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
INTRODUCTION
Research rationales
A dividend is a distribution of a company's profits to its qualified shareholders, serving as compensation for their ownership stakes Typically derived from net earnings, dividends can be allocated to shareholders while firms may also retain profits for ongoing and future operations Various factors influence a company's dividend policy, which is unique to each firm, and the dividend payout ratio serves as a key indicator of this policy.
Asquith and Mullins (1983) identified that enhancing shareholder wealth is a primary objective for firms, reflected through dividend payments, which also convey valuable information to investors High dividend payments indicate a company's financial health (Watts, 1973), while firm performance is assessed through various metrics such as revenue, return on equity, return on assets, sales growth rate, and profit margin (Murekefu & Ouma, 2012) The dividend payout ratio plays a crucial role in determining how much profit is distributed to shareholders versus retained for reinvestment, impacting the company's ability to generate future profits and sustain operations.
Deciding on the dividend payout ratio is a critical aspect of corporate finance that directly impacts shareholder prosperity Research by Afza and Mirza (2011) highlights that understanding the determinants of dividend policy enables researchers to analyze how various factors influence firms Cash dividend payments are considered income for investors, making dividend decisions vital for the welfare of both companies and the broader economy (Romus et al., 2020) Additionally, Asquith and Mullins (1983) found that in low interest rate environments, dividend payments can provide investors with higher returns compared to fixed-income investments.
The relationship between dividend payout and firm performance remains a contentious topic, with various studies presenting differing views Amidu (2007) found a negative correlation between dividend payout rates and firm performance in Ghana Lintner (1956) posited that changes in dividend payout ratios are influenced by current and projected profits Theoretical frameworks, including those by Modigliani and Miller (1961), suggest that in an ideal market, dividend payouts do not affect shareholder profitability or future growth However, this notion has faced criticism, as later research challenges the feasibility of a perfect market, highlighting the impact of additional expenses on the dividend-performance relationship.
The Black-Scholes model, introduced in 1974, has been foundational in finance; however, Ball et al (1979) highlighted challenges in empirically testing the Modigliani-Miller theorem, noting the complexities in design and execution Additionally, Abor and Bokpin (2010) raised concerns about the existence of a perfect market, emphasizing the impact of various costs such as transaction fees, bankruptcy expenses, unpredictable inflation, and taxation.
The "Bird-in-hand" theory suggests that dividends positively influence firm performance, as investors typically favor cash dividends over uncertain future cash flows Researchers advocate for a high dividend payout ratio, which enhances investor expectations and maximizes corporate profitability A higher dividend payout ratio reduces the risk associated with future cash flows, lowers the cost of capital, and ultimately increases share value.
(1961) researched on the UK financial market that dividend payout ratio had a greater and more significant influence on firm performance than retained earnings
The theory presented stands in stark contrast to the Modigliani and Miller framework, as evidenced by research from Litzenberger and Ramaswamy (1979) and Baker et al (2002), which yielded results contradicting the Bird-in-Hand theory.
Signaling theory suggests that dividends serve as indicators of a company's future growth potential When a company increases its dividends, investors typically respond positively, while a decrease in dividends often leads to negative reactions.
Research by Asquith and Mullins (1983) revealed a significant increase in stock returns during the period surrounding dividend announcements This finding was further supported by Travlos et al (2001), who demonstrated a positive market reaction to such announcements among firms listed on the Cyprus Stock Exchange.
Recent studies by Dewenter and Warther (1998) and Amihud and Murgia (1997) indicate that the theory of dividend increases may not hold true in developed markets like the US, Japan, and Germany, as stock prices showed little to no significant response to changes in dividends.
Numerous research papers have explored dividend-related issues, yet debates persist from various perspectives Studies by Farsio et al (2004) examined the link between investment opportunities and dividend payment policies, while Gill et al (2010) investigated factors influencing enterprise dividend payments The relationship between dividend payout and firm performance remains contentious, with no consensus among economists Jeong (2013) analyzed the Korean market from 1981 to 2012, finding minimal changes in dividend payments compared to US firms, and noted that low-growth businesses in Korea tend to distribute higher dividends, contrary to US trends Abor and Bokpin (2010) studied dividend payment behaviors in the US, revealing a positive correlation with corporate finance, but highlighted a gap in research regarding the dividend payout-performance relationship in emerging markets They emphasized that firms in emerging markets exhibit different performance reflections compared to those in developed markets, as argued by Al-Yahyaee et al (2010), who stated that behaviors observed in developed markets are not applicable to developing ones due to specific financial constraints affecting dividend payout sensitivity.
Understanding the relationship between dividend payout ratios and firm performance in emerging markets, particularly in Southeast Asia and Vietnam, is crucial, as existing research predominantly focuses on developed markets The unique characteristics of investment opportunities, corporate finance, and financial market developments in these regions lead to different dividend payment practices and influencing factors compared to developed markets (Ng'ang'a, 2014).
The Vietnam market is an emerging economy, with its stock market established in 1998 through the creation of securities trading centers in Hanoi and Ho Chi Minh City Initially, the stock market had minimal economic impact due to a lack of regular activity However, significant growth occurred in 2006, when the market size reached 27% of GDP, further increasing to 43% in 2007, driven by a surge in State-Owned Enterprise (SOE) IPOs (Lee et al., 2022) Despite this progress, the global economic crisis posed challenges to the market's continued development.
