Finance dissertation on how firm performance affect the dividend payout ratio evidence from vietnam listed firms

to find the influence of 6 dependent variables: return on equity ROE, firm growth FG, liquidity rate LDR, financial leverage LEV, firm size SIZE and equity growth EG to dividend payout r

Dissertation submitted in partial fulfillment of the

Requirement for the MSc in Finance

FINANCE DISSERTATION ON

HOW FIRM PERFORMANCE AFFECT THE DIVIDEND PAYOUT RATIO EVIDENCE FROM VIETNAM LISTED

FIRMS

NGUYEN HUYEN TRANG

ID No: 22080914 Intake 6

Supervisor: Asso Prof Dr Nguyen Thi Phuong Hoa

September 2022

to find the influence of 6 dependent variables: return on equity (ROE), firm growth (FG), liquidity rate (LDR), financial leverage (LEV), firm size (SIZE) and equity growth (EG) to dividend payout ratio (DPR)

The study found that ROE, firm growth and liquidity have a positive effect on dividend payout ratio The financial leverage, firm size and equity growth variables have an inverse relationship with the dividend payout ratio Liquidity ratios have a positive relationship with dividend payout ratio but the degree of influence is insignificant Among them, financial leverage and return on equity have the greatest influence on the dividend payout ratio The conclusions of this study are consistent with hypotheses from signaling theory, agency cost and bird-in-hand theory

This research article can contribute in providing more information about the impact

of firm performance on the dividend payout ratio in Vietnam From there, it helps domestic and foreign investors to choose companies with large return on equity or

low debt utilization ratio to invest because these companies have high dividend payout ratios For businesses, they can offer dividend payment policies consistent with their financial indicators to attract more investors Furthermore, this article can become a foundation for further research on dividend payout ratio in Vietnam with relation to macro factors

First of all, I would like to express my deepest gratuities to Banking Academy and the University of the West of England for giving me the chance to conduct this research

I am grateful for the prolonged support from my supervisor Assoc Prof Dr Nguyen Thi Phuong Hoa who made this work possible Whenever I had problems or questions in my research, she was always ready to answer my questions She continuously let me complete this paper on my own, but she also guided me when she felt I needed it

I must express my sincere gratitude to my parents and friends for their unwavering support and never-ending motivation during my years of study as well as during the process of conducting the research and writing this thesis Without them, this achievement would not have been possible Thank you

TABLE OF CONTENTS

EXECUTIVE SUMMARY i

ACKNOWLEDGEMENT iii

TABLE OF CONTENTS iv

LIST OF TABLES vii

CHAPTER I: INTRODUCTION 1

1.1 Research rationales 1

1.2 Research objective 6

1.3 Research questions 6

1.4 Research methodology 7

1.5 Research scope 8

1.6 Research structure 8

CHAPTER II: LITERATURE REVIEW 10

2.1 Concepts and role of dividend payout ratio 10

2.1.1 Agency cost and the free cash flow hypothesis 11

2.1.2 Dividend clientele effect 12

2.2 The effect of profitability on dividend payout ratio 14

2.3 The effect of firm size on dividend payout ratio 16

2.4 The effect of financial leverage on dividend payout ratio 17

2.5 The effect of firm growth on dividend payout ratio 18

2.6 The effect of firm liquidity on dividend payout ratio 19

2.7 The effect of equity growth on dividend payout ratio 21

CHAPTER III: METHODOLOGY 23

3.1 Research method 23

3.2 Data 23

3.3 Variables 24

3.3.1 Dependent Variables 24

3.3.2 Independent Variables 25

3.4 Model specification 26

CHAPTER IV: RESULTS 28

4.1 Descriptive statistics 28

4.2 Methodology test 32

4.2.1 Breusch-Pagan test 32

4.2.2 Hausman test 33

4.3 Regression results 34

CHAPTER V: DISCUSSION AND CONCLUSION 37

5.1 Discussion 37

5.2 Conclusion 38

5.3 Recommendations 41

5.4 Further study 43

REFERENCES 44

APPENDIX 59

LIST OF TABLES

Table 1: Data descriptives 28

Table 2: Pearson correlations 30

Table 3: Multi-collinearity problems using the VIF indicator 32

Table 4: Breusch-Pagan test 32

Table 5: Hausman test 33

Table 6: Regression results for dependent variable 34

CHAPTER I: INTRODUCTION

1.1 Research rationales

A dividend is the payment of a company's profits to qualified shareholders A dividend is a payment made to shareholders as compensation for their ownership stakes in a firm, and it typically came from the latter's net earnings (Allen & Michaely, 1995) Although profits can be retained by the firm to be used for current and future business operations, a portion can be distributed to the shareholders as a dividend There are many factors affecting the dividend policy of firms For each company, they will have their own policy to allocate the dividend, and the dividend payout ratio can be called the measurement of that policy

