The relation between stock price volatility and firm characteristics of vietnamese listed firms on ho chi minh city stock exchange luận văn thạc sĩ

UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business --- NGUYEN HOANG MINH TRI THE RELATION BETWEEN STOCK PRICE VOLATILITY AND FIRM CHARACTERISTICS OF VIETNA

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

International School of Business

-

NGUYEN HOANG MINH TRI

THE RELATION BETWEEN STOCK

PRICE VOLATILITY AND FIRM

CHARACTERISTICS OF VIETNAMESE LISTED FIRMS ON HO CHI MINH CITY STOCK EXCHANGE

MASTER OF BUSINESS (Honours)

Ho Chi Minh City - 2014

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

International School of Business

-

NGUYEN HOANG MINH TRI

THE RELATION BETWEEN

STOCK PRICE VOLATILITY AND FIRM CHARACTERISTICS OF

VIETNAMESE LISTED FIRMS ON HO CHI MINH CITY STOCK EXCHANGE

ID: 22110071

MASTER OF BUSINESS (Honours)

SUPERVISOR: Dr PHAM PHU QUOC

Ho Chi Minh City – 2014

ACKNOWLEDGEMENTS

Firstly, I would like to express my deep gratitude to Dr Pham Phu Quoc,

my supervisor who has given highly support and valuable advices during the process of my conducting the research Especially, I am grateful for his enthusiasm in answering, reminding as well as his feedback, guidance and correction thank to that I can able to accomplish this thesis

Second, I would like to thank Prof Sarath Delpachitra of Flinders University Australia and invited lecturer at International School of Business (ISB) – University of Economics Ho Chi Minh City (UEH) for his review and revision my thesis

Third, I would like to express profound gratitude to Dr.Dinh Thai Hoang who taught me the methodology of data analysis, and give me guidance in data analysis of this thesis as well

Next, I would like to express my sincere gratitude to all of my lecturers at International School of Business (ISB) – University of Economics Ho Chi Minh City (UEH) who have transmitted their knowledge and experience to me during

my master course Furthermore, the enthusiastic assistance of the ISB’s executive board and staffs was greatly appreciated

Last but not least, I would also want to thank my friends and classmates who have shared their knowledge, supported, and worked with me during the

time of my studying at ISB Without their continual encouragement and understanding, I would not have been able to complete this journey It is very fortunate for me to have such wonderful friends and supporters in my life

With my appreciation

Nguyen Hoang Minh Tri

STATEMENT OF AUTHORSHIP

I hereby declare that this submission is my own work and except where due reference is made; this thesis contains no material previously published or written by another person(s)

This thesis does not contain material extracted in whole or in part from a thesis or report presented for another degree or diploma at University of Economics Ho Chi Minh City (UEH), International School of Business (ISB), or any other education institution

Nguyen Hoang Minh Tri

May 2014

ABSTRACT

This paper attempts to determine stock price volatility in the Vietnamese stock market using a rich and detailed data set, including both market data and firm characteristics In particular, this research aim to investigate whether firm’s characteristics affect stock price volatility and examines the relation between stock price volatility and firm characteristics of Vietnamese listed firms on Ho Chi Minh City Stock Exchange A sample of 110 listed companies in Vietnam stock market is examined for a period from 2008 to 2012 The empirical estimation is based on panel data modeling technique The findings of the paper indicate that stock price volatility is negative affected by firm leverage, positively influenced by asset growth rate and firm size firm Meanwhile, this study find out that dividend yield and dividend pay-out ratio insignificant to the stock price volatility in Vietnam stock market