Since the 2008 financial crisis, Vietnam's emerging market has shown remarkable resilience, with the National Institute for Finance reporting a robust recovery that has led to the country's bond market achieving the highest average growth rate in Southeast Asia at 27% per year However, the Vietnamese stock market faced significant challenges during the Covid-19 pandemic from late 2019 to 2021, resulting in stagnation and a decline in various financial indices In response, the government has implemented several policies since 2022 to foster market development and support recovery.
Over the past 25 years, the Vietnamese market has experienced significant innovations aimed at attracting investors, establishing itself as a potential hub for both domestic and foreign investments In comparison to international markets, Vietnam's stock market presents unique opportunities for growth and development.
Research objective
This research aims to analyze the influence of firm performance on the dividend payout ratio of publicly listed companies in Vietnam, highlighting the key factors that affect this ratio By understanding these determinants, readers can gain insights into the significant influences on dividend payouts within the Vietnamese stock market Furthermore, the findings of this study offer valuable benefits for investors and businesses, enabling them to make informed decisions regarding investment strategies and dividend distributions.
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?
Research methodology
This study employs various methods to investigate the impact of a firm's performance on its dividend payout ratio, utilizing a causal research design with a quantitative approach Initially, a narrative literature review is conducted to analyze and summarize existing studies on dividend payouts, providing relevant theories and empirical support that establish the foundational context for the research problem Additionally, a sampling method is utilized to gather secondary data, which includes information on the financial position of the firms, facilitating the execution of the analytical model.
Between 2018 and 2022, 107 companies were listed on the Vietnam stock exchange, with data sourced from publicly available financial statements and annual reports This study employs the Ordinary Least Squares (OLS) model to examine how various firm performance variables influence the dividend payout ratio Utilizing a linear regression model aligns with previous research, ensuring consistency in results Following the model's execution, an analytical approach will be applied to interpret the findings and provide recommendations.
Research scope
The research is applied in the Vietnamese stock market The study was made up of
This study examines 107 large and reputable companies listed on the Hanoi Stock Exchange (HNX) and Ho Chi Minh Stock Exchange (HOSE) from 2018 to 2022 This timeframe was selected due to the availability of updated data on these enterprises and the significant impact of the Covid-19 pandemic on global financial markets During these five years, many Vietnamese businesses faced substantial losses or bankruptcy, providing investors with valuable insights into the Vietnamese market's dynamics during and after the pandemic Understanding how these companies responded to dividend payments during this period is crucial for comprehending their financial resilience and recovery strategies.
Research structure
This chapter gave an introductory overview of the research paper, setting out the research objectives, questions, and scope
This chapter reviews prior research addressing the same issue as this study, offering theoretical foundations to underpin the investigation.
This chapter discusses the research methodology and variables that will be used Then provide the model design of the research paper
This chapter will focus on analyzing the obtained results and answering the research questions
This chapter concludes the study and makes recommendations for future research
LITERATURE REVIEW
Concepts and role of dividend payout ratio
The dividend payout ratio, defined by Bernstein (1996) as the percentage of a company's net income distributed to shareholders, plays a crucial role in investment decisions This ratio indicates how much earnings are returned to investors as dividends, with the remainder retained for debt repayment or reinvestment (Gordon, 1963) While not the sole factor in stock selection, a high dividend payout ratio is particularly appealing to income and value investors, guiding them in portfolio management and alignment with investment goals (Anastassiou, 2007) It reflects a company's financial health and growth trajectory, with younger companies typically offering lower ratios compared to their slower-paced counterparts, which may provide higher dividends Understanding the dividend payout ratio is essential for evaluating potential returns, whether through capital gains or dividend income.
2.1.1 Agency cost and the free cash flow hypothesis
In enterprises, conflicts of interest often arise between managers and shareholders, exacerbated by asymmetric information and the separation of ownership and control This can lead to costly actions by managers, such as excessive perks or investments in unprofitable projects, resulting in agency costs for shareholders Jensen (1986) suggested that paying dividends could mitigate these issues by distributing benefits to investors and limiting managers' available funds Additionally, Ang (1987) noted that shareholders prefer larger dividends to secure returns, while Easterbrook (1984) argued that dividends reduce managers' cash flow, compelling them to seek external capital Consequently, both shareholders and external investors become more vigilant over managerial decisions Dividends and interest payments limit the free cash flow available to managers for low-value investments, as highlighted by Lloyd et al (1985) To minimize authorization costs, contracts should align managers' incentives with maximizing the company's market value and profits, although Jensen cautioned that many compensation plans based on accounting figures may lead management to manipulate financial outcomes.
12 statements by applying accounting policies to achieve their intended personal benefit
Rozeff (1982) was a pioneer in researching agency costs, finding that dividends have a reduced effect on agency costs in firms with fewer shareholders or higher insider ownership LaPorta et al (2000) expanded on this by demonstrating that in countries with strong shareholder protections, shareholders can compel managers to distribute cash, while in weaker protection environments, firms may need to enhance their reputations by offering higher dividends to attract external investments This insight is particularly relevant to emerging markets Supporting the agency costs hypothesis, Holder, Langrehr, and Hexter (1998) along with Saxena (1999) identified agency costs as a crucial factor influencing corporate dividend policies Additionally, Lang and Litzenberger's research on dividend change announcements among US firms indicated that dividend payments can effectively limit cash flow directed towards projects with negative Net Present Value (NPV).
