This thesis investigates the relationship between specific-factors and the cost of equity capital in the Vietnam stock market. The approach applied by Pomerleano and Zhang (1991) has been used to estimate the cost of equity. The sample consists of 79 listed firms spread across both HoSE and HNX. For a period of three years, namely, 2009 to 2012 have been collected data to test the relationship between cost of equity capital and the level of firm-specific factors including market risk (BETA), the size of company (SIZE), Book to market ratio (BM), Debt to equity ratio (DE), Asset turnover ratio (ATO), Inventory to total assets (INV). Panel data and econometric testing model are implemented in the paper in order to get the most precise results. After running regressions, the final results show that BETA, SIZE, BM, ATO, INV are positive related to the cost of equity, while DE shows a negative association. Most coefficients confirm the expected relationship, documented by previous studies. For exception results between DE, SIZE and cost of equity, the paper explains basing on some unique characteristics of Vietnam market. Finally, some conclusions and recommendations for further research are made in order to capture some limitation of this paper as well as understand deeply these relationships accompanied by difference of Vietnam stock market.
FIRM-SPECIFIC FACTORS AFFECTING COST OF EQUITY IN VIETNAM HoChiMinh city, Vietnam 2013 TABLE OF CONTENTS LIST OF TABLES iv LIST OF FIGURES v ABSTRACT vi CHAPTER I: INTRODUCTION 1.1 Background and motivation of the study 1.2 Research Objectives 1.3 Outline of the study CHAPTER II: OVERVIEW OF VIETNAM STOCK MARKET CHAPTER III:LITERATURE REVIEW 3.1 Cost of equity and estimation models 3.1.1 Cost of equity 3.1.2 Cost of equity estimation models 3.1.3 Alternative methodology for estimation of cost of equity capital 12 3.2 Firm-level factors 13 3.2.1 Beta 13 3.2.2 Size 14 3.2.3 Debt to Equity ratio (DE) 15 3.2.4 Book to market ratio (BM) 15 3.2.5 Assets turnover ratio 16 3.2.6 Inventory to total assets 17 CHAPTER IV: DATA & METHODOLOGY 18 4.1 Data 18 4.2 Methodology 20 4.2.1 Estimating cost of equity 20 4.2.2 Hypothesis 20 4.3 Econometrics Testing 21 4.3.1 Multicolinearity Test 21 4.3.2 Auto-correlation Test 22 4.3.3 Fixed or Random Effects Model: 23 4.3.4 Heteroskedasticity Test : 23 CHAPTER V: EMPIRICAL RESULTS 26 5.1 Data description 26 5.2 Econometric tests 28 5.2.1 Multicolinearity Test 28 5.2.2 Auto-correlation Test 28 5.2.3 Fixed or Random Effect Model ( Hausman Test) 29 5.2.4 Heteroskedasticity Test 30 5.3 Empirical Results 31 5.3.1 Beta and Cost of equity 31 5.3.2 Size and Cost of Equity 32 5.3.3 Debt to Equity and Cost of equity 32 5.3.4 Book to Market and cost of equity 34 5.3.5 Total Asset Turnover and Cost of Equity 35 5.3.6 Inventory to Total Asset and Cost of Equity 36 CHAPTER VI: CONCLUSION 37 6.1 Conclusion 37 6.2 Suggestions for further research 39 6.3 Research limitation 39 LIST OF REFERENCES 41 APPENDIX 45 LIST OF TABLES Table : Hypothesizes 21 Table 2: Description Data 26 Table 3: Correlation 28 Table : Hausman Test 29 Table 5: Final Regression Result on firm-specific factors and cost of equity 31 LIST OF FIGURES Figure 1: The performance of VN-Index and trading volume from 2000-2013 Figure : The research framework 25 Figure : Mean of Cost of Equity and Debt to Equity Ratio (2009-2012) 33 Figure 4: Mean of Cost of Equity and Book to Market Ratio (2009-2012) 34 ABSTRACT This thesis investigates the relationship between specific-factors and the cost of equity capital in the Vietnam stock market The approach applied by Pomerleano and Zhang (1991) has been used to estimate the cost of equity The sample consists of 79 listed firms spread across both HoSE and HNX For a period of three years, namely, 2009 to 2012 have been collected data to test the relationship between cost of equity capital and the level of firm-specific factors including market risk (BETA), the size of company (SIZE), Book to market ratio (BM), Debt to equity ratio (DE), Asset turnover ratio (ATO), Inventory to total assets (INV) Panel data and econometric testing model are implemented in the paper in order to get the most precise results After running regressions, the final results show that BETA, SIZE, BM, ATO, INV are positive related to the cost of equity, while DE shows a negative association Most coefficients confirm the expected relationship, documented by previous studies For exception results between DE, SIZE and cost of equity, the paper explains basing on some unique characteristics of Vietnam market Finally, some conclusions and recommendations for further research are made in order to capture some limitation of this paper as well as understand deeply these relationships accompanied by difference of Vietnam stock market CHAPTER I INTRODUCTION 1.1 Background and motivation