Asquith and Mullins (1983) showed that one of the main objectives of firms was to enhance the wealth of shareholders and the reflection of this is through dividend payment They assumed that a positive impact on dividend payments is also likely

to convey valuable information to investors High dividend payment was important for investors because they could show some part about the company's financial well-being (Watts, 1973) Firm performance can be understood as how the company operates to fulfill the above objective through the growth in the business period Businesses use different metrics to measure their performance It may be assessed based on the company's profitable-driven earnings, some common measurements used by researchers include: revenue, return on equity, return on asset, sale growth rate, profit margin, etc (Murekefu & Ouma, 2012) Dividend payout ratio affects how much to pay to shareholders or how much profit to keep for reinvestment Businesses must always carefully consider this payout ratio This affects whether

to increase the prosperity of shareholders Therefore, deciding the dividend payout ratio is a very important decision in corporate finance for each company According

to Afza and Mirza (2011), the understanding about the determinants of dividend policy helped researchers to find out the impacts of particular factors on firms As the cash dividend payment could be classified as income of investors, the decision

on dividend payment is crucial for the welfare of both companies and the economy

as a whole (Romus et al., 2020) In the same study, Asquith and Mullins (1983) also showed that in a low interest rate environment, dividend payments helped investors

to get higher returns than the offered rates from fixed-income investments

The dividend-related problems are very controversial There are some research papers on the relationship between dividend payout and firm performance According to Amidu (2007), there was a negative relationship between firm performance and dividend payout rates in Ghana Lintner suggested that the change

in dividend payout ratio depended on data from current and estimated future firm profits (1956) There are some theory and hypothesis support for the relationship between dividends and firm value, in both irrelevance and relevance aspects Modigliani and Miller (1961) were among the first to develop the theory of dividends They argued that in a perfect market with rational behavior, and zero taxes, dividend payout ratio and the future growth of firms did not have any relationship Changing the dividend payout ratio will not cause any change to the profitability of shareholders as well Kinkki (2001); Bernstein (1996) and Benartzi

et al (1997) also gave similar results and support for this theory However, this theory has also been disproved by many subsequent studies because the assumption

of a perfect market is almost impossible with the existence of many other expenses

(Black and Scholes, 1974) Ball et al (1979) made empirical tests of M&M theorem that the model is “difficult to design and to conduct” Abor and Bokpin (2010) questioned the reality of a perfect market in the presence of multiple costs like transaction cost, bankruptcy cost, unpredictable inflation or the taxes

An older theory applied in this regard is the “Bird-in-hand” which holds that dividends have an effect on firm performance This theory also makes judgments about investors' preferences, investors generally prefer cash dividends rather than uncertain future cash flows Researcher believes that the company should offer a high dividend payout ratio so that investors have better expectations in the business, thereby maximizing corporate profitability High dividend payout ratio means less risk of future cash flows, lower cost of capital and increased share value Fisher (1961) researched on the UK financial market that dividend payout ratio had a greater and more significant influence on firm performance than retained earnings

It can be seen that this theory and the theory of Modigliani and Miller are completely opposite Some studies by Litzenberger and Ramaswamy (1979), Baker

et al (2002) also gave the opposite result to the Bird-in-hand theory

Moreover, there is a theory called “Signaling theory”, which assumes that dividends are a predictive signal about a company's future growth prospects Basically, investors would have positive reactions when dividends increased and vice versa when dividends decreased, they would give negative reactions (Koch and Shenoy, 1999) In a research by Asquith and Mullins (1983), they found that over the period

of the dividend announcement, there was a significant growth in stock returns Travlos et al (2001) reinforced this theory when studying firms listed on the Cyprus Stock Exchange, they showed a positive market reaction to the announcements of

dividend increased However, this theory does not seem to be applicable to developed markets such as the US, Japan, or Germany, through the studies of Dewenter and Warther (1998) and Amihud and Murgia (1997), stock prices did not have a notable response to the change in dividends