Modigliani and Miller (1961) proposed that market imperfections, including transaction costs and varying tax rates, influence investors' portfolio choices, leading them to prefer specific mixes of capital gains and dividends This phenomenon, known as the "dividend clientele effect," drives investors to select stocks that help minimize these costs in real market scenarios.
Investors and businesses face various costs, particularly taxes and transaction fees, influencing their investment choices They are likely to favor companies that align with their preferences for capital gains or dividends Research by Allen, Bernardo, and Welch (2000) indicates that institutional investors are drawn to dividend-paying stocks due to their tax advantages over individual investors Consequently, these investors prioritize after-tax profits, leading to the emergence of a tax-induced clientele that is more inclined to invest in firms that offer consistent and substantial dividends (Dhaliwal, Erickson, and Trezevant, 1999; Short, Zhang, and Keasey).
Investors classified as transaction cost-induced clientele may adjust their portfolio allocations due to dividend policies, resulting in transaction costs Research by Pettit (1977) indicates that older investors tend to prefer high-dividend stocks to cover living expenses and minimize trading costs Conversely, studies, including those by Elton and Gruber (1970), reveal that high-tax-bracket investors favor capital gains over dividends due to the heavier taxation on dividends They also observed that share prices typically decline less than the dividend amount on ex-dividend dates, indicating significant transaction costs for both long-term and short-term investors However, Kalay (1982) presents an alternative view, suggesting that short-term traders can exploit arbitrage opportunities on ex-dividend days without incurring substantial trading costs, despite facing similar tax implications on dividends and capital gains.
The effect of profitability on dividend payout ratio
Dividend policies exhibit notable differences between developed and developing countries, particularly in relation to shareholder protection (Glen et al., 1995; La Porta et al., 2000) Recent research by Murekefu and Ouma (2012) highlights a significant positive correlation between dividend payouts and firm performance in Kenya In Vietnam, Dinh and Nguyen (2021) found that return on equity (ROE) significantly influences dividend decisions Lintner (1956) established that both current earnings and previous dividends affect a firm's dividend payment patterns Additionally, Hair et al (2007) identified that Nigerian managers perceive past dividend trends, current earnings, financial leverage, and liquidity alternatives as key factors influencing dividend policy decisions.
Pecking order theory is frequently utilized by researchers to elucidate the positive correlation between profitability and dividend payout ratios Al-Malkawi (2007) found that in the Jordanian financial market, companies with lower profits tend to pay minimal or no dividends, as the costs associated with issuing debt or equity financing surpass the advantages of using retained earnings for 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
15 to explain the positive correlation between company profits and dividend payout ratio
Research on the dividend policy of Polish listed companies reveals a significant negative correlation between firm profitability (measured by ROE) and the dividend payout ratio Farsio, Geary, and Moser (2004) argue against the conventional view, suggesting that there is no enduring relationship between dividends and profitability, with existing studies often relying on short time frames that could mislead investors Their analysis presents three scenarios illustrating the lack of long-term significance between dividends and future earnings Similarly, Najjar & Hussainey (2009) found in their study of the US market that firms with higher profits tend to distribute fewer dividends to shareholders.
Increasing dividends alongside declining earnings can occur as management aims to satisfy investors, as noted by Farsio et al (2004) This strategy may encourage shareholders to retain their shares despite future earnings downturns Moreover, rising dividends may reflect strong past performance, suggesting a positive causal link between current dividends and future earnings However, the overall long-term relationship appears inconsequential, as there are times when the correlation between dividend payouts and future profits is both positive and negative.
The effect of firm size on dividend payout ratio
Firm size significantly impacts dividend policy, as larger, established companies with ample free cash flow tend to distribute dividends more frequently compared to startups or smaller firms However, research has shown a lack of consensus regarding the correlation between cash dividends and company size (Baker et al., 2007; Jakob & Johannes, 2008).
Research indicates that firm size positively influences dividend payout ratios, as larger firms have easier access to capital markets and can secure funding at lower costs (Al-Kuwari, 2009; Redding, 1997; Holder, Langrehr & Hexter, 1998; Al-Malkawi, 2007) Behr and Guttler (2007) found that small and medium-sized companies face high external funding costs, resulting in limited surplus cash flow for dividend payments Consequently, small businesses often retain profits rather than distribute them as dividends, prioritizing savings for future growth Furthermore, Eddy and Seifert (1988) noted that larger firms typically offer higher dividends, while smaller firms exhibit greater sensitivity to dividend payout decisions.
Research indicates a negative correlation between dividend payout ratios and firm size, with larger firms, as noted by Talat (2010) and Hafeez and Attiya (2012), favoring reinvestment in assets over distributing dividends to shareholders In contrast, smaller companies often opt to pay dividends as a strategy to enhance their fundraising capabilities.