Keywords: Stock price volatility, firm characteristics, Vietnam stock

market, panel data

Table of Contents

ACKNOWLEDGEMENTS i

STATEMENT OF AUTHORSHIP iii

ABSTRACT iv

ABBREVIATION viii

LIST OF TABLES ix

CHAPTER 1 INTRODUCTION 1

1.1 Introduction 1

1.2 Research background 3

1.3 Research objectives and research questions 5

1.4 Research scope 5

1.5 Thesis contributions 6

1.6 Structure of the thesis 7

CHAPTER 2 LITERATURE REVIEW 8

2.1 Introduction 8

2.2 Stock price volatility 9

2.3 Stock price volatility and dividend policy 10

2.4 Stock price volatility and firm age 13

2.5 Stock price volatility and trading liquidity 13

2.6 Other firm’s characteristics and stock price volatility 14

2.7 Developing empirical research hypotheses 15

2.7.1 Dividend yield and dividend payout ratio 17

2.7.2 Firm Leverage 19

2.7.3 Asset growth rate 21

2.7.4 Firm size 22

2.8 Chapter summary 24

CHAPTER 3 DATA AND METHODOLOGY 25

3.1 Introduction 25

3.2 Data sources 25

3.3 Variables: 26

3.3.1 Dependent variable -Price volatility (PV) 26

3.3.2 Independent variables -Firm characteristics 27

3.4 Methodology 28

3.4.1 Multiple regression 29

3.4.2 Ordinary Least Square (OLS) regression 30

3.5 Chapter summary 30

CHAPTER 4 EMPIRICAL RESULTS 31

4.1 Introduction 31

4.2 Descriptive Statistics and Correlation Analysis 31

4.2.1 Descriptive Statistics 31

4.2.2 Correlation Analysis amongst Variables 32

4.3 Multiple Linear Regressions Analysis 34

4.3.1 Regression analysis 34

4.3.2 Hypothesis test 36

4.4 Chapter Summary 41

CHAPTER 5 CONCLUSION 42

5.1 Reviews of findings 42

5.2 Contributions 43

5.3 Implications 44

5.4 Limitations and recommendations for future researches 45

References 47

APPENDIX A: LIST OF SAMPLE COMPANIES 54

APPENDIX B REGRESSION RESULT 57

ABBREVIATION

AGE Firm age

ASGR Asset growth rate

CURR Current ratio

DY Dividend yield

EBIT Earnings Before Interest and Tax

EV Earning volatility

HNX Hanoi Stock Exchange

HOSE Ho Chi Minh City Stock Exchange IPO Initial Public Offer

LEVR Firm leverage

OLS Ordinary Least Square

POR Payout ratio

PV Price volatility

ROA Return on assets

ROE Return on equity

SIZE Firm size

TOVR Liquidity

LIST OF TABLES

Table 2.1: Expected relation to stock price volatility 16

Table 4.1: Descriptive Statistics 31

Table 4.2: Correlations 33

Table 4.3: Coefficientsa 35

Table 4.4: Model Summaryb 36

Table 4.5: Hypotheses summary 41

CHAPTER 1 INTRODUCTION

1.1 Introduction

Stock prices are the most important indicators used by investors to invest

or not to invest on a particular share The main objective of investing in the stock market is to maximize the expected return at low level of risk The volatility of stock price is the systemic risk faced by investors who possess ordinary shares investment Investors are by nature risk averse, and the volatility of their investments is of importance to them because it is a measure of the level of risk they are exposed to (Hussainey,2011) Therefore, the stock price volatility gets investors’ undivided attention

Furthermore, stock market growth plays an important role in predicating future economic growth in situations where the stock markets are active Economies without well-functioning stock markets may suffer from three types

of imperfections First, opportunities for risk diversification are limited for investors and entrepreneurs Second, firms are unable to structure optimally their financing packages Third, countries without well-functioning markets lack information about the prospects of firms whose shares are traded, thereby restricting the promotion of investment and its’ efficiency (Demirguc-Kunt and Levine, 1996)