There are many different research papers that have been done to explain related issues but they are still controversial issues from different faucets There were experts who study the relationship between investment opportunities and dividend payment policy (Farsio et al., 2004), there was other research on the factors affecting dividend payments of enterprises (Gill et al., 2010) The study of the relationship between dividend payout and firm performance has always been a dilemma for economists and researchers, but they have not come to any final agreements Jeong (2013) conducted research on the Korean market during the period 1981 to 2012, and concluded that businesses in Korea had little change in dividend payments compared to businesses in the US He also pointed out that low-growth businesses often pay more dividends, which was opposite to US market Abor and Bokpin (2010) conducted studies in the US to study the dividend payment behavior of firms in relation to corporate finance, and showed that a positive relationship occurred between the two factors In the same study, they also pointed out a lack of studies on dividend payout and firm performance relation in emerging markets It is very clear that firms in emerging markets will have a different reflection on firm performance when compared to those in developed markets Al-Yahyaee et al (2010) argued that firm behavior in developed markets could not be applied to developing markets Because for emerging markets, there are certain financial constraints leading to that dividend payout ratios may be more sensitive

dividend-to certain facdividend-tors than others Therefore, it is imperative dividend-to study the relationship between dividend payout ratio and firm performance in these markets to investigate whether there is any difference compared to developed markets Most of the research papers usually focus on analyzing the developed market, there are very few studies on Southeast Asia, especially Vietnam about the effect of firm performance on dividend payout ratio With different characteristics in terms of investment opportunities, corporate finance, and developments in financial markets, companies in these emerging markets have different ways of paying dividends as well as other factors affecting dividends, which is also different from the developed market (Ng'ang'a, 2014)

The Vietnam market is an emerging market The Vietnam stock market was established in 1998 with the formation of two securities trading centers in Hanoi and Ho Chi Minh City At that time, the existence of the stock market made almost

no contribution to the economy because there was no regular activity 2006 saw a leap in market size, reaching 27% of GDP and increasing to 43% in 2007 with the wave of SOE IPOs (Lee et al., 2022) However, with the global economic crisis in

2008, an emerging financial market like Vietnam was severely affected As reported from the National Institute for Finance in 2019, with a strong recovery from 2009

to now, Vietnam is the bond market with the highest average growth rate among emerging economies in the Southeast region Asia, reaching 27%/year However, during the period from the end of 2019 to 2021, the Vietnamese stock market had

to go through the Covid-19 pandemic This caused the Vietnamese stock market to stagnate again, with many financial indexes falling seriously From 2022 until now, the government has also issued a number of policies to help the market develop and

recover from past events During about 25 years of development, the Vietnamese market has undergone many innovations to attract more investors gradually turn the Vietnamese market into a potential market for both domestic and foreign investors Compared to the international market, Vietnam's stock market is completely a

"baby" To better understand this incomplete market, this study was conducted to fill in the gap by studying the effect of firm performance on dividend payout ratio

on companies listed on the Vietnam stock exchange

1.2 Research objective

The main objective of this research is to study the impact of firm performance on dividend payout ratio of listed firms in Vietnam, thereby showing the factors that affect dividend payout rate From there, it helps readers better understand the factors that have a great influence on the dividend payout ratio in the Vietnamese stock market Then, present the benefits of this research for investors and businesses so they can apply it in making reasonable decisions to invest or pay dividends

1.3 Research questions

In order to have a perspicuous vision of the influence of firm performance on dividend payout ratio, this study will focus on answering the two following questions:

 To what extent does firm performance affect the dividend payout ratio in Vietnam?

 Which factors affect the dividend payout rate?

 Which factors have a more significant effect on dividend payout rate on listed firm in Vietnam?

 Who benefits from this research? What can investors use from this research

to make investment decisions in the Vietnam market?

 What advice can be given to both businesses and investors to maximize benefits for both parties?