of the study: In order to increase the total value of economic unit, it is not only making the right decisions and selecting the optimal solutions for investment funds but also estimating accurate cost of capital, which is major issue in the financial literature A company's securities typically include both debt and equity, so determining a firm’s cost of capital requires one to calculate both the cost of debt and the cost of equity However, the cost of equity is more challenged to calculate because equity does not pay a set return to its investors The cost of equity is the return that stockholders require for their investment in a company There are many reasons to explain why equity cost is important Firstly, cost of equity represents to the compensation that the market demands in exchange for owning the asset and bearing the risk of ownership Secondly, the cost requires the company to maintain a share price that is theoretically satisfactory to investors Thirdly, it is also a major criterion in determining the investment priorities and the optimal capital structures Hence, the practice of estimating precise equity cost is a necessity Eichengreen (2001) suggests that firm-level data should be used to capture the effects of institutional development on the cost of equity capital In Vietnam stock market, the paper conducted by Anh (2012) also presents that there is not only the systematic risk but also the liquidity risk strongly affect the rate of return, so using CAPM in Vietnam is not stable To continue this subject, this study would investigate whether and how some firm-specific variables such as market risk (BETA), the size of company (SIZE), Book to market ratio (BM), Debt to equity ratio (DE), Asset turnover ratio (ATO), Inventory to total assets (INV) to impact on cost of equity in the emerging market, Vietnam is in particular There have been conducted relatively large numbers of research about the relationship between firmspecific factors and the cost of equity And empirical results of the paper’s findings will make the literature of the subject richer In the present, there are many models using for estimating cost of equity: the capital asset pricing model (CAPM) (Sharpe,1964; Lintner,1965); Dividend Growth Model (Gordon, 1962); the three-factor model (Fama and French,1993) the international asset pricing model (IAPM) (Bekaert and Harvey, 1995), and so on Each of these models have the effectiveness needed for estimating the cost of equity capital in one or more specific market in a period of time; and their efficiency is reduced and replaced with each other over time Although these different models or techniques provide estimates of ‘reasonable’ magnitude, the search for a model that is easy to use and provides accurate and stable estimates over time is not over yet (Fama and French, 1997; Madanoglu and Olsen, 2005) Moreover, Vietnam is an emerging market and the stock exchange is too young (established in 2000) with lack of historical data and consistent accounting standards Although the above techniques have been applied successful in developed countries, such limitations cause some issues when they are used in emerging markets like Vietnam Instead, this study introduces an alternative estimation model applied by Pomerleano and Zhang (1999) to estimate ex-post measures of cost of equity capital at firm-level based on historical realized returns The disadvantage of ex-ante measures, the limitation of the above methods as well as the reasons why using the approach applied Pomerleano and Zhang (1999) would be considered in the literature review Vietnam is one of the emerging markets which have small young stock markets, so Vietnam market has some unique characteristics which influence on the relationships between cost of equity and firm-specific factors mentioned above The question is here whether theories as well as results of previous studies regarding the relationships are still accurate in Vietnam stock markets or not For example, the financial leverage ratio or Debt to Equity (DE) of Vietnamese firms is 1.1x on average (2009-2012) and higher than mean of the DE in other neighbor markets, 0.98x (Feng et al., 2013); however, investors still believe that whether there is a negative relationship between cost of equity and Debt to Equity ratio in Vietnam market Similarly, such questions are also made to other factors Hence, the answers would be in the finding section of this study This paper would contribute on the literature as well as the real stock exchange by several ways First, the results give clearly understanding cost of equity related to firm-specific factors for investors to make accurate decisions in Vietnam stock market In addition, this paper supports reliable results in conclusions for the future studies to investigate deeper the relationship between equity costs