HUYNH Thi Ngoc Han Dr. MAI Huu Minh MAI Thuy Vy
HUYNH Thi Ngoc Han Dr. MAI Huu Minh MAI Thuy Vy Download : Viet Nam Foreign Ownership
Director of IFRC Vietnam
Master of Banking and Finance, Paris, France
IFRC Founder & CEO
Professor Paris Créteil University, France
IFRC Financial Analyst
Master of Finance, IESEG School of Management, Paris, France
 
     

While the relationship between foreign ownership and firm performance has been widely researched, the empirical evidence has provided mixed results over the world for the past few years. For the Vietnamese market, the research on the subject are still few and cover a short period.

After the official establishment of Ho Chi Minh Securities Trading Center (HOSE) on July 20th 2000 and Hanoi Securities Trading Center (HNX) in 2005, the Vietnamese market seems to be an attracting investment destination for foreign companies. Among the corporate governance, foreign ownership impact the economic performance of firms by providing more resources and skills to monitor the internal structure (Xiaming Liu, 2009). Phan Huu Viet (2009) mentions an U-shaped relationship between foreign ownership and firm performance measured by Tobin’s Q and ROA criteria. However after a certain point, firm performance tends to decrease according to the level of foreign ownership. This curvilinear relation was also shown in Ferris and Park study (2005) for the Japanese market. Since the Securities Law in Vietnam only allows foreign investors to retain up to 49% of shares in a non-financial field and 30% in financial firms, it is relevant to analyze the proportion of shares a foreign company can hold to optimize its performance.

This study examines the relationship between foreign ownership and firm performance based on stock market performance and fundamental ratios of about 600 companies listed on Ho chi Minh and Hanoi Stock Exchanges since 2009. By controlling different factors such as the market (exchange), the size (capitalization) and the sector, we will be able to provide a more fine-grained understanding of this growing emerging market. The next step will extend the study period to 2000.

This paper is structured as followed. First, we introduce the data description, the research method then we report empirical results to finally conclude this paper.

DATA

  • The ownership data are provided by STOXPLUS for all listed securities (Ho chi Minh and Hanoi stock exchanges) since December 2008.
  • Stock market and fundamental data are those of Intelligent Financial Research & Consulting (IFRC) of which history dates back to 2005. IFRC is going back in time to the creation of the stock exchange in Vietnam in 2000 shortly.

CONTROLLING FACTORS

The objective is to measure the firm performance depending on the market by using fundamentals such as the percentage of shares held by foreign investors and by comparing with other companies with similar criteria (market, size in terms of market capitalization, activity sector)

  • Market: Ho Chi Minh Stock Exchange (HOSE),  Hanoi Stock Exchange (HNX)
  • Size: Large, Medium, Small. Firms are ranked by market capitalization in a decreasing order. For example, Large Caps are those that accumulate a capitalization percentage of 80%, Mid-Caps are the ones between 80-95% and the remaining are Small Caps. Size groups are reviewed every year.
  • Sector: companies are classified into 10 sectors (Bank, Basic Material, Consumer Goods, Consumer Services,  Finance, Healthcare, Industrials, Oil & Gas, Technology, Utilities)

Concerning the Vietnam foreign ownership, we define 3 groups: Low, Medium and High.

Firms in the « Low » group are the non-foreign-owned firms. The remaining companies sorted into two quantiles; either they belong to the « Medium » group or « High » group.

ABNORMAL PERFORMANCE

To verify the foreign ownership effect in Vietnam stock market, we use abnormal performance.

For each month over the study period (2009 to June 2014), we calculate monthly returns of each company and controlling factor portfolio (market, size, sector and overall market).

Then, abnormal returns are calculated following each factor to measure the out (or under) performance to comparable companies. We define abnormal performances by analyzing the difference between the firm performance and the average group performance. If the abnormal performance is positive (negative), the company outperforms (underperforms) this group.

RESULTS

Difference between groups is tested by Student statistics. In the following tables, results are reported with different confidence interval (1-a) : * for a = 5% and ** for a = 1%.

Ownership distribution

The foreign ownership in Vietnam is distributed between 0 and 20% for 83,89% of listed companies (552 companies), less than one-sixth of these firms have between 20% and 50% of foreign investors (217 companies) then none have more than 50% of foreign ownership since the Securities Law only allows up to 49% in non-financial firms and 30% in financial firms. 