Larger firms typically have more publicly available information, which reduces information asymmetry among investors This transparency often leads to better pricing of equity shares, as indicated by Eddy and Seifert (1988).
The effect of financial leverage on dividend payout ratio
Financial leverage involves utilizing borrowed capital to expand a firm's asset base and enhance returns on risk capital This investment strategy aims to increase potential returns by employing financial instruments or debt to finance assets Companies often opt for leverage to invest in future growth and boost shareholder value, as opposed to issuing stock for capital.
Companies with high financial leverage often reduce their dividend payout ratios due to financial constraints, as highlighted by Asif et al (2011) The reliance on significant debt places them under pressure from lenders, prioritizing creditor payments in the event of liquidation Additionally, heavy debt usage leads to increased external financing costs, such as higher interest rates, as noted by Rozeff.
Aivazian et al (2003) conducted a comparative analysis of dividend payments between companies in emerging markets and the US, revealing that while the influencing factors for payment decisions were similar, their impact varied significantly In the Asian market, firms with high debt ratios exhibited a lower likelihood of paying dividends, primarily due to their reliance on bank debt and the considerable pressure exerted by financial institutions This study highlights the critical role of financial leverage in shaping dividend policies in emerging markets.
18 negative impact on dividend payout, indicating less dividend payments by high- debt firms (Al-Twaijry, 2007; Crutchley & Hansen, 1989; Akhmadi and Robiyanto,
The use of debt can effectively minimize conflicts of interest between managers and shareholders, thereby lowering agency costs By introducing pressure from both internal and external stakeholders, debt compels managers to make more informed decisions that satisfy the demands of all parties involved (Agrawal & Knoeber, 1996; Fleming, Heaney & McCosker, 2005; Stulz et al., 2006) Additionally, a study by Adedeji (2003) supports the pecking order theory within the UK market, demonstrating that financial leverage positively influences the dividend payout ratio.
The effect of firm growth on dividend payout ratio
Research indicates that a company's dividend payout ratio is closely linked to its growth potential, as dividends reflect profits during an accounting period Partington (1985) highlighted a positive correlation between growth potential, investment, and dividends through signaling theory Additionally, numerous studies suggest that companies use historical earnings data to forecast future earnings, influencing their decisions on dividend payouts Notably, Flint et al (2010) and Dempsey et al (2019) found evidence of a positive relationship between dividend payout ratios in both listed and delisted firms within the Australian market.
19 and their future growth rates Investors tend to choose large companies that pay dividends rather than start-ups or low-profit generating companies
A study by Fitri et al (2016) examined the factors influencing the dividend payout ratio of companies listed on the Jakarta Islamic Index, revealing a negative correlation between firm growth and dividend payouts Imad (2016) noted that small and medium-sized enterprises with high growth potential often retain earnings for reinvestment, while slower-growing firms tend to distribute higher dividends at maturity Similarly, Gul (1999) identified a significant negative relationship between firm growth and dividend payout ratios in the Japanese market from 1988 to 1992 This trend is supported by various studies, including those by Alli, Qayyum & Ramirez (1993), Kania & Bacon (2005), and Baker & Powell (2012) Additionally, research by Hellström and Inagambaev in Sweden corroborated the negative relationship between growth and dividend payouts, particularly in large-cap companies, while small and medium-cap firms showed no significant impact Mitton (2004) further argued that inadequate corporate governance and weak shareholder protection policies exacerbate the negative relationship between a company's growth rate and its dividend payout ratio.
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
20 ratios that express accounting liquidity, but in this research, we use the current ratio as a proxy for the liquidity of the companies
Liquidity plays a crucial role in influencing a firm's decision to pay dividends, as a lack of cash can prevent dividend payments despite favorable profitability on the income statement Research by Botoc and Pirtea (2014) highlights that in developing countries, weak investor protection policies make liquidity a key determinant of dividend payments Prior studies, such as those by Anil & Kapoor (2008) and DeAngelo & Skinner (2004), emphasize that corporate dividend policies are more closely tied to a firm's cash position than its earnings Deshmukh (2003) found a positive correlation between dividend payout ratios and cash positions among industrial firms listed on the New York and American Stock Exchanges Additionally, Kato et al (2002) revealed that while liquidity significantly affects dividend payments in non-keiretsu Japanese firms, this relationship is less pronounced in keiretsu firms.
Griffin (2010) analyzed the impact of liquidity on dividend payout ratios in both developed and emerging markets Using the US, the world's most liquid market, as a case study, Banerjee et al proposed that shareholders of highly liquid stocks are less inclined to receive cash dividends This trend is attributed to a greater emphasis on future cash flow growth in business and real estate investments.
(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
Liquidity plays a crucial role for investors in emerging markets when identifying potential stocks (Griffin, 2010) Recent studies highlight its significance for dividend payments in developing markets (Adil et al., 2021; Arsyad et al., 2021; Stereńczak and Kubiak, 2022) These markets tend to be more volatile due to economic and political events, leading to substantial fluctuations in liquidity compared to developed markets.
