Abstract Vietnamese stock market is an interesting laboratory to examine the reaction of stock price to dividend announcements due to its taxation regulations. This study examines the stock price response to the dividend announcement and analyzes the impact of firm characteristic factors on the reaction of the stock market. The research sample includes dividend announcements made by 351 companies listed on stocks listed on Ho Chi Minh Stock Exchange (HOSE) for the period 20152018 corresponding to 2016, 2017, and 2018 dividends announcements, this period is the most recent stability of tax rates applicable to stock trading and dividends for investors in Vietnams stock market. The research method is carried out with two combined parts: traditional event study methodology and regression analysis of firm characteristic factors affecting the cumulative abnormal returns. This study expects to find the relationship between dividend announcement and stock price on the stock market and show the level of influence on the Vietnamese stock market for the increase dividend announcements, neutral dividend announcements and decrease dividend announcements. Keywords: stock market reaction, dividend announcement, Vietnam stock market
Abstract Vietnamese stock market is an interesting laboratory to examine the reaction of stock price to dividend announcements due to its taxation regulations This study examines the stock price response to the dividend announcement and analyzes the impact of firm characteristic factors on the reaction of the stock market The research sample includes dividend announcements made by 351 companies listed on stocks listed on Ho Chi Minh Stock Exchange (HOSE) for the period 2015-2018 corresponding to 2016, 2017, and 2018 dividends announcements, this period is the most recent stability of tax rates applicable to stock trading and dividends for investors in Vietnam's stock market The research method is carried out with two combined parts: traditional event study methodology and regression analysis of firm characteristic factors affecting the cumulative abnormal returns This study expects to find the relationship between dividend announcement and stock price on the stock market and show the level of influence on the Vietnamese stock market for the increase dividend announcements, neutral dividend announcements and decrease dividend announcements Keywords: stock market reaction, dividend announcement, Vietnam stock market Table of Contents List of Tables iii List of Figures iv CHAPTER INTRODUCTION 1.1 Research Background 1.2 Research questions and objectives 1.3 Significance of the Study CHAPTER LITERATURE REVIEW 2.1 Theories of reaction of stock market to dividend announcements 2.1.1 Signaling theory .5 2.1.2 The theory of free cash flow 2.1.3 Customer effect theory .7 2.1.4 Efficient Market Theory 2.2 Emperical Literature 2.3 Institutional Environment of Vietnamese Stock Market .13 2.4 Hypotheses development 14 CHAPTER METHODOLODY 19 3.1 Conceptual Framework 19 3.2 Research Design 20 3.2.1 Analysis of Abnormal Return 20 3.2.3 Analysis of firm characteristic variables 23 3.2.4 Testing hypotheses 24 3.3 Sampling Design 27 3.4 Data collection 27 Reference 28 List of Tables Table 2.1 Vietnam tax policy on dividends and capital gains from 2008 to 2014 14 Table 3.2 Describe the variables used in the regression model .23 Table 3.3 List of methods used for each hypothesis 26 Table 3.4 Total Dividend Announcements from 2016 to 2018 27 List of Figures Figure 2.1 Vietnam Stock market capitalization (in dollars) 13 Figure 3.1 Research framework .20 CHAPTER INTRODUCTION 1.1 Research Background The stock market, with its continuous development, is an effective channel to raise capital for businesses and an investment method favored by many investors because of its convenience, profitability, and liquidity Along with raising capital, businesses must also ensure the rights of their shareholders through the annual dividend distribution Not only is the decision to allocate returnsto shareholders, but it is also a basis for changes in investor behavior as well as a channel for transmitting information from corporate governance to the market Therefore, in the stock market, the period of announcing the annual dividend payment is always the time that investors are interested in and the fluctuation of stock prices during this period is also relatively large For nearly 60 years from the background studies of dividends by Lintner (1956), Miller and Modigliani (1961), the topic of dividends has always been an urgent issue, a category that is still in its infancy and always a great question for researchers Although there have been many studies, many theories of dividends have been published such as the signaling theory of Bhattacharya (1979), the theory of representation costs of Easterbrook (1984) or the theory behavior of Shefrin and Statman (1984) This study focuses on research to find out the relationship between the fluctuation of stock prices and the volume of stocks and the dividend notification of the business Built on the basis of an event analysis model, the standard model is used to analyze the reaction of the stock market to activities such as dividend