Table 1: Foreign Ownership Distribution (June 2014)


Interval Nb % Cumulative %
0 26 3.95% 3.95%
0%-10% 433 65.81% 69.76%
10%-20% 93 14.13% 83.89%
20%-30% 45 6.84% 90.73%
30%-40% 19 2.89% 93.62%
40%-45% 10 1.52% 95.14%
45%-46% 2 0.30% 95.44%
46%-47% 2 0.30% 95.74%
47%-48% 3 0.46% 96.20%
48%-49% 25 3.80% 100.00%
49%-50% 0 0.00% 100.00%
50% 0 0.00% 100.00%
>50% 0 0.00% 100.00%

Source: IFRC Vietnam, www.ifrcresearch.com

Performance by market 

  • The results show significant relationship between foreign ownership and stock performance. Firms with a higher foreign ownership outperform in average at 2.93 % while the medium at  0.86 % and the non-foreign ones underperform at -13.81%

Table 2: Viet Nam Foreign Ownership Excedent Performance by market (2009 - 2014)


LOW MEDIUM HIGH LONG-SHORT STRATEGY
Market Nb Perf % Nb Perf % Nb Perf % Nb Perf %
HNX 3,926 -12.81 * 11,783 2.30 7,037 3.86 68 18.30 *
HSX 1,169 -11.54 * 5,942 -3.18 10,761 3.15 * 68 14.17 *
All 5,095 -12.85 * 17,725 0.57 17,798 3.40 * 68 17.44 *

Source: IFRC Vietnam, www.ifrcresearch.com

Nb : Number of observations

% Perf : Abnormal performance over the periode

**  p_value = 1%

*   p_value = 5%

Performance by size

  • We find an inverted U-shaped relationship between firms performance and the percentage of equity owned by foreigners for the Large Caps. In this case, the overall performance increases with the percentage of foreign ownership before reaching a turning point then decreases. 
  • The Mid caps and the Small caps follow a linear relationship from the Low Group to the High Group.

Table 3: Viet Nam Foreign Ownership Excedent Performance by size (2009 - 2014)


LOW MEDIUM HIGH LONG-SHORT STRATEGY
Size Nb Perf % Nb Perf % Nb Perf % Nb Perf %
LARGE CAPS 128 -8.08 244 0.54 2,813 0.34 57 20.73
MID CAPS 580 3.25 3,585 3.64 6,501 -2.24 68 -11.16
SMALL CAPS 4,387 -12.02 * 13,896 1.84 8,484 3.65 * 68 16.49 *
All 5,095 -12.85 * 17,725 0.57 17,798 3.40 * 68 17.44 *

Source: IFRC Vietnam, www.ifrcresearch.com

Nb : Number of observations

% Perf : Abnormal performance over the periode

**  p_value = 1%

*   p_value = 5%

Performance by sector 

  • While comparing firm performance according to the different sectors, we can only observe this inverted U-shaped relationship for the Oil&Gas Industry. By having the lowest performance in the Low group with -44,80%, the industry sector reaches the highest one in the Medium group at 70,76% then the lowest one in the High group at -3,30%. 
  • The long-short strategy defined as the difference in terms of performance between firms in the High group and firms in the Low group offers significant evidence that firms with a higher foreign ownership perform 18,72% better than the ones with a lower foreign ownership at a 95% confidence level.

Table 4: Viet Nam Foreign Ownership Excedent Performance by sector (2009 - 2014)


LOW MEDIUM HIGH LONG-SHORT STRATEGY
Sector Nb Perf % Nb Perf % Nb Perf % Nb Perf %
BASIC MATERIALS 578 -15.20 2,175 0.28 2,053 4.40 68 19.79
BANKS 39 -22.89 73 -1.95 369 3.15 37 45.26 *
CONSUMER GOODS 567 -17.45 1,630 -0.04 3,331 3.31 66 22.70
CONSUMER SERVICES 473 -4.73 1,337 -1.07 902 4.21 68 3.59
FINANCIALS 485 -3.49 2,233 -2.86 2,574 3.23 68 1.82
HEALTH CARE 70 -22.23 340 4.36 657 0.44 39 26.97
INDUSTRIALS 2,529 -11.79 * 8,531 2.30 6,229 1.97 68 14.54 *
OIL & GAS 4 -44.80 * 20 46.07 248 -2.15 3 112.98
TECHNOLOGY 194 -9.20 501 0.65 711 2.19 63 16.60
UTILITIES 156 -12.05 885 3.79 724 -1.79 67 19.83
All 5,095 -12.85 * 17,725 0.57 17,798 3.40 * 68 17.44 *

Source: IFRC Vietnam, www.ifrcresearch.com

Nb : Number of observations

% Perf : Abnormal performance over the periode

**  p_value = 1%

*   p_value = 5%

CONCLUSION 

This study has examined the effect of foreign ownership on firms performance in Vietnam between 2009 and 2014. The overall results indicate that foreign ownership improves firm financial performance in Vietnam up to a certain level, beyond which additional ownership isn’t allowed according to the Securities Law. These foreign-owned firms outperform the market because of an easier access to managerial know-how, external source of capital and transparency of information (Mariya Hake, 2008). According to Yla-Anttila, P., A. Jyrki, and N. Martti (2005), since the foreign-owned companies already have the technology, they don’t need to invest as much as the domestic so the rate of return is higher.  Further studies will be required to measure this effect. By using financial ratios (EBITDA, ROA) we will be able to initiate further investigation. Because of the data limitations, it will be valuable to broaden our range of data back to 2000 to get more accurate results. In future work, it would be of interest to strengthen our study to offer portfolio strategies to help foreign investors in their decision process. 

 

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