The effect of equity growth on dividend payout ratio
Empirical research on the relationship between dividend payments and equity financing is limited Horne and McDonald (1970) suggest that when a firm's desired investments exceed its internally generated funds, dividend payments must be matched by new equity issues, assuming fixed investment decisions and capital structure If dividends surpass undistributed after-tax profits, investors must prefer dividends over capital gains despite the higher costs of issuing new equity compared to using retained earnings According to Miller and Modigliani's perfect capital market theory (1961), financing dividends through debt does not add value However, in emerging markets, the growing significance of equity investments incentivizes businesses to distribute dividends (Al-Najjar and Kilincarslan, 2019) Jensen (1986) posits that dividends and loans serve as alternative methods for managing agency costs associated with free cash flow, a theory supported by Agrawal and Jayaraman (1994), which found higher dividend payout ratios in all-equity firms.
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
METHODOLOGY
Research method
This study will utilize the ordinary least squares (OLS) method, a widely used linear regression model OLS is particularly useful for estimating parameters when they are unknown and for testing hypotheses regarding the relationship between dependent and explanatory variables.
In 2006, the analysis will utilize the Hausman test and Breusch-Pagan test to determine the most appropriate model among Pooled OLS, fixed effect, or random effect models Additionally, multi-collinearity tests will be conducted to ensure the model's accuracy.
Data
The research object of this study is all companies listed on the Vietnam stock exchange, including two major stock exchanges, Hanoi Stock Exchange (HNX) and
The study focuses on companies listed on the Ho Chi Minh Stock Exchange (HOSE), specifically excluding those that have been delisted or have received warnings due to a lack of data compliance over five consecutive years from 2018 to 2022 This exclusion ensures the reliability and accuracy of the data used in the analysis Ultimately, 107 companies were selected for their transparent, consistent, and continuous information These companies span a variety of sectors, including banking, finance, construction, manufacturing, mining, oil and gas, commerce, real estate, and agriculture.
This study employs a probability sampling method, stratifying companies by sector and size to select firms based on their industry magnitude Utilizing secondary data from financial statements, annual reports, and stock exchange announcements, the research focuses on dividend information sourced from shareholder meeting reports and the State Securities Commission The panel data encompasses key metrics such as dividend payout ratios, return on equity, firm growth, liquidity rates, financial leverage, firm size, and equity growth, drawn from 107 companies listed on the Vietnam Stock Exchange over a five-year period from 2018 to 2022.
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
The dividend payout ratio is a crucial metric for investors, as it indicates the return generated from a company's performance during a specific accounting period, with the remainder being reinvested in core business activities Consistent dividend payments reflect a company's profitability and enhance shareholder confidence in its management Within the dataset analyzed, some companies maintained full dividend payments over five years, while others distributed dividends for only two or three years In this study, the dividend payout ratio serves as the dependent variable, calculated using a specific formula.
Dividend payout ratio = Total Dividend payout / Net Income x 100
Profitability ratios are essential financial metrics that assess a company's ability to generate profits relative to its revenue, operating costs, balance sheet assets, and shareholders' equity at a specific point in time This study focuses on return on equity (ROE) as a key measure of profitability.
ROE = Net Income / Shareholder’s Equity x 100
Variable firm growth is an essential metric for assessing a business's year-over-year growth rate This variable specifically measures the annual growth rate of a company's net profit, calculated using a defined formula.
Firm Growth (FG) = Sales this year - Sale last year / Sales last year x 100
The firm size variable is essential for assessing the scale of an industry, typically measured by metrics such as the number of employees, total capital, and revenue In this study, we define firm size using a specific formula that captures these key dimensions.
Firm Size (SIZE) = Log of Total Assets
Leverage ratios measure a company's dependence on debt for asset acquisition and capital growth, with a focus on the debt to asset ratio in this study.
Debt-to-Assets ratio (LEV) = Total Debt / Total Assets *100
A company's liquidity is used to determine the ability of changing into cash of any asset Quick ratio is applied to measure the liquidity of companies:
Liquidity (LDR) = Current assets / Current liabilities
The equity growth rate measures how operations impact equity by tracking changes over time This study calculates the equity growth rate using a specific formula.
Equity growth rate (EG) = Equity this year - Equity last year / Equity last year x
Model specification
This study will utilize STATA software to conduct a linear regression analysis exploring the relationship between dividend payout ratios and various firm performance indicators The model is inspired by Malkawi's (2007) research on the Jordanian market and Ng'ang'a's (2014) findings in the Kenyan market, both of which are emerging markets with characteristics similar to Vietnam Consequently, the factors influencing dividend payout ratios in these countries may also be relevant to the Vietnamese market.
The study examines the impact of the dividend payout ratio (DPR) on several dependent variables, including return on equity (ROE), firm growth (FG), liquidity rate (LDR), financial leverage (LEV), and equity growth (EG), with firm size (SIZE) serving as a control variable in the model.
DPR i = 𝑎 + 𝛽 1 ROE i + 𝛽 2 FG i + 𝛽 3 LEV i + 𝛽 4 LDR i + 𝛽 5 SIZE i + 𝛽 6 EG i + Ɛ i
DPRi: Dividend payout ratio of company i
ROEi: Return on equity of company i
FGi: Growth rate of net profit of company i
LEVi: Financial leverage of company i
LDRi: The liquidity rate of company i by ratio between debt and total asset
SIZEi: Size of company i based on total assets
EGi: Growth rate of equity of company i Ɛi: Model error
RESULTS
Descriptive statistics
This section provides an overview of the model's dataset, which comprises 7 variables and 535 observations Key statistics such as the mean, standard deviation, minimum, and maximum values are discussed, offering essential insights into the dataset's characteristics.
