Factors affecting price to earnings ratios of listed companies on ho chi minh city stock market period 2008 2016

MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING UNIVERSITY HO CHI MINH CITY NGUYEN MINH NGUYET FACTORS AFFECTING PRICE-TO-EARNINGS RATIOS OF LISTED COMPANIES ON HO CHI MINH CITY STOCK MARKET: PERIOD 2008 - 2016 GRADUATION DISSERTATION MAJOR: FINANCE - BANKING CODE: 7340201 HO CHI MINH CITY, 2018 MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING UNIVERSITY HO CHI MINH CITY NGUYEN MINH NGUYET FACTORS AFFECTING PRICE-TO-EARNINGS RATIOS OF LISTED COMPANIES ON HO CHI MINH CITY STOCK MARKET: PERIOD 2008-2016 GRADUATION DISSERTATION MAJOR: FINANCE - BANKING CODE: 7340201 SUPERVISOR DR NGUYEN TRAN PHUC HO CHI MINH CITY, 2018 i ABSTRACT This dissertation studies the impact of influence factors on P/E ratios and to build regression models for estimating and forecasting P/E ratios It employs data of 123 listed companies on HOSE over the period 2008 -2016 Besides, the purpose of the study is to provide empirical model foundations for investigating whether portfolios consisting of low P/E ratio stocks provide better than average returns The empirical researches are divided into two parts Firstly, descriptive analysis, correlation analysis and regression process are used to examine the correlations Regression estimation and selection of estimation are built up the estimation model Finally, the author build up empirical model that investment in low P/E ratio stocks provides higher returns than that in high P/E ratio stocks by using the comparison between mean of overvalued stock return and undervalued ones The empirical results demonstrate that dividend payout ratios, growth rate, beta and return on equity have effect on P/E ratios and it is possible to invest in low P/E ratios to beat the market Moreover, the research effect will be better with more factors employed ii DECLARATION OF AUTHENTICITY I declare that this dissertation is my original work, gathered and utilized especially to fulfil the purposes and objectives of this study, and has not been previously submitted to any other university for a higher degree I have mentioned all people who were significant facilitators of the work Ho Chi Minh City, May, 2018 Nguyen Minh Nguyet iii ACKNOWLEDGEMENTS First of all, I want to send my gratitude and respect to Doctor Nguyen Tran Phuc for his sharing, understandings and considerate supports to give me useful recommendations and guidances during my study Finally, best regards to my lecturers, my friends, my classmates and my beloved BUH for their sharing and supports during my Bachelor program Ho Chi Minh City, May, 2018 iv TABLE OF CONTENTS ABSTRACT i ACKNOWLEDGEMENTS iii TABLE OF CONTENTS iv LIST OF ABBREVIATIONS vii LIST OF TABLES viii LIST OF FIGURES ix Chapter : INTRODUCTION 1.1 THE NECESSITY OF THE THESIS 1.2 RESEARCH OBJECTIVES 1.3 RESEARCH QUESTIONS 1.4 THE RESEARCH SUBJECT AND SCOPE OF THE STUDY 1.4.1 The research subject 1.4.2 Scope of the study .5 1.5 RESEARCH METHOD 1.6 RESEARCH CONTRIBUTION 1.6.1 The scientific contribution .6 1.6.2 The practical contribution .6 1.7 RESEARCH STRUCTURE Chapter : LITERATURE REVIEWS 2.1 Introduction 2.2 Theoretical background .8 2.2.1 The concept of P/E ratio 2.2.2 Use of P/E ratio for stock selection 2.2.3 Factors affecting P/E ratios 10 2.3 Previous empirical studies 15 2.3.1 Previous empirical studies in the international context 15 2.3.2 Previous empirical studies in the Vietnamese context 22 2.4 The position of this dissertation 25 v 2.5 Chapter conclusion .26 Chapter : RESEARCH METHOD AND DATA .27 3.1 Introduction 27 3.2 Estimation model 27 3.3 Measurement of variables and hypothesis 28 3.3.1 Measurement of variables 28 3.3.2 Hypothesis .30 3.4 Source of data .33 3.5 Steps of data analysis and estimation 33 3.5.1 Descriptive statistics .33 3.5.2 Multicollinearity Test .33 3.5.3 Residual Diagnostics .34 3.5.4 Selection of estimation method 34 3.5.5 Test of the obtained empirical model 35 3.6 Chapter conclusion .35 Chapter EMPIRICAL RESULTS AND DISCUSSIONS 36 4.1 Introduction 36 4.2 Descriptive statistics .36 4.3 Test of multicollinearity .42 4.4 Residual Diagnostics 42 4.5 Selection of estimation method 43 4.5.1 Pooled OLS .43 4.5.2 Random Effect Model (REM) .44 4.5.3 Fixed Effect Model (FEM) .45 4.5.4 Redundant Fixed Effect-Likelihood Ratio 46 4.5.5 Correlated Random Effects Hausman Test 47 4.6 Test of the obtained empirical model 51 4.7 Chapter conclusion .52 Chapter : CONCLUSIONS AND RECOMMENDATIONS 53 5.1 Conclusion .53 5.2 Recommendations 54 5.3 Limitations of this dissertation and new approaches in the future 55 vi 5.3.1 Limitations 55 5.3.2 Future studies 55 REFERENCE 57 APPENDIX 60 APPENDIX 1: The descriptive statistics for all variables .60 APPENDIX 2: The covariance of variables 60 APPENDIX 3: Breusch-Godfrey Serial Correlation LM Test .60 APPENDIX 4: Heteroskedasticity Test: White's result for empirical model61 APPENDIX 5: Pooled OLS's result for empirical model 61 APPENDIX 6: Random Effect Mode's result for empirical model 62 APPENDIX 7: Fixed Effect Mode's result for empirical model .63 APPENDIX 8: Fixed Effect-Likelihood Test' result for empirical model .63 APPENDIX 9: Hausman Test's result for empirical model 63 APPENDIX 10: Data for estimating P/E from the empirical model 65 APPENDIX 10: Data for estimating mean of ‘higher than normal’ P/E ratio stocks and ‘lower than normal’ 66 vii LIST OF ABBREVIATIONS CAPM Capital asset pricing model EPS Earnings per share FEM Fixed effect model g Expected growth rate GDP Gross domestic product HOSE Ho Chi Minh stock exchange NYSE New York Stock Exchange OLS Ordinary Least squares P/E Price-to-earnings POLS Pooled OLS R Required rate of return REM Random effect model ROE Return on equity S&P 500 The Standard & Poor‟s 500 market index viii LIST OF TABLES Figure 3.1 : Factors affecting P/E raios………………………….……………………30 Figure 4.1: The value of average Dividend Payout Ratio and P/E ratio on 2008 2016 period.……………………………………………………………………………… 37 Figure 4.2: The value of average Growth Rate and P/E ratio on 2008 -2016 period……………………………………………………………………………………… 38 Figure 4.3: The value of average ROE and P/E ratio on 2008 -2016 period ……………………………………………………………………………………………… 39 Figure 4.4: The value of average Dividend Payout Ratio and P/E ratio on 2008 2016 period………………………………………………………………………………….40 57 REFERENCE Afza, T., Tahir, S., 2012 Determinants of Price-Earnings Ratio: The Case of Chemical Sector of Pakistan International Journal of Academic Research in Business and Social Sciences, Vol 2(No.8), pp 331 - 343 Basu, S., 1977 Investment Performance Of Common Stocks In Relation To Their Price-Earnings Ratios: A Test Of The Efficient Market Hypothesis The Journal Of Finance, Vol Xxxii(No 3), p 663 – 682 Bhadu, Kumar, S and Warne, D P, 2009 Parametric Determinants of PriceEarnings Ratio in Indian Capital Markets The IUP Journal of Applied Finance, Vol 15(No 9), pp 63-82 Bodie, Z., Marcus, A., Kane, A., 2014 Investments Global Edition New York: MC Graw – Hill Education Gill, S., 2003 Price-Earnings Ratio Revisited Finance India, Vol XVII(No 3), pp 937-951 