Since the important role of the stock market plays in promoting the economic growth, any change in the stock market always draws attention of the

public and the society As an emerging market, the Vietnamese Stock Market is expected to lead to a lower cost of equity capital for firms and allow individuals

to more effectively price and hedge risk, and a place where can attract foreign portfolio capital and increase domestic resource mobilization, expanding the resources available for investment to develop the country However, what has been happening on the Vietnamese Stock Market shows an unstableness of the Vietnamese economics During the period from 2008 to 2012, the Vietnamese Stock Index (VN-INDEX) changed so much The VN-INDEX reached the highest point of 921.10 on January 2nd 2008, and then falling to the lowest point

of 235.50 on February 24th 2009 just in around one year On the last transaction day of the year 2012 the VN-INDEX gained 413.70 points (abstracted from historical data on HOSE)

As a result, stock price volatility in Vietnamese recent years becomes a topic attracting not only investors but also firm’s managers and the government Therefore, determining factors affect the stock price volatility is significant This thesis examines the effects of some firm’s characteristics on stock price volatility

in the context of Vietnam such as dividend yield, payout ratio, leverage ratio, asset growth rate, and firm size The findings of the study provides implications for investors in building up their investment portfolio, for managers in firm management, and for law maker in giving out laws and regulations as the solution to stable and to develop the Vietnamese Stock Market

Finally, the remainder of this chapter is structured as follows: section 1.2 provides the research background, section 1.3 discusses the research objectives and the research questions, section 1.4 presents the scope of the research, section 1.5 is the thesis contributions, and section 1.6 is the structure of the thesis

1.2 Research background

For many decades, stock price volatility and its determinants have been controversial topic of theoretical and empirical researches Investigations of share price changes appear to have presented evidences that change in fundamental variables should jointly influence changes in share prices in both developed and developing markets However, the relevant actual fundamental factors may vary between markets It is widely agreed that a set of fundamental variables as suggested by literature has been relevant as possible factors affecting share price changes in the short and the long run

Actually, there is a huge amount of researches has been conducted to analyze the relation between stock price volatility and firm characteristics Among those researches investigated developed market, it can point out some empirical findings such as Baskin (1989), Fama and French (1992), Pastor and Veronesi (2003) in the United States context, Allen and Rachim (1996) in Australian context, Hussainey, Mgbame, and Chijoke-Mgbame (2011) showed evidence from United Kingdom While Baskin (1989) reported a strongly significant relation between dividend yield and stock price volatility, Allen and Rachim (1996) could not find any evidence to support this hypothesis

but found another interesting results related to payout ratio

Even though Vietnam initiates the stock market later than many other developed countries, there has been a substantial growth The first stock exchange in Ho Chi Minh City was established in 2000 with only two listed companies, then by increasing foreign interest and the privatization of state-owned enterprises lead to a rapid increase in listings At the end of 2012, there were about 315 firms listed on the Ho Chi Minh Stock Exchange (HOSE) and

399 other firms on Hanoi stock exchange (HNX) At the end of Jan 2013, there were two more firms jointed in HNX

Most of the previous studies on determinants of stock return volatility focus on well-developed markets such as Baskin (1989), Gallant, et al.,(1992), Pastor and Veronesi (2003) in the context of United States, Allen and Rachim(1996) studied factors affected stock price volatility in Australia, Hussainey et al.,(2010) found evidence from London Stock Exchange of UK In the other hand, there is a less attention given to the developing markets Ramadan (2013) examined determinants affected stock price volatilities in Jordan, Irfan and Nishat (2003), Khan (2011) attempted to explain the effect of dividend policy on stock price of listed companied at Karachi Stock Exchange in Pakistan, Hashemijoo, Ardekani and Younesi (2012) investigated the impact of firm attribute on share price volatilities in the Malaysian Stock Market Whereas, there is no or a few study address the issue of stock price volatility and fundamental factors in the Vietnamese context This motivates the present

study to examine whether firm’s characteristics can affect the stock price volatility of the Vietnamese companies and to analyze their influence This study focuses on the same issue for Vietnam Stock market, as a developing Asian capital market Apart from using the latest data, the research will incorporate selected variables to examine the determinants of stock price volatility

1.3 Research objectives and research questions

The purpose of this thesis is to analyze the behavior of stock price from a broad perspective and to determine the relations between stock price volatility and firm characteristics This research also examines stock price behavior in each year in order to identify whether there is any annual differences

in stock price movement

This research will provide answer to the following question:

Do firm’s characteristics affect firm’s stock price volatility in Vietnam stock market?