1.4 Research methodology

In this paper, there are many types of methods applied to analyze how a firm's performance affects the dividend payout ratio This study will apply causal research design with quantitative approach to both find out the relationship between variables and determine the relationship between company performance and dividend payout ratio First of all, this study used a narrative literature review to analyze and summarize previous studies related to dividend payouts It helps to provide relevant theories and support empirical research, which help to build the basic background of the research problem and propose the research problem The second method used is the sampling method to collect secondary data to serve the running of the model The data includes information on the financial position of

107 companies listed on the Vietnam stock exchange from 2018 to 2022 These data are taken from the financial statements and annual reports of the company which are publicly available on the official website of each company The model used in this study is Ordinary Least Square to test the firm performance variables having impacts on the dividend payout ratio The use of linear regression model is very common in previous studies on this topic, so this study also applies this econometric model to be able to give consistent results with those ones After having the results from running the model, the study will use the analytical method

to analyze the results and make recommendations

1.5 Research scope

The research is applied in the Vietnamese stock market The study was made up of

107 listed companies in both Hanoi Stock Exchange (HNX) and Ho Chi Minh Stock Exchange (HOSE) that are large, reputable enterprises that are still being traded on

a daily basis The study concentrated on the period from 2018 to 2022 The reason for choosing this time period is because this is the period that there is enough updated data to the nearest time that can be collected of the companies listed on the Vietnam Stock Exchange Moreover, in these five years, the Covid-19 pandemic has had a great impact on financial markets around the world Vietnam market has seen the majority of businesses suffering losses or even go bankrupt So choosing this period help investors have a more valuable viewpoints of the Vietnamese market during and after the Covid-19 period, thereby better understanding how businesses react to dividend payments in these five years

1.6 Research structure

Chapter 1: Introduction

This chapter gave an introductory overview of the research paper, setting out the research objectives, questions, and scope

Chapter 2: Literature review

This chapter will present the previous research papers that have been done to solve the same problem as this study This section also provides theoretical foundations

to support the research

Chapter 3: Methodology

This chapter discusses the research methodology and variables that will be used Then provide the model design of the research paper

Chapter 4: Results

This chapter will focus on analyzing the obtained results and answering the research questions

Chapter 5: Discussion and Conclusion

This chapter concludes the study and makes recommendations for future research

CHAPTER II: LITERATURE REVIEW

2.1 Concepts and role of dividend payout ratio

Bernstein (1996) had defined dividend payout ratio as the ratio of the total amount

of dividends paid out to shareholders relative to the net income of the company It

is the percentage of earnings paid to shareholders via dividends The amount that is not paid to shareholders is retained by the company to pay off debt or to reinvest in core operations It is sometimes simply referred to as simply the payout ratio (Gordon, 1963) When investors choose stocks to invest in, dividend payout ratio isn't the only determinant, but it is one of the most important For beginner investors, dividend payout ratios can help them choose dividends with high payout ratios because generally, income or value investors look forward to a high payout ratio in companies they wish to add to their portfolio The dividend payout ratio cannot determine whether a dividend is good or bad, but it does measure the level and type of return a company can offer investors whether capital gains or dividend income Dividend payout ratio helps inform portfolio management decisions Investors use a company's payout ratio history to determine if the company aligns with a client's investment goals, risk tolerance, and investment portfolio (Anastassiou, 2007) Dividend payout ratio can partly reflect whether the company

is moving in the right direction Value investors use payout ratios to determine if a company's investment returns fit their investment strategy In addition, while younger and fast-paced companies pay low dividend ratios, slower-paced companies may offer high dividends Regarding the issue of how dividend should

be paid, there are many studies that relate this ratio to several determinants

2.1.1 Agency cost and the free cash flow hypothesis

In an enterprise, the problem of conflict of interest between managers and shareholders always exists The rising of asymmetric information problem between shareholders and managers with the power dissociation of owning and controlling make conflicts worse Investors might conduct actions that are costly to shareholders, such as consuming excessive perquisites or over-investing in managerially rewarding but unprofitable activities As a result, shareholders bear agency costs for watching over managers' decisions, which are an implicit cost brought on by a potential conflict of interest between shareholders and company management Jensen (1986) argued that paying dividends would help to solve this problem by simultaneously sharing benefits for investors and reducing managers' funds Investors also preferred to be paid larger dividends to secure their returns (Ang, 1987) Easterbrook (1984) gave another perspective that paying dividends would reduce the cash flow of managers, forcing them to participate in the capital market to raise capital for the business At that time, not only shareholders but also external investors are the ones who oversee the actions and decisions of managers Dividends and interest payments reduced the free cash flow available to managers

to invest in marginal net present value projects and consume according to manager needs (Lloyd et al., 1985) The solution to reduce the cost of authorization is through contracts between shareholders and managers in the direction of encouraging managers to maximize the market value of the company and maximize the company's profits Jensen argued that most of these compensation plans were based on accounting numbers, so management would seek to influence the financial

statements by applying accounting policies to achieve their intended personal benefit