notifications, stock splits, and corporate rights issues In the world, most of the research on the same topic is done on the basis of some of the above mentioned topic, typical studies such as Petit (1972), Watts (1973), Dasilas et al (2011) and Kumar (2017) An outside investor usually has less information than an insider, in other words, there is information asymmetry between them Thus, one of the explanations for the effect of the dividend increase announcements that cause positive stock price reactions is based on the information asymmetries in the market It is explored that the dividend increase announcement as a manager’s signal of the firm’s future prospects due to information asymmetries Managers are reluctant to cut dividends because an increase in dividend payment is a positive signal that informs the market that the company not only has a successful business, a high current income, and an increasing stock price, but also good future earnings A decrease in dividend payment may signal poor future performance or the inability of the company to maintain a given level of dividends in the future Managers can use the dividend increase as a signal to communicate their future earnings forecasts Therefore, the announcements of dividend increase transfer positive information to the market as well as reflect the firm’s good prospects for the future In other words, an announcement of an increased (decreased) dividend payment is good (bad) news for the market and leads to the stock price increases (decreases) Jensen (1986) demonstrated that due to the conflict of interest that may occur between shareholders and managers, especially when the company has substantial free cash flows, the managers can increase dividend to resolve the agency problem That is, an increase in dividend payments might be a way to reduce the conflict of interest between managers and shareholders regarding a firm with free cash flows In contrast, it is showed that in a perfect market where there is no tax, no transaction costs, and no information asymmetry between managers and shareholders, dividends not impact a firm’s value and that dividend policy does not affect stock price Thus, a dividend increase announcement will not cause a stock price reaction However, taxes and transaction costs exist in practice; for example, the dividend tax rates of the US are between 10%-35%, in Canada tax rates are between 2.08%-19.58%, in England they are between 10-32.5%, in Germany the tax rate is 25%, in Holland the tax rate is 15%, and in Vietnam is 5% Also, there is asymmetric information between shareholders and managers in the market In the world, the research topic on the reaction of the stock market before dividend notice has received much attention from investors Researchers, however, the majority of studies are done in the US while studies in developing countries are still very few The majority of the research was conducted based on an event date methodology to check the market's reaction to news announcements In addition, a number of other studies, mainly in the US market, focus more on the research of factors that influence the market's reaction to news announcements This study will present a summary of typical studies, important results used in this study and some previous studies The first studies started in the United States and was followed by research in developing countries In Vietnamese stock market, insider trading transactions were introduced in the Security law 2006 However, until the Security law 2010 was issued, the sanctions for insider trading were stipulated in the Decree 85/2010/NDCP with “a fine of between VND 150,000,000 and 200,000,000 shall be imposed on an individual or institution” In addition, according to Vietnam criminal law the maximum sanction for this crime is years in prison Although, the sanctions for insider trading are less serious than those in developed market, there are only a few of cases detected and fined Even, individuals and institutions are willing to be fined to conduct insider trading transactions In Vietnam, the research on this topic was conducted by Trung and Dat (2015) and showed a significant positive effect of dividend notification on changes in stock prices and trading volumes The study was conducted on 233 enterprises listed on HOSE in the period of 20082014, the research results also showed the reaction of investors in Vietnam with dividend announcement as well as finding that there is significant insider trading before the official dividend announcement date This study was conducted with more updated data as well as conducting further research to better analyze, find out the impact of business-specific factors on the level of stock's reaction to dividend announcement through Regression analysis with the dependent variable as the cumulative abnormal profit representing the reaction of the general market The research has some implications and practical implications for many market participants For corporate executives, understanding the effect of dividend payment information on market reactions helps businesses better respond to market reactions when they make financial decisions For investors, understanding this effect helps stock investors make