The analysis reveals that the average dividend payout ratio among sampled firms is 38.12%, with a maximum of 99.6%, indicating that some companies allocate nearly all of their after-tax profits to dividends This dataset encompasses both dividend-paying and non-dividend companies, resulting in a minimum payout ratio of 0% A dividend payout ratio exceeding 30% is generally regarded as favorable.
ROE: The companies in the sample data have an average return on equity at
The company's shareholders can expect a return of 20.78% from after-tax profits, indicating a strong performance In emerging markets, a Return on Equity (ROE) exceeding 20% is typically viewed as a favorable investment opportunity.
-8.8% to 58.85%, which is quite a wide range This shows that there are companies
Variable Obs Mean Std dev Min Max
29 with very high return on equity, up to 58.85%, but there are also companies that have experienced a period of negative return
The company's growth rate averages 38.69%, as highlighted in Table 1 While some companies have experienced profit declines of up to 411.17%, nearly four times lower than the previous period, others have achieved remarkable growth, soaring by as much as 2726.68%.
The average debt-to-assets ratio among the companies analyzed is 46.96%, indicating that 46.96% of their operations are financed through debt, while 53.04% is funded by equity The sample reveals a diverse use of financial leverage, with the highest ratio reaching 95.85%, primarily due to the presence of banking industry businesses that typically engage in capital raising and lending activities.
The average liquidity ratio (LDR) among the sampled companies is 6.96, indicating that their short-term assets are nearly seven times greater than their short-term loans Some companies exhibit a liquidity ratio as high as 80.06, reflecting the presence of businesses in the banking sector within the sample, which typically maintain substantial annual cash and cash equivalents.
The size of a company is assessed using the logarithm of its total assets, with a mean value of 6.72 According to Vietnam's regulations, businesses with total capital below 20 billion VND are classified as small, while those with capital exceeding 100 billion VND are considered large.
30 the range of fluctuations between min and max values can be seen in the data set including small, medium and large sized companies
Table 1 reveals that the average value of this variable stands at 15.28% While some companies have faced a significant decline in equity value, with losses reaching as high as 51.76%, others have demonstrated remarkable growth, achieving increases of up to 375.56%.
The Pearson correlation coefficient (r) is utilized to assess the strength of the linear relationship between two quantitative variables, as noted by Gayen (1951) When two independent variables exhibit a strong correlation, indicated by a value close to 1.0, it may signal a multi-collinearity issue within the study model In such cases, it is necessary to remove one of the correlated independent variables to ensure the integrity of the analysis.
The analysis presented in Table 2 reveals a positive correlation between the dependent variable DRP and the variables ROE and FG, indicating that an increase in ROE and FG corresponds to a rise in DRP values In contrast, the coefficients for the remaining variables—LEV, LDR, SIZE, and EG—are negative, suggesting that these factors have an inverse relationship with DRP.
DPR ROE FG LEV LDR SIZE EG
The analysis reveals an inverse correlation between DRP and the examined variables Furthermore, the correlation coefficients among the independent variables do not exceed 0.8, indicating that all variables are suitable for model modification without the need for removal.
A multivariate regression model is applied to the data set:
DPR i = 𝑎 + 𝛽 1 ROE i + 𝛽 2 FG i + 𝛽 3 LEV i + 𝛽 4 LDR i + 𝛽 5 SIZE i + 𝛽 6 EG i + Ɛ i
The Variance Inflation Factor (VIF) test is a method used to assess multi-collinearity among independent variables in a regression model, which occurs when these variables are linearly dependent on each other, leading to inaccurate and unreliable estimates (Hsieh et al., 2003) According to Mansfield & Helms (1982), a VIF coefficient of 1 indicates no correlation with other variables, while values between 1 and 5 suggest some correlation without significant multi-collinearity impact on the regression results However, a VIF value exceeding 5 indicates serious multi-collinearity, necessitating the removal of the affected variable from the dataset.
EG 1.24 0.807810 LEV 1.79 0.558110 LDR 1.81 0.551726 SIZE 1.99 0.501377 Variable VIF 1/VIF
Table 3: Multi-collinearity problems using the VIF indicator
Table 3 indicates that all VIF values are below 2, confirming the absence of multi-collinearity Additionally, the average VIF value of 1.51 suggests that the model is free from significant multi-collinearity issues.
Methodology test
The Breusch-Pagan test is employed to assess the presence of heteroscedasticity, which is crucial for validating the estimation method (Baltagi, 2005) This analysis helps in deciding whether a random effects model or pooled OLS is more appropriate If the random effects model is deemed suitable, the Hausman test is then utilized to determine whether to retain the fixed effects or random effects models (Hausman, 1978).
Table 4: Breusch-Pagan test Ho: Homoskedasticity existing
The test results indicate a p-value of 0.0006, which is below the 0.05 threshold, leading to the rejection of the null hypothesis This suggests the presence of heterogeneous variance, making the random effects model the more appropriate choice for analysis.