One of the first to do research based on agency cost is Rozeff (1982) According to Rozeff, dividends had less impact on agency costs for businesses with fewer shareholders and/or more insider ownership He discovered that the agency costs factors were significant and in accordance with their predicted sign LaPorta et al studied this theory by 2 models and gave the following results (2000) In the high level of shareholder protection, shareholders have more rights and can therefore force managers to pay cash Otherwise, in countries with weak shareholder protection, companies may need to build a good reputation for treating investors by paying more dividends to shareholders in order to attract more external investment This result makes sense when applied to emerging markets Holder, Langrehr and Hexter (1998) and Saxena (1999) were consistent with the agency costs hypothesis and provide evidence that agency cost is a key determinant of the firm dividend policy Lang and Litzenberger also performed additional research based on the dividend change announcements of US firms using the Tobin Q ratio From this, it can be concluded that dividend payments have helped reduce cash flow into projects with negative NPV

2.1.2 Dividend clientele effect

Developed from the unrelated theory, Modigliani and Miller (1961) also suggested that certain market flaws, such as transaction costs and disparate tax rates, could affect individual investors' portfolio decisions to favor particular combinations of capital gains and dividends Therefore, investors tend to choose stocks that can minimize these costs, which is called “dividend clientele effect” In the real market,

not only businesses but also investors have to face many different types of costs, especially taxes and transaction costs Therefore, investors will choose to invest in companies that are in line with their investment tendency in terms of capital gain or dividends Allen, Bernardo and Welch (2000) suggested that clienteles such as institutional investors tended to be attracted to invest in dividend-paying stocks because they had relative tax advantages over individual investors Investors often tend to care a lot about their own profit after tax This is the premise to develop a tax-induced clientele They will be easily attracted to firms that pay long and high dividends (Dhaliwal, Erickson and Trezevant, 1999 and Short, Zhang and Keasey, 2002)

Another group of investors is the transaction cost-induced clientele Dividend policy may cause certain clients to change how they allocate their portfolios, leading to transaction costs Pettit (1977) provided empirical evidence for this hypothesis that older investors were more likely to choose stocks with high dividends that could finance their day-to-day living expenses and minimize transaction costs related to buy-sell shares However, several other studies have shown that because dividends are often taxed more heavily than capital gains, investors in high tax brackets prefer to receive returns in the form of capital gains (Elton and Gruber, 1970) They also found that share prices fell by less than the amount of the dividend on ex-dividend date So transaction costs are huge for both long-term and short-term investors However, Kalay (1982) offers a different perspective He argued that short-term traders who faced the same taxes on dividends and capital gains could make arbitrage profits during ex-dividend days, with zero trading costs incurred significantly

2.2 The effect of profitability on dividend payout ratio

According to Glen et al (1995), dividend policies varied between developed and developing countries, and with the same profitable, there are also differences between dividend payout in countries with strong legal protection for shareholders and those in countries without (La Porta et al., 2000; Pandey, 2001; Al-Kuwari, 2009; Al-Malkawi, 2007; Chen, 2011) In the most recent study done by Murekefu and Ouma (2012), they found that there existed a positive and significant relationship between dividend payout and firm performance for firms listed in Kenya When researching the Vietnam market, Dinh and Nguyen (2021) revealed that profit (measured as ROE) had a positive impact on the dividend decision with 1% level of significance Lintner (1956) in his study concluded that current year earnings and previous year's dividends influenced the dividend payment pattern of the firm Hair et al (2007) conducted a study on the perceptions of Nigerian managers on the factors affecting dividend policy and made similar findings that past dividend patterns, current earnings income, current level of financial leverage, availability of alternative sources of liquidity all significantly influenced the dividend policy decision adopted by the company

Many researchers use pecking order theory to explain the positive relationship between profitability and dividend payout ratio Al-Malkawi (2007), when studying the Jordanian financial market, demonstrated that companies that generate less profit might pay little to no dividends because the cost between issuing debt or financing with equity was higher than using retained earnings to make investments