the right decisions to maximize profits In addition, this study is an empirical test of effective market theory, which has practical implications for market managers in formulating management improving explicitness of stock market policies that contribute to 1.2 Research questions and objectives The objective of this study is to test the reaction of the stock market to the announcement of corporate dividends as well as to analyze the effect of the specific factors of the business on market’s response to dividend announcements The findings of this research will provide recommendations for investors and regulatory agencies in the market To that end, this study proceeds to answer research questions as followings (1) How does the market respond to dividend notices? (2) Does the market respond effectively to dividend notices? (3) How firm specific variables influence the stock price reaction to dividend announcement? 1.3 Significance of the Study The research purpose of this study is to investigate the market response to the dividend notification represented by cumulative abnormal returnsand factors affecting the reaction of the market to dividend notice In order to avoid errors affecting research results due to the impact of tax changes, the scope of this study will be done on stocks listed on the Ho Chi Minh Stock Exchange (HOSE) and the period of 2015 - 2018 corresponding to the dividend announcements of the financial years of 2015, 2016, 2017, which is the latest period of stability in the tax rate applicable to stock trading and dividends to market investors To ensure uniformity in impact and avoid jamming notifications, this study has built a standard releases choose individually tailored, based on the research of Yilmaz (2006) and some specifics in Vietnam stock market This study was conducted with more updated data as well as further analysis to find out the impact of business-specific factors on the level of stock's reaction to dividend announcement Moreover, this study enriches the academic treasure with a new empirical evidence from Vietnam, an emerging economy 1.5 Scope of Study This research focuses on examining how dividend announcements impact on stock market through stock prices of listed companies on the Ho Chi Minh Stock Exchange The study covers a sample of 403 announcements from 358 companies that declared dividend over a period of three years from 2016 to 2018 many analysts, investors as well as more comprehensive and transparent company information Therefore the company's dividend announcement does not contain much information about the future, which will make the response weaker Recent studies by Dasilas et al (2011) and Kumar (2017) have shown similar results Therefore, this study expects a significant negative effect or in other words, smaller businesses will receive a more positive response from the market before the dividend announcement H50: There is no significant relationship between firm size and cumulative abnormal return 24 CHAPTER METHODOLODY In order to provide answers to the research questions, this study establishes research hypotheses to guide the analysis content. The study of market reaction to dividend notification is conducted through two research sections: (1) Studying the impact of dividend notification on stock price, (2) Study the effect of dividend notice on the volume of transactions with the classic event day research method The next step was to examine whether the stocks had a risk factor Different systems, different sizes and different levels of dividends receive different responses to the dividend announcement To test this relationship, this study conducted regression with cross data of fiscal years of 2016, 2017, 2018 with the dependent variables being the abnormalreturnscumulative in representative time-observing event time frames for the reaction of stock market to the dividend announcement, while the independent variables representing the characteristics of the stock are respectively changing the beta of the stock (DBETA), the dividend rate of the stock (DY) and business size (SIZE) 3.1 Conceptual Framework The research questions guiding this study are the followings: (1) How does the market respond to dividend announcements? (2) Does the market react effectively to dividend announcements? (3) How firm characteristics variables influence on the stock price reaction to dividend announcements? To clarify the research questions, the hypotheses will be investigated Overall, there is a list of null hypotheses will be tested in this study 25 The conceptual framework is proposed as the followings Figure 3.1 Research framework 3.2 Research Design 3.2.1 Analysis of Abnormal Return This study conducts research based on the basis of a classic event day research model This is the model used by most of the studies related to market reactions to events such as dividend notices, stock dividends, rights issues (Binder, 1969) First introduced by Fama et al (1969), after many years of developments and modifications, the method of event research retains its inherent basic and essential characteristics In order to conduct research on the reaction of market price before news announcement, this study will conduct a review