Variable: Fitted values of DPR
Breusch–Pagan/Cook–Weisberg test for heteroskedasticity
Next, to determine the appropriate model between fixed effect model and random effect model, Hausman test is used
Table 5: Hausman test The results show that the p-value is 0.3065 > 0.05, so Ho cannot be rejected, so the suitable model is the random effect model
Regression results
Table 6: Regression results for dependent variable
Table 6 presents the results of three models: the Pool OLS model in column (1), the fixed effect model in column (2), and the random effect model in column (3) The findings from the random effect model indicate that all variables are statistically significant at the 1% level Therefore, the research model for the dividend payout rate is established based on these results.
DPR i = 1.432 + 0.330 * ROE i + 0.0254 *FG i - 0.437 * LEV i + 0.00445 * LDR i –
The return on equity (ROE) significantly influences the dividend payout rate, with a 1% increase in ROE leading to a 30.3% rise in the dividend payout ratio This finding aligns with Glen et al (1995), which highlights the positive correlation between ROE and dividend payouts in emerging markets.
Firm growth positively impacts the payout ratio, with a statistically significant correlation at the 1% level Specifically, a 1% increase in company growth corresponds to a 2.54% rise in the payout ratio This finding aligns with Partington's (1983) conclusion from signaling theory, which suggests that greater firm growth leads to an increased dividend payout ratio.
Financial leverage negatively impacts the dividend payout ratio; specifically, a 1% increase in financial leverage results in a 0.44 decrease in the payout ratio This relationship indicates that as the ratio of debt to total assets rises, the dividend payout ratio declines These findings align with prior research conducted by Rozeff (1982), Asif (2011), Al-Twaijry (2007), and Crutchley & Hansen (1989).
Table 8 illustrates a direct correlation between liquidity and the dividend payout ratio, indicating that a 1% increase in the current ratio leads to a 0.0044 times increase in the dividend payout ratio This finding aligns with the research conducted by Griffin in 2010 and Banerjee et al in 2009, which focused on developing markets They argue that firms in developed markets with greater liquidity are inclined to distribute higher dividends to attract external capital Notably, the coefficient associated with this factor is the smallest among the variables analyzed.
36 means that comparing to other variables, this variable has an insignificant influence on the dividend payout ratio
Finally, the variable equity growth has a negative effect on the dividend payout ratio Shows that if equity increases by 1%, the payout ratio will decrease by 0.0643 times
The size of a firm, represented by the control variable SIZE, is inversely related to the dividend payout ratio; larger companies are less likely to distribute after-tax profits as dividends to shareholders.
The model has an R-square value of 0.2095 This figure explains that the independent variables in the model can explain 20.95% of the variation in the dividend payout ratio
In analyzing the impact of independent variables on the dependent variable, the absolute values of the coefficients are significant Table 8 indicates that financial leverage (LEV) has the highest absolute value at 0.437, followed by return on equity (ROE) at 0.330 and company size (SIZE) at 0.136 This suggests that, for companies listed on the Vietnam stock market, financial leverage and profitability ratios exert the most substantial influence on the dividend payout ratio.
DISCUSSION AND CONCLUSION
Discussion
A study conducted in Vietnam has revealed a significant relationship between firm performance and the dividend payout ratio, utilizing linear regression and tests to address multi-collinearity and autocorrelation The findings indicate a positive correlation between profitability and liquidity ratios with the dividend payout ratio, while an inverse relationship exists between activity ratios and payout rates This aligns with similar research in emerging markets, including Kenya and Indonesia Key factors influencing the dividend payout ratio in Vietnam are identified as profitability and activity ratios, consistent with Partington's 1985 study Additionally, the study incorporates equity growth and firm size as control variables, both of which negatively impact the dividend payout ratio Other influencing factors, such as tax, price earnings ratio, and agency costs, were also noted, highlighting the complexity of determinants affecting dividend policies.
The Vietnamese market exhibits a diverse dividend payout ratio, averaging 38%, which indicates a healthy balance as it allows companies to retain sufficient cash flow for future business development A consistent dividend payout ratio reflects a company's strong growth trajectory and stable profitability, showcasing its financial reliability.
A significant indicator for investors is the retention of a substantial portion of earnings after taxes for reinvestment in the company, which can lead to quicker profit generation However, this strategy may also lead to shareholder disappointment if their expectations are not met.
This study has several limitations that affect its reliability Firstly, the model's R-square value is relatively low at 20.95%, indicating that the independent variables explain only a small portion of the company's dividend payout ratio Secondly, the dataset comprises only 107 listed companies out of approximately 743 on Vietnam's major stock exchanges (HNX & HOSE), limiting the study's market representation Additionally, some companies in the dataset did not pay dividends during the period from 2018 to 2022, particularly affected by the Covid-19 pandemic, which severely impacted profits for many service and manufacturing firms Moreover, the five-year study period may not be sufficient to accurately assess the company's profit growth rate, suggesting that future research should consider a longer timeframe Lastly, this research focuses solely on internal company factors influencing the dividend payout ratio, neglecting the potential impact of external macro and microeconomic factors.
