valuable insights into their potential trends.

Table 4.4: the summary of statistics by mean of each industry:

Source: Author’s calculate on the data set with Stata software.

The correlation matrix (see Appendix 5) reveals that, aside from the strong correlations between ROE and ROA, as well as between the Quick and Current ratios, most other variable correlations are relatively weak Consequently, the regression model will address multicollinearity among these variables.

Empirical Results

(a) Firm characteristics and foreign investor’s buying volume:

Table 4.5: The coefficient signs between buy-volume with other independent variables:

Buy volume Whole sample Finance stocks Construction stocks Manufacturing stocks

(*** and ** present statistical significance level at lower 5% and 10%, respectively)

Foreign investors are inclined to purchase value stocks from large firms in the finance and construction sectors that demonstrate strong performance and low financial leverage Additionally, across all industries, there is a noticeable decline in buying volume for companies with high debt ratios These observations align closely with prior empirical research findings.

(b) Firm characteristics and foreign investor’s selling volume:

Table 4.6: The coefficient signs between sell-volume with other independent variables:

Sell volume Whole sample Finance stocks Construction stocks Manufacturing stocks

(*** and ** present statistical significance level at lower 5% and 10%, respectively)

The sell-volume variable shows a generally positive correlation with EBITDA across most industries, while the finance sector uniquely exhibits a significant positive relationship with the ROE ratio Conversely, it demonstrates a negative correlation with the PB ratio, a trend that is not observed in the manufacturing industry.

Market size is only to affect to foreign investor’s selling decision in finance industry The relationship among other variables is separately differentiated.

(c) Firm characteristics and net purchase variable in relation to foreign investor’s ownership ratio

Table 4.7: The coefficient signs between ownership ratio with other independent variables:

Ownership Whole sample Finance stocks Construction stocks Manufacturing stocks

(***and ** present statistical significance level at lower 5% and 10%, respectively)

The analysis of buy and sell volumes indicates that foreign investors favor purchasing stocks of large, high-performing companies However, when it comes to maintaining a longer position, they prioritize firms with low financial leverage, showing less concern for the size of the companies they invest in.

EBITDA is a crucial factor in buying and selling decisions, but it does not influence ownership ratios This financial metric is particularly significant in the construction industry, where the majority of assets are tangible and subject to one of the three available methods of depreciation and amortization.

Table 4.8: The coefficient signs for finance industry:

Finance stocks Buy Volume Sell Volume Ownership ratio

(*** and ** present statistical significance level at lower 5% and 10%, respectively)

Foreign investors tend to favor value stocks from large companies that exhibit high profitability, low leverage ratios, and low dividend yields Their primary goal is to maintain ownership of firms with strong profitability and minimal financial leverage by consistently holding their net purchases over the years Interestingly, a firm's market capitalization does not significantly influence their long-term ownership ratio.

Table 4.9: The coefficient signs for construction industry:

Construction stocks Buy volume Sell volume Ownership ratio

(***and ** present statistical significance level at lower 5% and 10%, respectively)

Foreign investors in construction stocks typically seek undervalued large firms with low dividend yields and leverage ratios, while they are inclined to sell overpriced value stocks or those with high leverage ratios Interestingly, the size of the firm does not significantly influence their selling decisions.

For long-term investments, firms prioritize acquiring companies with strong profitability, indicated by high EBITDA, low financial leverage ratios, and undervaluation in the market The size of the firm does not significantly influence their long-term investment decisions.

Table 4.10: The coefficient signs for manufacturing industry:

Manufacturing stocks Buy volume Sell volume Ownership ratio

(*** and ** present statistical significance level at lower 5% and 10%, respectively)

Foreign investors in manufacturing stocks typically favor high-profit growth companies with low financial leverage, while they tend to sell stocks of firms exhibiting a high quick ratio This behavior aligns with the observation that the manufacturing sector has the lowest market capitalization among all industries, as a high quick ratio indicates an inefficient utilization of cash and cash equivalents.

Firm’s market capitalization does not affect to their trading both in buying and selling, it just only affects to their long term position via their ownership ratio.

Conclusions

The analysis reveals that a firm's market size does not have a significant impact on its overall buying and selling decisions However, it does play a role in influencing purchasing choices within the finance and construction sectors, as well as affecting selling decisions specifically in the finance industry.

Research indicates that foreign investors are inclined to trade stocks of highly profitable firms for both short-term and long-term positions In addition to Return on Equity (ROE) and Return on Assets (ROA) as key profitability indicators, Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) also significantly influences their buying and selling decisions for short-term investments and ownership ratios for long-term investments.

The study reveals that foreign investors tend to favor purchasing and holding stocks of firms with low leverage ratios across various industries However, in the construction sector, these investors predominantly sell stocks of companies with high leverage ratios, aligning with the initial hypothesis Conversely, in the finance industry, foreign investors are observed to sell stocks of firms with low leverage ratios, and similar behavior is noted in the manufacturing sector, although the latter findings lack statistical significance.