Gordon, M., Shapiro, E.,, 1956 Capital Equipment Analysis: The Required Capital Equipment Analysis: The Required, Volume Vol 3, pp 102-112 Gordon, M., 1959 Dividends, Earnings, and Stock Prices The Review of Economics and Statistics, Vol 41(No 2), pp 99-105 Gottwald, R., 2012 The Use of the P/E Ratio to Stock Valuation GRANT Journal, Issue 1805-0638 (online), pp 21-24 http://www.grantjournal.com/issue/0102/PDF/0102gottwald.pdf Graham, B., 1934 Security Analysis 1st ed New York: The McGraw-Hill Companies Hong Thai, Nguyen., Thanh Den, Pham., 2017 Factors affecting P/E ratios on HOSE Financial Journal online, Volume vol http://tapchitaichinh.vn/kinh-te-vi-mo/yeu-to-tac-dong-den-chi-so-p-e-cua-caccong-ty-niem-yet-tren-thi-truong-chung-khoan-113451.html 58 Kane, A., Marcus, A., & Noh, J., 1996) The P/E Multiple and Market Volatility Financial Analysts Journal, Vol.52(No.4), pp 16-24 Keown, A.J., Pinkerton, J.M., Chen, S.N., 1987 Portfolio Selection Based Upon P/E Ratios: Diversification, Risk Decomposition and Implication Journal of Business Finance and Accounting, Volume vol 14, pp 187-198 Kumar, S., Warne, D.P.,, 2009 Parametric Determinants of Price-Earnings The ICFAI Journal of Applied Finance, Vol.15(No.9), pp 63-82 Loc, Truong Dong, 2014 Factors affecting stock price changes: Evidence from the Ho Chi Minh City Stock Exchange Scientific Journal of Can Tho University, pp 73-78 Loughlin, J., 1996 Determinants of the Price-earnings Multiple for the Doctoral dissertation, St Louis University Markowitz, H., 1952 Portfolio Selection The Journal of Finance, Vol 7(No 1), pp 77-91 Muhammad, A., 2010 Factors Influencing the Price-earning Multiples Interdisciplinary Journal of Contemporary Research In , Vol.2(No.5), pp 105-139 Nicholson, F., 1968 Price Ratios in Relation to Investment Results Financial Analysts Journal, Issue January-February 1968, pp 105-109 Penman, S H., 1996 The Articulation of Price–Earnings Ratios Journal of Accounting Research, vol 34(no 2), pp 235-259 Premkanth, P., 2013 Determinant of price earning multiple in Sir Lankan listed companies European Journal of Business and Innovation Research , Vol.1(No 2), pp 44-56 Reilly F, Griggs F, Wong W , 1983 Determinants of the aggregate stock market earnings multiple Journal of Portfolio Management, Volume 1, p 36–45 Reilly, F.K., Griggs, F.T., Wong, W.,, 1983 Determinants of the aggregate Journal of Portfolio Management, Vol.1(No.1), pp 36-45 Shamsuddin, A., Hiller, A J.,, 2004 Fundamental determinants of the Australian price-earnings multiple Pacific-Basin Finance Journal, Vol.12(No.5), pp 565-576 59 Tri, H Q., 2013 Các yếu tố định đến hệ số p/e cơng ty phi tài niêm yết sở giao dịch chứng khốn thành phố Hồ Chí Minh Master thesis of University of Economic Watsham, T J., 1993 International Portfolio Management: A Modern Approach London: Longman Group UK Ltd White, C B., 2000 What P/E will the U.S Stock Market Support? Financial Analysts Journal, Vol.56(No.6), pp 30-38 Vu Phuc Thinh, 2008, "Các yếu tố tác động tới hệ số P/E HOSE", Master Thesis of Da Nang University 60 APPENDIX APPENDIX 1: The descriptive statistics for all variables APPENDIX 2: The covariance of variables APPENDIX 3: Breusch-Godfrey Serial Correlation LM Test 61 APPENDIX 4: Heteroskedasticity Test: White's result for empirical model APPENDIX 5: Pooled OLS's result for empirical model 62 APPENDIX 6: Random Effect Mode's result for empirical model 63 APPENDIX 7: Fixed Effect Mode's result for empirical model APPENDIX 8: Fixed Effect-Likelihood Test' result for empirical model APPENDIX 9: Hausman Test's result for empirical