On the contrary, for companies with high profits, they can both pay dividends but still have retained profits to reinvest Fama and French (2002) also used this theory

to explain the positive correlation between company profits and dividend payout ratio

However, the research about the determinants of dividend policy of Polish listed companies showed evidence that there is a significant negative relationship between the profitability of the firm (ROE) and dividend payout ratio Farsio, Geary, and Moser (2004) also offered a different perspective from the other research in that they noted that there was no substantial, long-lasting association between dividends and company profitability They stated that the research that supported this association was all based on brief time frames and may thus have misled investors Three scenarios were presented in their analysis to demonstrate the lack of significance of the long-term link between dividends and future earnings Najjar & Hussainey (2009) researched on the US market also gave similar results They show that companies with higher profits are less likely to pay dividends to shareholders

Another scenario is that of increasing dividends followed by declining earnings According to Farsio et al (2004), the management's strategy of having pleased investors who did not sell their shares when future earnings decreased may be the reason dividends were increased in a particular quarter Additionally, when dividends rise, it may be a result of prior periods' strong performances, which might last for a very long time This supports the idea that there is a causal link between current dividends and future earnings that is positive With this, they came to the conclusion that the overall long-term relationship was inconsequential since there were periods when the association between dividends payout and future profits was positive and periods when it was negative

2.3 The effect of firm size on dividend payout ratio

One of the key factors influencing dividend policy is firm size Dividends are often paid out more frequently to large, established companies with substantial free cash flow than to startups or small corporations There was no agreement found in the several studies that looked at the relationship between issued cash dividends and business size (Baker et al., 2007; Jakob & Johannes, 2008)

There are many researchers who believe that firm size has a positive effect on dividend payout ratio They argue that it is easier for large firms to access capital markets and that they can raise capital from outside at a lower cost (Al-Kuwari (2009); Redding, 1997; Holder, Langrehr & Hexter, 1998; Al-Malkawi, 2007) Behr and Guttler (2007), when conducting research on the relationship between firm size and dividend payout ratio for small and medium-sized companies, concluded that the cost of external funding of small companies was quite high so they have little surplus cash flow to pay dividends to shareholders Small businesses are less able to pay dividends due to the difficulty and high cost of obtaining external funding, which encourages them to save these profits instead of using them

to support future expansion Eddy and Seifert, (1988) showed that large firms tend

to pay larger dividends, while small firms are more sensitive to decisions related to dividends payout

On other hands, several studies confirm a negative relationship between dividend payout ratio and firm size For example, Talat (2010) and Hafeez and Attiya (2012) found that large-sized firms preferred investing in their assets to paying dividends

to their shareholders whereas, small companies tried to improve their ability to raise funds by paying dividends to accumulate required sum of money from applying of

equity shares at better price It is firm informing that the bigger the size of the firm, the greater the publicly available information about the lower of the information asymmetry (Eddy & Seifert, 1988)

2.4 The effect of financial leverage on dividend payout ratio

Financial leverage results from using borrowed capital as a funding source when investing to expand the firm's asset base and generate returns on risk capital Leverage is an investment strategy of using borrowed money specifically, the use

of various financial instruments or borrowed capital to increase the potential return

of an investment Leverage can also refer to the amount of debt a firm uses to finance assets Companies use leverage to finance to invest in their future to increase shareholder value rather than issue stock to raise capital

According to Asif et al (2011), companies with high financial leverage tended to reduce their dividend payout ratio because they are financially constrained to be able to pay dividends When using a lot of debt, companies often tend to be under pressure from lenders In order of priority, when a company faces a liquidation, its creditors are usually the first to get paid Furthermore, with heavy use of debt, the company will face increased external financing costs such as interest (Rozeff, 1982) Aivazian et al (2003) compared dividend payments between companies in emerging markets and the US market They showed that although the factors that influence payment decisions were the same, the degree of influence is different For companies in the Asian market, companies with high debt ratios were less likely to pay dividends They also explained the reason for this relationship was because emerging market businesses were heavily dependent on bank debt and businesses had been under great pressure from banks Financial leverage was found to have a

negative impact on dividend payout, indicating less dividend payments by debt firms (Al-Twaijry, 2007; Crutchley & Hansen, 1989; Akhmadi and Robiyanto, 2020)

high-Others argue that the use of debt helps reduce conflicts of interest between managers and shareholders, helping to reduce the agency cost of shareholders The use of debt puts managers under pressure from both sides, internal and external parties, from which managers have to make more informed decisions to meet the demand of both two sides (Agrawal & Knoeber, 1996; Fleming, Heaney & McCosker, 2005; Stulz et al., 2006) In a study by Adedeji (2003), proving the pecking order theory in the UK market on the relationship between dividend payout ratio and financial leverage, the evidence indicated that financial leverage had a positive effect on dividend payout ratio