1.4 Research scope

There are psychological factors contributed to the price changes or volatility such as investor’s overreactions to earnings, dividends, or other news; waves of social optimism or pessimism; fashions or fads (Shiller, 1987) According to the efficient market hypothesis, when new information either good

or bad news are available to the public, they will effect and change the company’s share price However, it is difficult to use the patterns of the stock

returns over weekends, holidays and different calendar periods as the news about fundamental values do not move systematically along during these periods (Thaler, 1987) Roll (1988) found that it will be difficult to rely only on systematic economic influences to predict the variation of the individual stock returns This is because there are other factors apart from fundamentals that reflect the movement of stock prices (Cutler et al., 1989) Therefore, this research only examines some fundamental factors belong to firm’s characteristics such as dividend yield, payout ratio, leverage ratio, asset growth rate, and firm size to find their effects on stock price volatility of listed companies on HOSE Besides, companies trade or do their transactions on Unlisted Public Company Market (UPCOM) and Hanoi Stock Exchange (HNX) are out of the scope of this research

1.5 Thesis contributions

This thesis is the very first research investigating the characteristics of stock price volatility in Vietnam stock market The main contribution to the financial literature is to provide an extensive empirical analysis on the stock price movements and firm characteristics relation over an extended period The construction of stock price data, together with detailed characteristics of listed firms in Ho Chi Minh City Stock Exchange, allows us to achieve this task The findings of this thesis are a confirmation of the irrelevance dividend theory

of Modigilani and Miler (1958), a verification of the hypotheses of the previous study of Baskin (1989), and a support to Allen and Rachim (1996)’s findings in

identifying the relation between stock price volatility and firm characteristics Furthermore, this research provides a useful caution for the investors in terms of real relation between stock price volatility and firm’s characteristics

1.6 Structure of the thesis

This thesis consists of five chapters from chapter 1 to chapter 5 The first chapter briefly introduces major concerns of this thesis such as the research background, research objectives, research question, research scope, and research contributions

Chapter 2 is the literature review In this part, it presents theoretical aspects of stock price volatility focusing on impacts from fundamental Based on theories, initial research model and hypotheses used for the research are formed

Next, Chapter 3 is research methodology that will show the research process and data collection There are 3 elements in Data collection consisting of data sample, data size and method using in this research

Then, Chapter 4, data analysis will reports the analysis results of data collection

The last chapter is the conclusions, this will summarize the findings; discuss the managerial implications and recommendation based on the results in chapter four; and show the research limitation as well as the suggestion for further research

CHAPTER 2 LITERATURE REVIEW

2.1 Introduction

This section provides theoretical background for the model to be developed in the next part and reviews the literature related to stock price volatility In the limited scope of this thesis, the majority of this section is focused on reviewing fundamental analyses of stock price volatility, which study the relation between stock price movement and firm characteristics in long run For information purpose, reviews of value relevance study for short-term relation between stock price behaviors with event announcements are also briefed Furthermore, since most of previous studies execute investigation on the relation between stock price volatility and dividend policy with adding other factors as controlling variables, this section first reviews those literature strands and summarizes key fundamental factors in the later parts

The structure of this chapter is as follow: Section 2.2 reviews the literature relating to stock price volatility and overviews some fundamental factors affecting stock price volatility Section 2.3 discusses the relation between stock price volatility and dividend policy in the literature Section 2.4 overviews the relation between stock price volatility and firm age Next, the literature related to stock price volatility and trading liquidity is presented in section 2.5 Section 2.6 reviews other firm’s characteristics and stock price volatility Section 2.7 is the development of the research hypotheses Final, section 2.8 is the summary of the chapter