Conclusion
This study is a quantitative research, using a multi-variables regression model on STATA software with related tests to provide a model suitable for sample data,
This study utilizes a random effect model to analyze a dataset of 107 companies listed on the Vietnam Stock Exchange over a five-year period from 2018 to 2022, derived from the companies' financial statements It investigates key factors influencing the dividend payout ratio, including profitability, firm growth, firm size, financial leverage, liquidity, and equity growth, all of which are integral to corporate finance The research aims to address several critical questions: the impact of firm performance on the dividend payout ratio in Vietnam, the specific factors influencing the dividend payout rate, and which of these factors exert a more significant influence on listed firms Additionally, the study explores the benefits of its findings for investors, offering insights for making informed investment decisions in the Vietnam market, and provides recommendations for both businesses and investors to enhance mutual benefits.
The study reveals that in the Vietnamese market, return on equity (ROE), firm growth, and liquidity positively influence the dividend payout ratio, while financial leverage, firm size, and equity growth exhibit an inverse relationship This indicates that companies with strong profit growth are more likely to distribute higher dividends to shareholders Conversely, larger firms and those with high leverage prefer to retain more after-tax profits for reinvestment rather than paying out dividends Notably, financial leverage and ROE significantly impact the dividend payout ratio Thus, novice and foreign investors entering the Vietnamese stock market should consider a company's leverage and ROE when making decisions about purchasing or holding its stocks.
This research is valuable for investors, businesses, and researchers interested in the Vietnamese market It demonstrates that several dividend theories, including signaling theory, agency cost theory, and bird-in-hand theory, are applicable in Vietnam The study reveals that profitability and liquidity ratios positively influence the dividend payout ratio, aligning with these theories Companies in Vietnam tend to offer higher dividend payouts to attract investors and signal growth potential, as noted by Sawicki (2009), who highlights that high dividend rates in Southeast Asian markets convey positive signals about a company's future Additionally, substantial dividend payouts enhance a firm's reputation and investor confidence, while also mitigating agency problems and information asymmetry—a significant issue in emerging markets lacking robust investor protection (Okpara, 2010) Conversely, activity ratios (LEV) negatively impact the dividend payout ratio, mirroring trends observed in other developing countries.
41 in Vietnam market, many businesses are still heavily dependent on loans from banks
Investors can leverage financial indicators to make informed investment decisions in the Vietnamese market Those seeking high dividends should focus on companies with strong profitability and liquidity ratios, as these are positively correlated with higher payout ratios Additionally, the firm's size and leverage ratio are crucial factors; larger and highly leveraged companies typically offer lower dividends By considering these aspects, investors can tailor their investment strategies to align with their individual preferences and goals.
Businesses can leverage their financial indicators to determine a dividend payout ratio that aligns with their growth strategies By offering higher dividend payout ratios, companies can enhance shareholder confidence and attract additional investment opportunities in the future.
This article explores the dividend payout ratio in Vietnam, highlighting the relationship between firm performance and dividend distributions The findings offer valuable insights that can inform future research in this area.
Recommendations
Companies need to rebalance their asset structure between debt and equity, as an increase in debt leads to a decrease in the dividend payout ratio This is particularly relevant for firms in the construction and banking sectors, which are highlighted in the sample data set.
Many companies with high leverage tend to offer low dividends Beyond just total assets, it's crucial for businesses to focus on the effective development and utilization of their assets A strategic plan for managing debt and total assets is essential to align with the company's overall strategy and ensure optimal asset performance.
When deciding on dividend payments, companies must take into account their developmental stage, as research indicates that larger firms tend to have lower payout ratios compared to smaller ones The size and structure of a company can vary significantly at different stages of its growth, influencing its approach to dividend distribution.
External factors, such as tax policies and government regulations, significantly influence company performance alongside internal factors like profitability and liquidity According to LaPorta et al (2000), countries that offer strong shareholder protection tend to lead investors to prefer capital gains over dividends Consequently, it is essential to take into account both investor preferences and the specific policies of a country when assessing these dynamics.
Businesses must consistently evaluate their dividend policies by gathering shareholder feedback and analyzing financial performance to accurately reflect current cash flows, forecast future cash flows, and enhance shareholder value while ensuring financial stability Moreover, companies should maintain transparency in communicating dividend payment details and provide comprehensive insights into their financial status, enabling shareholders to understand corporate finances better and potentially accept lower dividends in favor of reinvested cash flows.
Further study
Future research should focus on the impact of personal income tax factors on shareholders, particularly since cash dividend payments are currently subject to individual income tax in Vietnam It is essential to incorporate tax policy elements to better understand shareholders' preferences for dividends versus capital gains A significant issue in Vietnam's stock market is information asymmetry, highlighted by discrepancies between monthly and quarterly financial statements, which contributes to agency costs Therefore, studies should examine the effects of asymmetric information and agency costs on the market Additionally, to gain deeper insights into the dividend payout ratio, future research should consider external macro factors such as taxes, government policies, and market conditions.
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The chart illustrates the relationship between the dividend payout ratio (DPR) and several dependent variables, including return on equity (ROE), firm growth (FG), liquidity rate (LDR), financial leverage (LEV), firm size (SIZE), and equity growth (EG) Additionally, it offers insights into the correlations among the independent variables.
In addition to Breusch Pagan test and Hausman test, F-test is also a form of test commonly used to determine a suitable model for estimation