2.5 The effect of firm growth on dividend payout ratio

Many researchers believe that the dividend payout ratio is highly dependent on a company's ability to grow because dividends are a reflection of the company's profits during the accounting period Partington (1985) conducted research based

on the signaling theory which also showed a positive relationship between growth potential, investment and dividends Many other research papers have shown that the company will rely on past earnings data to predict future earnings, thereby making decisions about dividend payout ratios for shareholders According to Flint et.al (2010) and Dempsey et al (2019), both conducting research in the Australian market, testing on both listed and delisted firms on the stock market, have shown evidence of a positive relationship between dividend payout ratios of companies

and their future growth rates Investors tend to choose large companies that pay dividends rather than start-ups or low-profit generating companies

Fitri et al (2016) conducted a study on factors affecting dividend payout ratio in companies listed in Jakarta Islamic Index They found that firm growth had a negative effect on a company's dividend payout ratio Imad (2016) was also just small and medium-sized businesses with significant development potential that often maintain a high amount of retained earnings for reinvestment, whereas slow-growing or non-growing companies typically pay significant dividends at the mature stage Gul (1999) by analyzing time series cross-sectional data on the Japanese market from 1988 to 1992, found that there was a significant negative relationship between firm growth and dividend payout ratio were detected There are many other studies that have similar results (Alli, Qayyum & Ramirez, 1993; Kania & Bacon, 2005; Baker & Powell, 2012) In addition, Hellström and Inagambaev's study of companies in Sweden provided evidence of a negative relationship between growth and dividend payout ratio For large-cap companies, only the negative relationship occurs, while for small and medium-cap companies, there is no significant impact Mitton (2004) also argued that a negative relationship would appear between the relationship of a business's growth rate and its dividend payout ratio when that business did not have good corporate governance or did not have a strong policy to protect shareholders

2.6 The effect of firm liquidity on dividend payout ratio

Liquidity measures the ease at which an individual or company can meet their financial obligations with the liquid assets available to them There are several

ratios that express accounting liquidity, but in this research, we use the current ratio

as a proxy for the liquidity of the companies

Liquidity is also perceived as an important factor that affects firms’ propensity to pay dividends With a shortage of cash, dividends will not be paid even if the income statement, based on the accrual basis of accounting, reflects a decent profitability Botoc and Pirtea (2014), when conducting research on dividend payment behavior of sixteen developing countries including the Asian region, pointed out that in the environment of developing countries, if policy for investor protection is weak, liquidity is an important factor affecting dividend payments Prior studies reported that corporate dividend policy is highly dependent on the firm’s cash position rather than earnings (Anil & Kapoor, 2008; DeAngelo & Skinner, 2004) Using a sample of industrial firms in the New York Stock Exchange and American Stock Exchange, Deshmukh (2003) documented a positive relationship between dividend payout ratio and cash position Moreover, in a recent research of Japanese firms, Kato et al (2002) concluded that in non-keiretsu firms, the liquidity had significant impact on dividend, but for keiretsu firms, the relationship between liquidity and dividend payment was not sensitive

Griffin (2010) compared stock markets of developed and emerging countries to show how liquidity affects dividend payout ratios Taking the US as an example, perhaps the most liquid market in the world, Banerjee et al suggested that owners

of more liquid common stock are less likely to receive cash dividends because both businesses and homes investments are more focused on future cash flow growth (2009) Pattiruhu and Paais (2020) by using current ratio as a measure of liquidity, have shown evidence that liquidity had no major impact on dividend payout ratio

However, for emerging markets, liquidity is an important factor for investors to identify potential stocks (Griffin, 2010) Many recent studies in developing markets also show the importance of liquidity for dividend payments (Adil et al., 2021; Arsyad et al., 2021; Stereńczak and Kubiak, 2022) This is explained as developing markets in their economies and markets are often seen as being more volatile than those of the other developed markets, with economic and political events causing significant fluctuations in liquidity