of the reaction with different groups corresponding to dividend announcements We have increase dividend announcements, neutral dividend announcements and decrease dividend announcements The division into each small research group helps this study analyze more details and answer them more fully The first step in the method of studying event dates is to determine event dates Based on the research characteristics of this study, the date of the event mentioned here is the date of official announcement of dividends of the business Similar to the study of Gurgel et al 26 (2003), the event date was determined to be the closest to the time when public notice of management's events appeared on the mainstream media like news or the information center is well known Therefore, the determination of the dividend notification date chosen by this study is the official date of the written notice of the final registration date of the enterprise issued by the Ho Chi Minh Stock Exchange After determining the event date, in the second step, this study builds a research time frame for the event Based on recent studies conducted in countries with less effective markets such as Dasilas et al (2011), Kumar (2017) as well as research by Trung and Dat (2015) Previously, the results showed that the main reactions of the market all came within the 11day time frame around the date of dividend notification and normally from the 4th onwards, the reaction was no longer true clearly Therefore, in order to have the most effective observation time frame, this study uses the official observation time frame of 11 days around the official dividend notification date [- 5; + 5] To assess the impact of events on stock prices, similar to previous studies, this study uses the abnormal return With the assumption that the expected return value is determined based on the data collected from the previous period, it is the value of profit that the stock will achieve on day t if there are no new impact factors Under the new impact from the dividend notice, the actual profit value on day t will have changes that increase or decrease compared to its forecast value At that time, the abnormal profit, the concept is used to indicate the difference between the actual return of the stock and the profit which is expected to receive during the day, is used to measure the impact of dividend notification on stock prices in the market The abnormal return (hereinafter “AR”) is computed as the difference between the actual return and the security's normal return that would be expected in the absence of the event, according to the following equation: = – E () (3.1) Where: is the abnormal return of share i on day t and E () is the expected return of share i on day t The return of stock i on day t is computed: = Where: denotes unadjusted closing price of stock i on announcement date (t0); is unadjusted closing price of stock i on the previous day (t-1) 27 The CAPM model introduced by Sharpe (1964) and Lininer (1965) was used to determine the expected return of a stock based on its covariance with a portfolio of market performance Meanwhile, the determination of expected returnsis based on Ross's business valuation model (1976) based on a linear combination of many different risk factors The method of adjusted average value of Brown and Warner (1980) proved to be simpler when using the average profit value in the previous time period of the stock as the expected profit value As a whole, though not the perfect method and there are still some problems about qualitative estimates, the CAPM valuation model is still the optimal method and is a popular choice in event date studies (Cable and Holland, 1999) Therefore, to ensure the accuracy of the research results as well as to provide effective data for regression analysis, similar to most of the same type studies, this study uses the CAPM model to estimate Expected return for stocks With the characteristics of changes in stock prices depending heavily on short-term trends in Vietnam market, similar to the time frame made previously by Trung and Dat (2015), this study used Regression with time frame in months before the date of dividend notice At that time, this study conducted Ordinary Least Squares (OLS) regression to determine the coefficient α and β are estimated by the OLS regression using 120 daily returns data prior to the event window [t-125, t-6]: E () = + × + (3.2) Where: , are Market Model parameters with stock i; Rm,t is the market return on the day calculated through the change of the VN Index; is random error terms for firm i at time t If dividend announcements have no impacts on stock prices the abnormal returns on the event day on and after the event day are equal to zero = – - × (3.3) The average abnormal returns of the t-day dividend group is denoted by AAR, and is determined by the formula: AA = (3 4) Where: N is the number of dividend notices in the group Then, this study uses the value of cumulative abnormal return (CAR) to represent all the abnormal returns that investors receive from stocks in any period of time 28 in event windows CAR[- 5; + 5], CAR[0; +5] At that time, the cumulative abnormal profit is determined by the formula: CA (;) = (3 5) For the