Luận văn thạc sĩ UEH evidence on market to book value and firm performance, a study of listed firms

MINISTRY OF EDUCATION AND TRAINING

UNIVERSITY OF ECONOMICS HOCHIMINH CITY

--- oOo ---

NGUYEN TUONG PHUONG

EVIDENCE ON MARKET-TO-BOOK VALUE

AND FIRM PERFORMANCE:

A STUDY OF LISTED FIRMS IN VIETNAM

MASTER THESIS

Ho Chi Minh City – 2011

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MINISTRY OF EDUCATION AND TRAINING

UNIVERSITY OF ECONOMICS HOCHIMINH CITY

--- oOo ---

NGUYEN TUONG PHUONG

EVIDENCE ON MARKET-TO-BOOK VALUE

AND FIRM PERFORMANCE:

A STUDY OF LISTED FIRMS IN VIETNAM

MAJOR: FINANCE & BANKING

MAJOR CODE: 60.31.12

MASTER THESIS

INSTRUCTOR : DR. TRUONG TAN THANH

Ho Chi Minh City – 2011

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i

ACKNOWLEDGEMENT

I would like to expess my sincere gratitude to my instructor, Dr. Truong Tan

Thanh for guiding me throughout this thesis.

My appreciation to all of my teachers at Faculty of banking and finance,

University of Econimics Hochiminh City for their teaching and guidance during

my MBA course.

I would like to dedicate my deepest gratitude to my parents and my uncle for

their support and encouragement.

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ii

ABSTRACT

This study tries to interprete the relationship between market to book value (a

proxy of growth opportunity) and firm performance based on capital structure

theory, tradeoff theory and costly external financing theory, and other studies

relative to this topic. The author uses cross-sectional data 2009 and 2010 of 70

listed companies in Vietnam to investigate the effect of market to book on

firm‟s performance. As the results of this study, price to book value is the

important determinant of firm performance. This finding supports the argument

of Xu et al (2005), Fairfield (1994), Block (1995), Frank et al (2005) and Myers

et al (1984). Firm leverage has significant and negative impact on firm‟s

performance, which is consistent with the results of Modigliani and Miller

(1958), Robichek and Myers (1966), Jensen and Meckling (1976), Frank et al

(2005). Firm size has negative and significant correlation with firm‟s

performance, which contrasts with Titan & Zeitun (2007). Beta has negative

influence to market to book ratio. This finding is consistent with Damodaran

(2002), Myers and Majluf (1984), Baker and Wurgler (2002), Harris and

Marston (1994). Firm performance in 2009 has positive influence to growth

opportunity (Pb) in 2010. This result favours Damodaran (2002), Block (1995).

Industry has influence to firm‟s performance.

Keywords: Market to book value, corporate performance, Vietnam, HOSE,

HNX.

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iii

TABLE OF CONTENTS

ACKNOWLEDGEMENT --------------------------------------------------------------------------------i

ABSTRACT -------------------------------------------------------------------------------------------------ii