2.7 The effect of equity growth on dividend payout ratio

There is very little empirical research supporting the relationship between these two factors Horne and McDonald (1970) argue that when desired investment exceeds internally generated fund, under the assumption that the investment decision and capital structure of the firm are given, dividend payments must be offset exactly by new equity issues When the dividend payment is over the undistributed after-tax profit, investors' preference when choosing to pay dividends instead of capital gains must outweigh the cost difference between retained earnings and new equity financing If the company pays a dividend, that payment will be financed with new equity with a greater issue cost than retained earnings According to the perfect capital market assumption of Miller and Modigliani (1961), if dividends are financed with debt, they create no additional value With the increasing importance

of equity investments, businesses in emerging markets have more incentives to pay dividends (Al-Najjar and Kilincarslan, 2019) According to Jensen (1986), dividends and loans are alternative techniques for regulating the agency costs of free cash flow A study by Agrawal and Jayaraman in 1994 supported this theory, which demonstrated that the dividend payout ratio of all-equity firms is higher

Therefore, it is reasonable to assume that the growth of equity is in the same direction as the company's dividend payout ratio

From the theory and literature review, there are some hypothesis developed as below:

H(1): Profitability ratios (ROE & FG) have positive impacts on DPR

H(2): Activity ratios (LEV) have negative impact on DPR

H(3): Liquidity ratios (LDR) have positive impact on DPR

CHAPTER III: METHODOLOGY

3.1 Research method

This study will employ the linear regression or ordinary least square (OLS) method The OLS model is one of the most commonly used models OLS is helpful when the parameters are undetermined and there is a hypothesis that has to be tested on the interaction of the dependent and explanatory variables (Dismuke and Lindrooth, 2006) The model will then use the Hausman test and Breusch-Pagan test to find out which model: Pooled OLS, fixed effect model or Random effect model is the most suitable In addition, multi-collinearity test models will also be applied to ensure the accuracy of this model

to be empty or inconsistency in information From there, 107 companies that met the requirements for transparent, consistent and continuous information were selected These companies are in various fields such as banking, finance, construction, manufacturing, mining, oil and gas, commerce, real estate, agriculture

This study uses a probability sampling method Companies are stratified into different sectors and sizes, from which companies are selected based on order of magnitude within their industry The data used in this study is secondary data, collected from financial statements and annual reports of companies or from announcements in stock exchange More detail, information about dividends is collected from the report of the general meeting of shareholders or from information published by the State Securities Commission A panel data is collected including data on dividend payout ratios, return on equity, firm growth, liquidity rate, financial leverage, firm size and equity growth from 107 companies listed on the Vietnam stock exchange in the past five-year period from 2018 to 2022

3.3 Variables

This study includes a dependent variable which is the dividend payout ratio; and 6 independent variables are return on equity, firm growth, liquidity rate, financial leverage, firm size and equity growth

3.3.1 Dependent Variables

Dividend payout ratio helps investors determine the return they receive from business results in the accounting period of the business, the rest is retained by the business to reinvest in the core activities of the business Dividend payments also signal that a business is making enough money to share a portion of the profits with owners, encouraging shareholder confidence in the management team In the dividend payout ratio dataset, there are companies that pay dividends fully over the period of five years, but there are also companies that pay dividends only two or three years during the study period In this study, the dividend payout ratio is the dependent variable, and is calculated according to the following formula:

Dividend payout ratio = Total Dividend payout / Net Income x 100

3.3.2 Independent Variables

3.3.2.1 Return on equity (ROE)

Using information at a single point in time, profitability ratios are a class of financial measurements that are used to evaluate a company's capacity to make profits in relation to its revenue, operating costs, balance sheet assets, or shareholders' equity over time In this study, return on equity (ROE) was used as following:

ROE = Net Income / Shareholder’s Equity x 100

3.3.2.2 Firm Growth (FG)

The variable firm growth is used to measure the growth rate of the business year over year Here the variable is used to measure the growth rate of the company's net profit over the years, and is calculated by the formula:

Firm Growth (FG) = Sales this year - Sale last year / Sales last year x 100

3.3.2.3 Firm Size (SIZE)

The firm size variable is used to determine the size of the firm's industry Normally, this variable will be measured through the number of employees, total capital, revenue, In this study, firm size is determined by the formula:

Firm Size (SIZE) = Log of Total Assets