model 64 65 APPENDIX 10: Data for estimating P/E from the empirical model No Stock ABT ACL 10 19 28 29 32 34 35 37 42 45 55 59 63 69 71 76 77 82 92 93 BBC COM DRC GMC GMD HBC HDG HPG HTI KHA L10 NNC PAC PGC PVD RDP SC5 SCD SJD TBC TCL Year Payout 2016 2016 1.159 1.091 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016 2016 0.951 0.63 10.008 1.223 0.675 0.686 0.836 7.306 0.907 0.79 0.818 1.193 1.236 0.598 54.56 0.711 11.217 0.859 0.904 0.528 0.596 Growth rate 36.433036 26.366675 36.364994 10.540405 9.1553341 29.136503 4.2154187 48.962244 21.389771 17.25174 98.600359 211.5639 28.743059 2462.2504 22.320406 4.6243569 4.3264651 11.253119 75.343717 33.718633 32.526432 42.210468 1.4111957 ROE 10.29 6.67 15.95 7.68 2.08 1.58 14.04 35.21 18.72 4.09 7.11 1.71 0.83 4.14 14.83 13.78 9.74 11.25 10.79 9.97 13.14 16.1 Beta:YP/E P/E from the market empirical model 0.45 9.65 14.73424732 undervalued 0.09 7.55 12.63329198 undervalued 0.58 0.44 0.81 0.33 0.77 1.06 0.53 1.19 0.78 1.03 0.29 0.71 0.98 0.57 1.42 0.49 0.41 0.39 0.49 0.31 0.53 15.66 7.56 9.32 5.41 13.27 8.51 13.35 6.97 6.72 5.62 4.49 7.04 14.27 8.4 54.03 7.47 10.91 10.5 9.56 11.49 9.18 16.43912021 9.783644969 26.99434736 6.541575611 14.15979549 35.52715304 21.35912154 19.8693644 11.21473828 8.162414404 4.920543169 96.84533895 15.89765503 14.8783512 150.1542792 10.05689042 44.28309253 14.68791441 13.34997797 16.9589873 17.33171424 undervalued undervalued undervalued undervalued undervalued undervalued undervalued undervalued undervalued undervalued undervalued undervalued undervalued undervalued undervalued undervalued undervalued undervalued undervalued undervalued undervalued 66 96 98 105 107 109 117 118 121 123 TCT TDH TMS TNC TRA VNM VNS VSH VTO 2016 2016 2016 2016 2016 2016 2016 2016 2016 1.172 6.479 0.603 0.902 1.151 1.338 0.792 14.126 0.85 13.656996 73.500655 229.78866 30.335119 106.93051 9.0753209 64.898749 17.520873 7.7065301 11.14 3.13 10.79 12.97 22.67 42.18 8.22 7.35 6.61 0.65 0.72 0.69 0.47 0.75 0.89 0.82 0.44 0.88 10.48 5.8 10.46 12.64 19.22 21.36 7.7 13.55 6.41 13.61280886 21.52294924 19.49970546 16.41074939 28.06705375 43.83133687 10.5468537 45.8104223 6.608191614 undervalued undervalued undervalued undervalued undervalued undervalued undervalued undervalued undervalued APPENDIX 10: Data for estimating mean of ‘higher than normal’ P/E ratio stocks and ‘lower than normal’ overvalue d AGF 14.20 7.18 -0.494366 overvalued ANV 7.90 5.55 BBC 56.00 85.30 -0.297468 overvalued 0.523214 overvalued BMC 16.60 15.20 BMP 128.00 171.00 CII 22.80 28.15 CLC COM D2D 44.60 53.00 32.50 53.00 48.00 22.50 -0.084337 0.335937 0.234649 0.188340 -0.09434 -0.307692 undervalue d ABT 48.50 44.00 ACL 9.60 10.00 DRC 43.50 39.00 overvalued HBC 19.00 36.40 overvalued HDG 28.50 23.85 overvalued HPG 28.80 43.15 overvalued overvalued overvalued HTI KHA NNC 14.40 17.90 57.00 72.90 -0.093 undervalued 0.041 undervalued -0.103 undervalued 0.915 undervalued -0.163 undervalued 0.498 undervalued 0.243 undervalued undervalued 0.278 undervalued 67 10 DHA 20.40 29.60 11 DHG 12 DIC 65.50 6.60 98.00 5.24 13 DMC 41.20 47.50 14 DPM 28.40 22.35 15 DPR 33.50 37.00 16 DQC 56.00 62.00 17 DSN 80.00 51.80 18 DVP 63.50 72.00 19 ELC 20 FDC 22.50 18.80 26.50 28.20 21 FMC 25.00 22 FPT 0.450980 0.496183 -0.206061 0.152912 overvalued 10 PGC 10.80 36.20 overvalued overvalued 11 PVD 12 RDP 26.30 29.60 29.40 36.20 overvalued 13 SC5 26.90 27.70 -0.213028 overvalued 0.104477 overvalued 0.107142 overvalued 14 SCD 45.90 47.50 15 SJD 25.90 25.50 16 TBC 26.00 27.00 overvalued 17 TCL 30.20 31.70 overvalued 18 TCT 50.20 58.60 overvalued