2.2 Stock price volatility

Stock price volatility is the rate of change in the price of a security over a given time period Consequently, the greater the volatility is the greater the risk

of substantial gain or loss If a stock is labeled as volatile, it is more difficult to forecast what the company’s future share price will be Likewise, many investors prefer stocks that support more predictable earnings and therefore carry less risk (Profilet and Bacon, 2013)

Since the stock price is the most important indicator readily available to investors for their decision to invest or not in a specific share Factors influencing stock prices are studied from different points of view Several researchers examined the relation between stock prices and selected factors, which could be either internal or external Rappoport (1986), and Downs (1991) suggested that share price changes are associated with changes in fundamental variables which are relevant for share valuation such as payout ratio, dividend yield, capital structure, earnings, size of the firm and its growth

Ball and Brown (1968) are the first to highlight the relation between stock prices and information disclosed in the financial statements Empirical research

on the value relevance has its roots in the theoretical framework on equity valuation models Ohlson (1995) depict that the value of a firm could be expressed as a linear function of book value, earnings and other value relevant information

The link between fundamental factors and share price changes is

extensively investigated over short horizons but only few studies attempt to model it over lengthy periods Studies over short windows commonly applied cross- sectional tests using event-based research methodology The models of studies examining this relation cross-sectional or inter-temporally are few, and one common feature, the fundamental factors used in a specific study are either one or two although there is a long list of fundamental factors Furthermore, while price revisions at the time of announcements of price relevant disclosures are valid as announcement effects shown over short horizons, it is equally important to test the effect over a lengthier period using data over several years

as measure of the variables

2.3 Stock price volatility and dividend policy

The most important internal factors are related to dividend policy which includes dividend yield and payout ratio has been widely studied and the main subject of contention in the field of finance (e.g., Modigliani and Miller, 1958; Miller and Rock, 1985; John and Williams, 1987; Baskin, 1989; Fama and French,1992; Allen and Rachim,1996; Irfan and Nishat ,2003) Different researchers have different views about the relation among dividend policy and stock prices

The relation between dividend payouts and stock price volatility, which is firstly initiated by Modigliani and Miller (1958) , is still open for discussion and investigation According to Modigliani and Miller (1958), firm value is irrelevant to dividend policy and stock price volatility is solely based

upon its earning ability Miller and Rock (1985), John and Williams (1987) reported that the above statement could be only true if shareholders have symmetric information about the company’s financial position However, managers normally pass positive information to the shareholders by retaining any negative information until any regulation or financial constraint to force them to disclose that information

Gordon (1963) argues that stock prices are influenced by dividend payouts He reports that firm with large dividends faces less risk in terms of stock price volatility

Friend and Puckett (1964) initiated the work on relation between dividend and stock price volatility They found a positive relation among dividend and stock prices

Jenson (1986) stated there is a positive relation between dividend and stock price reaction He argues that dividend payouts reduce the cost of funds and increase the cash flows of the firm The company after paying cash dividends

to stockholders would have less idle funds in the hands of managers to invest in less or negative net present value (NPV) projects

In the context of the United States, Baskin (1989) argued that there is significant, dominating negative relation between dividends and stock price volatility He advanced four basic models, which relate dividends to stock price risk: duration effect, rate of return effect, arbitrage effect and informational effect He suggests the use of the following control variables in testing the

significance of the relation between dividend yield and price volatility: operating earnings, firm size, level of debt financing, payout ratio, and asset growth rate According to his findings, dividend yield and payout ratio are negatively correlated with stock price volatility Whereas, firm size, asset growth rate and firm leverage positively affect stock price volatility with a slight different approach from stock returns not stock prices

Fama and French (1992) inferred that dividend and cash flow variables such as earning, investment and industrial production may serve as indicator of stock returns

Allen and Rachim (1996) failed to find any evidence that dividend yield influence the stock price volatility in Australia However, they find a significant positive correlation among stock price volatility and earning volatility and leverage, and a significant negative relation between price volatility and payout ratio According to their results, there is a negative correlation between size and stock price volatility, as large companies incur more liabilities