purpose of selecting representative values similar to the previous AAR, this study determines the value The average abnormal return accrues to each time frame so that we can give the most general view of the total abnormal return earned by investors according to each observation time frame CAAR (;) = (3.6) 3.2.3 Analysis of firm characteristic variables For the main purpose, to get a better insight as to which firm specific variables influence the stock price reaction to dividend announcements, the research conducts cross-sectional regressions I specifically regress the CARs for different event windows CAR[- 5; + 5], CAR[0; +5] on the number of independent variables such as the firm size (SIZE), systematic risk (BETA), firm’s yearly dividend yield (DY) A number of recent studies have also been carried out with the transfer from patent data to similar cross-data, such as those of Kadioglu (2008), Dasilas et al (2011), Kumar (2017) At that time, the model influencing the firm's specific factors on the market reaction to dividend notification is presented in the formula (3.14) = = μ0 + μ1SIZEi + μ2BETAi + μ3 DYi+ (3.14) In which: + : Is an cumulative abnormal profit of stocks with observation frames respectively [- ; + 5], [0; + 5] + SIZE is the firm size measured by taking logarithm of the market capitalization + BETAi is the systematic risk estimated using data in the pre-event (estimation) period + DYi estimated as the ratio of dividend for the year over the price one day prior to dividend announcement Table 3.2 Describe the variables used in the regression model 29 Describe the variables used in the regression model Numb er Symbol Previous study Dependent variable CAR CAR[- 5; + 5], CAR[0; +5] Wansley (1991), Grullon (2002), Lee & Yan (2003), Dasilas&Leventis (2011) and Kumar (2017) Independent variables SIZE The firm size measured by taking Dasilas&Leventis logarithm of the market capitalization (2011) and Kumar (2013) BETA BETA is the systematic risk Dasilas&Leventis estimated using data in the pre- (2011) and Kumar event (estimation) period (2013) DY The ratio of dividend for the year Bajaj&Vijh (1990), over the price one day prior to Christensen (1995), dividend announcement Dasilas&Leventis (2011) and Kumar (2013) 3.2.4 Testing hypotheses The previous study helped determine the value of abnormal return of stocks, with the assumption of abnormal earnings value of stocks with standard distribution, similar to previous studies (Kadioglu, 2008; Dasilas, 2011; Kumar, 2017) The significance of the average abnormal returns (AAR) and the cumulative abnormal return (CAAR) for the event period was tested using t-statistics at 5% and 10% significance levels The main aim of these tests was to determine if the AARs and CAARs were significantly different from zero T-test of a sample average allows testing to see whether the sample average (µ) of a variable with a normal distribution ratio N (µ,) is statistically different from initial assumed or not The test is expressed as a statistical hypothesis: : µ≠ With µ selected as 0, and values are calculated by the formula 30 = With (3.10) = (3.11) = With (3.12) = (3.13) Where and are standard deviations for ARt, and CARt, on day t of dividend notices To test the effect of a number of firm specific factors of the business on cumulative abnormal return, this study conducts the conversion of subtables It represents the market reaction to dividend announcements in different time frames with selected independent variables being the characteristic elements of the stock Similar to other studies on the same topic, with the main purpose to test the direction of the impact instead of focusing on the level of edge effects, the regression method of factors is performed with cross-data In order to control some possible impacts, step by step, this study also implements pairs of dummy variables to test the strength of the model and overcome the limitations of cross-data to select the best fit model In addition, for each regression model, this study performed Breusch-Pagan tests, VIF tests, and Dubin-Watson tests to check for variance, multicollinearity and autocorrelation 31 Table 3.3 List of methods used for each hypothesis Hypotheses Method H10: There is no significant relationship between T-test, Simple Regression dividend announcements and abnormal return H1a0: There is no significant relationship between T-test, Simple Regression increase dividend announcements and abnormal return H1b0: There is no significant relationship between neutral T-test, Simple Regression dividend announcements and abnormal return H1c0: There is no significant relationship between T-test, Simple Regression decrease dividend announcements and abnormal return H20: There is no significant efficient reaction between T-test dividend announcements and Vietnam Stock Market H30: There is no significant relationship between Multiple Regression, VIF systemic risks and cumulative abnormal tests, and Dubin-Watson tests return H40: There is no significant relationship between Multiple Regression, VIF dividend yield and cumulative abnormal tests, and Dubin-Watson tests return H50: There is no significant relationship between Multiple Regression, VIF tests, and