The study indicates that the quick ratio is a more statistically significant measure of a firm's liquidity compared to the current ratio However, the relationship between liquidity and ownership ratio is inconclusive and lacks statistical significance While liquidity shows a positive correlation with buying and selling volume across the entire sample, this correlation is not statistically significant Notably, the correlation does exhibit partial significance when analyzed within individual industries.

The ownership ratio across various industries shows a positive correlation with the firm's dividend policy, although this relationship is not statistically significant Similarly, the connection between dividend policy and trading volumes is consistent across most industries, except for the finance sector, where foreign investors tend to favor trading stocks of firms that offer lower dividend yields.

Policy recommendation

Domestic investors should prioritize firm size and EBITDA profitability when making short-term investment decisions, particularly in the construction sector for buying and the manufacturing sector for selling, rather than relying on traditional metrics like ROE or ROA.

Investors should exercise caution when using the price-to-book (PB) ratio to assess potential stocks, particularly in the context of foreign investors' trading behavior Foreign investors often engage in buying and selling stocks that exhibit a low PB ratio This is especially relevant for construction sector stocks, where it is crucial to evaluate their buying or selling positions in relation to the stock's price-to-earnings (PE) ratio.

Investors considering long-term investments in companies that benefit from foreign ownership should carefully analyze the firms' net purchase positions and debt ratios A higher net purchase and a lower debt ratio indicate a more favorable investment opportunity Additionally, for construction firms, evaluating the EBITDA indicator is essential for making informed long-term investment decisions.

For companies seeking to attract foreign investors, particularly listed firms, it is essential to evaluate their financial leverage A higher financial leverage ratio may diminish the company's appeal to potential foreign investors.

Construction firms must strategically evaluate their appeal to foreign investment, as current construction-related stocks are overvalued Consequently, foreign investors are seeking to decrease their ownership stakes in these stocks.

A notable correlation has been observed between government policy and the net purchase of foreign investors with portfolio equity In years where foreign investor net purchases in the stock market are low or negative, policymakers should consider adjusting relevant policies or regulations to attract foreign capital inflows and remain competitive with neighboring emerging markets, such as Myanmar and Malaysia.

Standardizing accounting principles for amortization and depreciation is essential to align with global standards Failure to do so may lead to discrepancies in traditional financial indicators used to assess a firm's profitability, such as Return on Equity (ROE), Return on Assets (ROA), and Earnings Before Interest and Taxes (EBIT), ultimately distorting their intended purpose and effectiveness.

Limitations and Further research

The analysis focuses exclusively on large firms within the finance industry, specifically those with a market capitalization exceeding VND 100 billion Additionally, only stocks that have experienced foreign trading activity over the past year are included in this selection.

The study focuses on three specific industries to enhance market awareness It suggests that the trading volume of foreign investors, along with their ownership stakes in smaller companies (valued under VND 100 billion), may reveal a trend in their investment strategies aimed at acquiring and scaling these firms, potentially leading to their globalization in the future.

The relationship between net purchases by foreign investors in the Vietnam stock market and net inflows of portfolio equity is significant, particularly when analyzed over quarterly, half-yearly, and yearly periods Understanding this correlation can provide insights into investment trends and the overall health of Vietnam's financial markets By examining these metrics, we can better assess the impact of foreign investment on Vietnam's economy and stock market dynamics.

Consistent net purchases of stocks by foreign investors over a period can indicate strong momentum, potentially driving an increase in stock prices.

A study should be conducted to analyze the stock returns of foreign investors who hold stocks over an extended period following their initial net purchases in earlier years This research will focus on the performance of a portfolio based on these net purchases and evaluate the returns achieved after a specified duration.

For manufacturing firms, it’s necessary to take a further study about the relationship between foreign investor’s ownership ratio and their structure of owner equity as well as their profitability.

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Appendix 1: Testing multicollinearity among variables by using the variance inflation factor for the whole sample:

Buy volume variable for whole sample

Sell volume variable for whole sample Variable VIF 1/VIF

Ownership Ratio variable for whole sample Variable VIF 1/VIF

Appendix 2:Testing multicollinearity among variables by using the variance inflation factor for the finance sample:

Sell volume variable for Finance sample Variable VIF 1/VIF MKC 6.11 0.16374

PB 5.36 0.18664 EBITDA 3.59 0.27881 DIV 2.18 0.45862 ROE 2.09 0.4792 Debt 1.54 0.65044

Appendix 3:Testing multicollinearity among variables by using the variance inflation factor for the construction sample:

Sell volume variable for Construction Sample

Appendix 4:Testing multicollinearity among variables by using the variance inflation factor for the Manufacturing sample:

Sell volume variable for Manufacturing sample Variable VIF 1/VIF EBITDA 5.83 0.172

Appendix 5: Correlation Matrix of variables:

All samles buy sell net_buy own MKC PE PB EBITDA ROE ROA DIV Debt Q_Ratio C_Ratio buy 1 sell 0.86 1.00 net_buy 0.17 -0.35 1.00 own 0.27 0.19 0.13 1.00

Finance buy sell net_buy own MKC PE PB EBITDA ROE ROA DIV Debt Q_Ratio C_Ratio buy 1.00 sell 0.88 1.00 net_buy -0.23 -0.66 1.00 own 0.15 0.09 0.06 1.00