Regarding to emerging markets, Irfan and Nishat (2003) in a study in Pakistan argued that both dividend payout ratio and dividend yield have significantly negative effect on stock price volatility Most of their findings were similar to those of Baskin (1989) They observe a positive correlation between debt and price volatility but its influence is less than that of dividend yield

Following Irfan and Nishat (2003), a number of studies were conducted in Pakistan regarding to dividend policy and stock price volatility Asghar et al.,

(2010) stated that stock price volatility and dividend yield have strong positive correlation but stock price volatility is highly negative correlated with growth in assets Nazir et al., (2010) found that dividend yield and payout ratio have significant impact on the share price volatility The effect of dividend yield on stock price volatility increases during the studying period whereas payout ratio has only a significant impact at lower level of significance

Rashid and Rehman (2008) found a positive but insignificant relation among stock price volatility and dividend yield in the stock market of Dhaka

2.4 Stock price volatility and firm age

Pastor and Veronesi (2003) found a negative cross-sectional relation between volatility and firm age The median return volatility of the United States stocks falls monotonically from 14% per month for 1-year-old firms to 11% per month for 10-year-old firms The authors’ model predicts higher stock volatility for firms with more volatile profitability, firms with more uncertain average profitability, and firms that pay no dividends

2.5 Stock price volatility and trading liquidity

Various studies reported that there are significant relations between volume and stock price movement and liquidity because trading volume is a source of risk caused by the flow of information For example, Saatccioglu and Starks (1998) found that volume lead stock prices changes in four out of the six emerging markets Jones, et al., (1994) found that the positive volatility-volume relation documented by numerous researchers reflected a positive relation

between volatility and the number of transactions Gallant, et al., (1992) investigated the price and volume co-movement using daily data from 1928 to

1987 for New York Stock Exchange and find positive correlation between conditional volatility and volume

Song, et al., (2005) examined the roles of the number of trades, size of trades, and share volume in the volatility-volume relation in the Shanghai Stock Exchange and confirm that mainly the number of trades drives the volatility volume relation In addition, other studies reported that stock trading volume represents the highest positive correlation to the emerging stock price changes; thus represent the most predicted variables in increasing price volatility in both emerging and developing stock markets (Sabri, 2004)

2.6 Other firm’s characteristics and stock price volatility

Ariff et al., (1994) established the joint linear effect of these six variables for the three markets using data relating to samples of firms over 16 or more years in Japan, Malaysia and Singapore In general, the six variables are significantly related to share price volatility in the three markets although some were not significant in particular markets In the case of more analytically intensive Japanese market, changes in the fundamental factors account for two fifth of the variation in share price volatility The same is not the case in the less analytically intensive developing markets of Malaysia and Singapore Obviously, larger portions of price variation appear not to be explained by the variation in the six firm specific fundamental variables in the less developing markets

Irfan and Nishat(2003) identified the joint-effect multiple factors exert on share prices on Karachi Stock Exchange in the long run The significant joint factors observed are payout ratio, size, leverage and dividend yield This study undertakes investigation for pre-reform, post-reform and overall period

After reviewing some distinguished works in the field, it can be seen that many works are done so far on this topic However, to the best knowledge

of the author, there are very few studies about stock price fluctuations and firm attributes in developing countries, especially in Vietnam The empirical evidence

of stock price volatility in Vietnam stock exchange is lack in the literature This gives the current study great relevance and is the impetus for the researcher to begin investigation In lieu of the current literature, this research enriches the literature by examining whether stock price volatility is affected by firm characteristics as in previous related studies

This thesis may contribute to the literature by reducing gaps of previous studies on the relation between stock price volatility and firm characteristics for firms listed in Vietnam stock market

2.7 Developing empirical research hypotheses

There are several empirical hypotheses, which are consistent with the literature have studied previously to determine the factors affect stock price volatilities In this paper, the author just gives out five hypotheses that related to five characteristics of a firm to examine the relation between them to stock price volatility in Vietnamese stock market They are dividend yield, dividend payout

ratio, firm leverage, asset growth rate, and firm size These hypotheses and their relation to stock price volatility have been summarized as follow:

Table 2.1: Expected relation to stock price volatility

2 H2: Stock price volatility is negatively

influenced by dividend payout

POR Negative

3 H3: Stock price volatility is positively influenced

by firm leverage

LERV Positive

4 H4: Stock price volatility is positively influenced

by asset growth rate

AGR Positive

5 H5: Stock price volatility is negatively

influenced by firm size

SIZE Negative

Source: Summarized by the author

These hypotheses have been developed based on previous studies in literature (Miller and Modigliani,1958; Asquith et al.,1983; Baskin ,1989; Allen and Rachim,1996; Ariff and Khan ,2000; Cooper, Gulen, and Schill,2008);

therefore, they allow the researcher to make comparisons between the characteristics of stock price volatility in Vietnam and other markets including developed market such as the United States, UK and Australia as well as emerging market such as Pakistan, Jordan and Malaysia The development of these hypotheses has been presented in part from 2.7.1 to 2.7.5 below

2.7.1 Dividend yield and dividend payout ratio

As the results of previous researches’ findings which have been reviewed

in the literature (see 2.1 above), there are two standpoints arguing the impact of dividend policy on the stock price volatilities

The first group of researchers includes those who support the dividend irrelevance theory Miller and Modigliani (1958) proposed that dividend policy is irrelevant to the shareholder and they stated that dividend policy does not affect the wealth of shareholders and the shareholders’ return Black and Sholes (1974) used capital asset pricing model to test the relation between dividend yield and expected return Their findings showed no significant association between dividend yield and expected return They reported that there is no evidence to convince that difference dividend policies lead to different stock prices Their findings were consistent with dividend irrelevance hypothesis

In the other hand, the second group of researchers consists of those who agree that there is the impact of dividend policy on the stock price volatilities Gordon (1963) proposed that the dividend policy of firms affects the market

value of stocks, as the future situation of the market is uncertain so investors may prefer dividend in hand in order to avoid risk rather than future capital gain It means that there is a direct relation between dividend policy and market value of shares

Dividend announcements can be seen as a signal of future profitability of firm (Asquith & Mullins,1983) Travlos, Trigeorgis, and Vafeas (2001) studied the response of stock price to the announcement of stock dividend and cash dividend increase on the Cyprus Stock Exchange over 1985 to 1995.Their results showed strong evidence to prove the response of stock price to both cash dividend announcement and cash dividend increase

On the same standpoint with Asquith et al.,(1983), Baskin(1989) proposed that fluctuation in the discount rate has less impact on high dividend yield stocks because high dividend yield can be a signal of more near-term cash flow so the firm with high dividend yield expectedly has less volatility in share price Accordingly,

H1: Stock price volatility is negatively influenced by dividend yield with all other factors remaining constant

According to Baskin(1989), dividend yield is the most important factors affecting stock price volatility He argues that there is a significant negative relation between dividend yield and stock price volatility

H2: Stock price volatility is negatively influenced by dividend payout ratio, with all other factors remaining constant

This hypothesis is derived from the hypothesis of Allen and Rachim (1996) which indicates a significant negative relation price volatility and payout ratio The dividend payout policy also expected to be negatively related to investment opportunities

2.7.2 Firm Leverage

Another relevant factor in affecting the share prices is the capital structure

of the firm A high-risk firm (a firm with debt) must generate high return consistent with the investor’s expected return (Hamada,1972, and Sharpe,1964)

It follows that with higher debt firm should have greater rate of change in its share price Hence capital structure changes must be directly related to the share price volatility

Theoretical finance regards leverage as one of the sources of risk, and thus claims that the more levered a firm is, the higher the risk for equity holders As the risk-averse equity holders are exposed to more uncertain cash flows, they will require a higher rate of return on their investment (Penman, Richardson, and Tuna,2007)