Dubin-Watson tests firm size and cumulative abnormal return 32 3.3 Sampling Design Based on the sample selection in the study of Yilmaz et al (2006) as well as the selection of common and necessary standards of the previous studies, this study conducts research on announce dividends of businesses listed on HOSE in the period of 2015 - 2018 meeting the following conditions: (1) Dividends are only paid in cash (2) Announcements must have data on prices and volume of stocks in the range from [-126; + 5] around the date of dividend payment (3) No activities of stock splitting, pooling, dividends by stock, or rights issuance take place within the range of [-126, + 5] around the day Dividend payment (4) Enterprises only pay cash dividends once a year, for those enterprises who pay dividends twice a year, the selected date is the date of the second dividend notice 3.4 Data collection Information on dividend rates and the official announcement date was obtained from the Website of FPT Securities Joint Stock Company www.fpts.com While historical price data will be collected from the www.website.cophieu68.vn and corporate financial information will be collected from www.vietstock.vn This study just uses only secondary data, then analyzed by Statistical Package for the Social Sciences (SPSS) version 23 Table 3.4 Total Dividend Announcements from 2016 to 2018 Increase Neutral Decrease Year dividend dividend dividend Total 2016 35 8 51 2017 62 55 43 160 2018 73 61 58 192 33 Total 170 124 109 34 403 Reference Akhigbe, A., Borde, S F., & Madura, J (1993) Dividend policy and signaling by insurance companies Journal of Risk and Insurance, 413-428 Asquith, P., & Mullins Jr, D W (1986) Signalling with dividends, stock repurchases, and equity issues Financial Management, 27-44 Bajaj, M., &Vijh, A M (1990) Dividend clienteles and the information content of dividend changes Journal of Financial Economics, 26(2), 193-219 Below, S D., & Johnson, K H (1996) An analysis of shareholder reaction to dividend announcements in bull and bear markets Journal of Financial and Strategic Decisions, 9(3), 15-26 Bernheim, B.D., &Wantz, A., (1995) “A tax-based test of dividend signaling hypothesis” Am Econ Rev 85, 532-551 Bhattacharya, S (1979) “Imperfect information, dividend policy, and "the bird in the hand" fallacy” Bell journal of economics, 10(1), 259-270 Binder, J., (1969) The event study methodology since 1969 Rev Quant Finance Account 11 (2), 111-137 Black, F., & Scholes, M (1974) The effects of dividend yield and dividend policy on common stock prices and returns Journal of financial economics, 1(1), 1-22 Brown, S J., & Warner, J B (1980) Measuring Securities Price Performance Journal of Finance Economics, 205-258 Cable, J., & Holland, K (1999) Regression vs non-regression models of normal returns: implications for event studies Economics Letters, 64(1), 81-85 Campbell, J., Lo, A., & Mackinlay, A C (1997) The Econometrics of Financial markets Princeton University Press Christensen, B & Prabhala, N.R., 1995 Expectation and the Cross-Section of Dividend Announcement Effects Working Paper New York Univ Dasilas, A., & Leventis, S (2011) Stock market reaction to dividend announcements: Evidence from the Greek stock market International Review of Economics & Finance, 20(2), 302-311 35 Fama, E F (1965) The Behavior of Stock Market Prices Journal of Business, Vol 38, January, pp 34–105 Fama, E.F., Jensen, L and Roll, R (1969) The adjustment of stock prices to new information International Economic Review, Vol 10, pp 1-21 DeAngelo, H., DeAngelo, L., & Skinner, D J (2000) Special dividends and the evolution of dividend signaling Journal of Financial Economics, 57(3), 309-354 Denis, D J., Denis, D K., & Sarin, A (1994) The information content of dividend changes: Cash flow signaling Overinvestment, and dividend clienteles Journal of Financial and Quantitative Analysis, 29(04), 567-587 Easterbrook, F H (1984) Two agency-cost explanations of dividends The American Economic Review, 74(4), 650-659 Eckbo, B.E & Verma, S (1994) Managerial share ownership, voting power and cash dividend policy Journal of Corporate Finance, 1, pp 33 62 Fama, E F., Fisher, L., Jensen, M C., & Roll, R (1969) The adjustment of stock prices to new information International economic review, 10(1), 1-21 Fuller, K P., & Goldstein, M A (2003) The impact of informed trading on dividend signalling: A theoretical and empirical examination Journal of Corporate Finance, 3, 385−407 Grullon, G., Michaely, R., & Swaminathan, B (2002) Are dividend changes a sign of firm maturity? 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Signaling theory Signaling theory is one of the most important theories used to explain the reaction of the market to the announcement of corporate dividends The foundation of the theory begins with the. .. analyzing the reaction of the market on many different stock groups, the study shows that the dividend rate of stocks is one of the important factors affecting the intensity of the correlation According... transmission is real or not 2.1.2 The theory of free cash flow The second theory used in the study to explain the relationship between the change of dividend notice and abnormal profit is the theory of