overvalued 19 TDH 20 TMS 13.40 93.00 12.30 82.00 19.20 -0.232 overvalued 21 TNC 9.60 47.80 41.00 -0.142259 overvalued 22 TRA 23 GDT 37.70 52.90 23 VNM 24 GIL 34.50 45.00 0.403183 overvalued 0.304347 overvalued 90.00 126.0 10.50 114.0 127.0 24 VNS 30.00 33.20 25 GMC 26 GMD 37.00 43.00 25.20 27.00 -0.318919 overvalued -0.372093 overvalued 25 VSH 16.00 18.50 -0.3525 0.133858 0.177777 0.5 2.351 0.117 0.223 0.029 0.034 undervalued undervalued undervalued undervalued undervalued -0.015 0.038 0.049 0.167 undervalued -0.082 -0.118 0.093 0.266 0.007 0.106 0.156 MEAN undervalued undervalued undervalued undervalued undervalued undervalued undervalued undervalued undervalued undervalued 0.071709437 68 27 28 29 30 GTA HAI HDC HRC 16.50 5.10 13.80 39.80 13.20 4.20 10.80 28.70 31 HTV 14.60 16.00 32 IJC 7.10 7.80 33 IMP 37.00 55.90 34 KDC 35 KHP 23.50 11.40 36.35 9.89 36 KSB 37 L10 37.50 16.00 65.30 14.00 38 39 40 41 42 43 44 45 46 47 48 LBM LGC LHG LIX LM8 LSS MCP NAV NBB NSC NTL 23.00 22.50 18.40 58.50 25.90 9.40 10.00 9.90 20.90 94.50 12.40 34.80 24.30 15.30 47.90 22.90 11.75 12.70 6.20 16.00 81.20 9.40 49 OPC 35.00 38.90 -0.2 -0.176471 -0.217391 -0.278894 0.095890 0.098591 0.510810 0.546808 -0.132456 0.741333 -0.125 0.513043 0.08 -0.168478 -0.181197 -0.11583 0.25 0.27 -0.373737 -0.23445 -0.140741 -0.241935 0.111428 overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued 69 50 PAC 51 PAN 32.90 32.80 32.90 42.80 52 PDN 53 PET 38.70 13.20 58.40 10.30 54 PGD 55 PHR 56 PJT 36.20 16.30 10.00 39.20 13.54 12.90 57 PNJ 58 PPC 43.00 18.30 66.50 15.70 59 RAL 60 REE 61 SAV 53.00 25.10 11.60 78.60 19.60 7.90 62 SBA 63 SBT 9.60 25.00 11.35 24.50 64 65 66 67 68 69 70 SFC SFI SHI SHP SRC SRF SSC 22.00 31.90 11.20 19.00 33.60 14.40 57.00 28.00 28.80 8.35 17.90 17.40 15.30 39.10 71 ST8 72 STG 21.00 17.50 28.00 24.90 0.304878 0.509043 -0.219697 0.082872 -0.169325 0.29 0.546511 -0.142077 0.483018 -0.219124 -0.318966 0.182291 -0.02 0.272727 -0.097179 -0.254464 -0.057895 -0.482143 0.0625 -0.314035 0.333333 0.422857 overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued 70 73 SVC 74 SVI 43.80 33.80 48.00 44.50 75 SZL 20.50 33.80 76 77 78 79 TAC TCM TCO TDC 38.50 30.40 11.20 6.70 57.30 14.50 8.70 5.90 80 TDW 23.90 28.00 81 TIE 82 TIX 10.60 25.00 10.90 34.00 83 TLG 85.00 101.00 84 TLH 85 TMP 4.10 28.20 4.20 24.00 86 TNA 37.70 57.50 87 TPC 88 TRC 89 TS4 6.20 20.00 8.10 7.60 26.75 4.80 90 UIC 20.70 29.00 91 VFG 58.00 76.00 0.095890 0.316568 0.648780 0.488311 -0.523026 -0.223214 -0.119403 0.171548 0.028301 0.36 0.188235 0.024390 -0.148936 0.525198 0.225806 0.3375 -0.407407 0.400966 0.310344 overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued overvalued 71 92 93 94 95 96 VHC VIP VNL VPK VSC 27.50 9.30 29.70 19.30 76.50 97 VTB 12.20 98 VTO 6.80 0.076363 -0.268817 -0.158249 -0.170984 -0.267974 0.049180 12.80 0.173529 7.98 MEAN 29.60 6.80 25.00 16.00 56.00 overvalued overvalued overvalued overvalued overvalued overvalued overvalued 0.0558402 ... ? ?Factors affecting price- to- earnings ratios of listed companies on Ho Chi Minh City Stock Market: Period 2008- 2016? ?? The author expects that the obtained empirical model of factors affecting price- toearning...MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM BANKING UNIVERSITY HO CHI MINH CITY NGUYEN MINH NGUYET FACTORS AFFECTING PRICE- TO- EARNINGS RATIOS OF LISTED COMPANIES ON HO CHI MINH CITY STOCK. .. SCOPE OF THE STUDY 1.4.1 The research subject The subject of this dissertation is to examine the factors affecting price- toearnings ratios of listed companies on Ho Chi Minh City Market for the period