Modigliani and Miller (1958), on the other hand, emphasized that in competitive capital markets the value of a firm is independent of its financial structure But if markets are imperfect, due to transaction cost, taxes,

informational asymmetry, agency cost etc., then capital structure matters and influences of the share prices The immediate implication of this proposition is that the return on equity capital is an increasing function of leverage This is because debt increases the riskiness of the stock and hence equity shareholders will demand a higher return on their stocks

Furthermore, as due to operation risk, there is a possibility of direct link between firm leverage and stock price volatility Firms with high leverage increase their likelihood of default and its expected cost (Chen and Zhang, 2010) According to them, if the default risk is priced, a significant increase in the leverage should lead to a higher expected future return

environment and more importantly in a developing country like Vietnam This has served as a motivation for the current thesis

2.7.3 Asset growth rate

One of premier roles of capital market is the efficient pricing real investment Companies acquire and dispose their assets as the economic efficiency demands that the market appropriately capitalizes such transactions There are evidences identifies an important bias in the market’s capitalization of corporate asset investment and disinvestment The prior findings show that corporate actions related to asset expansion such as acquisitions, public equity offerings, public debt offerings, and bank loan initiations tend to be followed by periods of abnormally low returns (Rau and Vermaelen,1998; Loughran and Ritter,1995; Spiess and Affleck-Graves,1999; Billet, Flannery, and Garfinkel,2006) Whereas, corporate actions related to asset contraction such as spinoffs, share repurchases, debt repayments, and dividend initiations tend to be followed by periods of abnormally high returns (McConnell and Ovtchinnikov,2004; Lakonishok, and Vermaelen ,1995; Affleck-Graves and Miller ,2003; Michaely, Thaler, and Womack,1995)

In addition, the changes in asset growth of firms are significant to shares

price while earnings appear to be universally a relevant factor (Ariff, et al.,1994)

It is widely agreed that a set of fundamental variables as suggested by individual

theories is no doubt relevant as possible factors affecting share price changes in the short and the long run (Ariff and Khan, 2000)

Furthermore, asset growth rate is strong predictor of subsequent stock returns and the strongest determinant of future returns (Cooper, Gulen, and Schill,2008) Therefore, a firm’s annual asset growth rate emerges as an economically and statistically significant predictor of the cross-section of stock returns Therefore,

H4: Stock price volatility is positively influenced by asset growth rate with all other factors remaining constant

The inclusion of this variable is to see the growth in assets because it is quite possible that any other relation between dividend policy and stock price volatility could be occurred Dividend payout policy could be inversely linked to growth and investment opportunities Therefore, adding assets growth is as an independent variable to reflect firm growth

2.7.4 Firm size

Size of a firm does have effect on the valuation of the firm’s assets Smaller stocks have higher average returns Introduction of size, as a multiplicative term to dividend, provides a significant improvement in the explanation of share prices (Karathanassis and Philiappas ,1988) The size of the firm if captured through total capital employed, is expected to influence the share

prices positively as large firms are better diversified than smaller ones and thus are less risky (Benishy,1961)

Merton(1987) and Huberman(2001) argued that investors prefer securities that they are familiar with It is more likely that foreign investors prefer to invest

in Vietnamese firms about which they have some knowledge or familiarity It is commonly assumed that more information is available on large firms than on small ones (Merton,1987) It is argued that foreign investors should favor large firms to minimize the negative impact of informational asymmetry since the degree of informational asymmetry is higher for foreign investors than for local investors Similarly, foreign investors should favor bluechip stocks

Benishay (1961) and Atiase (1985) show that as the size of the firm increases, their share price volatility declines Size of firm is important variable that affect the stock volatility This stock price of small firms may be more unstable compared to large firms, as small firms as less diversified than large firms Moreover, investor of small firms acts more irrationally to new events Hence size of firm may affect choice of investors and then causing stock price volatilities in Vietnamese stock market as well Accordingly,

H5: Stock price volatility is negatively influenced by firm size with all other factors remaining constant