and factors in emerging markets in general or Vietnam in particular 1.2 Research Objectives: The purpose of this thesis would be Indicating whether and how firm-specific factors relate to cost of equity in Vietnam stock market Investigating empirical results compared with arguments of the previous papers Recommendations for the future studies regarding the relationship between cost of equity and firm-specific factors 1.3 Outline of the study: The study is laid out as follows Chapter I: INTRODUCTION briefly mentions the dissertation objectives, important contents and methodology conducted in the dissertation Chapter II: OVERVIEW OF VIETNAM STOCK MARKET includes the background, the organization and operation and the main features of Vietnam stock market index Chapter III: LITERATURE REVIEW focuses on the theoretical, estimating cost of equity models and empirical review of the relationships between firm-specific factors and cost of equity Chapter IV: DATA & METHODOLOGY describes the data characteristics, the way used for gathering figures of different sources and research methodology employed in this dissertation The chapter provides the test process including econometric assumptions Chapter V: EMPIRICAL RESULTS illustrate data, the regression results of the study, analysis and compare arguments obtained from the empirical tests Chapter VI: CONCLUSION part summaries the outcome and provides some limitations and recommendations for further studies CHAPTER VI CONCLUSION This chapter first presents conclusions regarding the main research question, and then comments on the research limitations as well as suggestions for further research will follow 6.1 Conclusion This research investigated the relationship between firm-specific factors and the cost of equity capital for stock exchange listed companies in the Vietnam stock market This thesis answers the research question: How firm-specific factors affect to the cost of equity capital in Vietnam market? The cost of equity is the return that stockholders require for their investment in a company, being a cost requires the company to maintain a share price that is theoretically satisfactory to investors; or being a major criteria determining the investment priorities and the optimal capital structures Hence, the practice of estimating precisely rate of equity cost is a necessity Eichengreen (2001) suggests that firm level data should be used to capture the effects of institutional development on the cost of equity capital The sample research consisted of 79 listed firms on both main stocks exchange, Hose and HNX In this research, the ex-post cost of equity has measured by using the approach applied by Pomerleano and Zhang (1999) because this method is simple and deal with issues of other methods As remarkable periods of the Vietnam stock market, the period 2009-2012 is taken into the investigation The results are that the positive associations between cost of equity and firm-specific factors (including Beta, Size, Book to Market ratio, Total Asset Turnover, and Inventory to total assets) ; Debt to Equity ratio has negative related to the cost of 37 equity Most coefficients confirm the expected relationship, documented by previous studies With the exception result between DE and cost of equity, the paper explains basing on some unique characteristics of Vietnam market This paper looks at empirical results in order to check again whether these finding are still accurate in Vietnam or not Based on the findings of the empirical research performed in chapter V, the significant relationships have been found between firm-specific factors and the cost of equity capital Most regression statistics of this thesis are consistent with the previous papers such as the relationships between Beta, Book to Market ratio, Total Asset Turnover, Inventory to Total assets Yet, there are two exceptions that Debt to Equity ratio has negative related to the cost of equity while this relationship is positive in most other stock markets and the positive coefficient of Size with cost of equity, which contradicts with the theories and most of empirical studies In this research, this implies that Vietnam stock market still has unique characteristics compared with others The first reason can be that the market is young and unstable Another possible explanation is that there are some unobservable variables (corporate cronyism), managerial opportunism as well as physiological factors influencing on the way investors to make decisions Such variables are recommended for the future studies to contain into the models and investigate empirical results which are adverse with the previous theories In addition, the paper realizes that there are three different levels of effect which investors consider before making decisions First, the most effective factor is SIZE with coefficient 0.2 (p-value