TABLE OF CONTENTS----------------------------------------------------------------------------------iii

LIST OF FIGURES ----------------------------------------------------------------------------------------iv

LIST OF TABLES -----------------------------------------------------------------------------------------v

CHAPTER 1: INTRODUCTION -----------------------------------------------------------------------1

1.1 BACKGROUND ---------------------------------------------------------------------------------------1

1.2 RATIONALE -------------------------------------------------------------------------------------------2

1.3 RESEARCH PROBLEMS ----------------------------------------------------------------------------6

1.4 RESEARCH OBJECTIVE ----------------------------------------------------------------------------7

1.5 RESEARCH METHODOLOGY AND SCOPE----------------------------------------------------8

1.6 STRUCTURE OF THE STUDY ---------------------------------------------------------------------9

CHAPTER 2: LITERATURE REVIEW --------------------------------------------------------------10

2.1 INTRODUCTION--------------------------------------------------------------------------------------10

2.2 CASHFLOW INTO EMERGING MARKETS-----------------------------------------------------10

2.3 PRICE TO BOOK VALUE ---------------------------------------------------------------------------12

2.4 FIRM PERFORMANCE ------------------------------------------------------------------------------14

CHAPTER 3: RESEARCH METHOD ----------------------------------------------------------------17

3.1 INTRODUCTION---------------------------------------------------------------------------------------17

3.2 DATA -----------------------------------------------------------------------------------------------------17

3.3 RESEARCH METHOD --------------------------------------------------------------------------------17

3.4 RESEARCH SAMPLE ---------------------------------------------------------------------------------18

3.5 VARIABLES MEASUREMENT FOR MODEL ---------------------------------------------------19

3.5.1. Dependent Variables ---------------------------------------------------------------------------------19

3.5.2. Independent Variables -------------------------------------------------------------------------------20

3.6 HYPOTHESIS AND EMPIRICAL MODEL -------------------------------------------------------24

3.7 SUMMARY----------------------------------------------------------------------------------------------29

CHAPTER 4: EMPIRICAL RESULTS OF THE RESEARCH----------------------------------30

4.1 INTRODUCTION---------------------------------------------------------------------------------------30

4.2 CHARACTERISTICS OF RESEARCH SAMPLES-----------------------------------------------30

4.3 DESCRIPTIVE STATISTICS-------------------------------------------------------------------------31

4.4 QUANTILE ANALYSIS-------------------------------------------------------------------------------39

4.5 REGRESSION ANALYSIS ---------------------------------------------------------------------------43

4.5.1 Model 1: The firm performance model-------------------------------------------------------------43

4.5.1.1 ROE as Firm Performance proxy ----------------------------------------------------------------43

4.5.1.2 EB as Firm Performance proxy-------------------------------------------------------------------50

4.5.2 Model 2: The Market to Book model---------------------------------------------------------------56

CHAPTER 5: CONCLUSIONS, RECOMMENDATIONS AND LIMITATIONS -----------60

5.1 INTRODUCTION---------------------------------------------------------------------------------------60

5.2 CONCLUSIONS ----------------------------------------------------------------------------------------60

5.3 RECOMMENDATIONS-------------------------------------------------------------------------------62

5.4 LIMITATIONS ------------------------------------------------------------------------------------------62

REFERENCES

GLOSSARY

APPENDIX A

APPENDIX B

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iv

LIST OF FIGURES

Figure 1: Distribution of Sectors------------------------------------------------------------------------31

Figure 2: Distribution of Market to Book and Leverage ratios -----------------------------------38

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v

LIST OF TABLES

Table 1: Mid-cap property and casualty companies evaluation ----------------------------- 3

Table 2: Summary of Statistics of Market to Book of other Countries in 2010 --------- 11

Table 3: Summary of Statistics of Return on equity of other Countries in 2010 --------- 11

Table 4: Summary of Variables for model ------------------------------------------------------ 24

Table 5: Summary of Statistics and Correlation of the Variables for Year 2009--------- 31

Table 6: Summary of Statistics and Correlation of the Variables for Year 2010--------- 33

Table 7: Classification by ROE in 2009 --------------------------------------------------------- 39

Table 8: Classification ROE in 2010-------------------------------------------------------------- 40

Table 9: Classification by EB in 2009 ------------------------------------------------------------ 40

Table 10: Classification by EB in 2010 ----------------------------------------------------------- 40

Table 11: t-test for Two-Sample Assuming Unequal Variances----------------------------- 42

Table 12: Estimate results using ROE and LTDTA in 2009 --------------------------------- 43

Table 13: Estimate results using ROE and LTDTE in 2009---------------------------------- 44

Table 14: Estimate results using ROE and TDTE in 2009------------------------------------ 45

Table 15: Estimate results using ROE and LTDTA in 2010 --------------------------------- 45

Table 16: Estimate results using ROE and LTDTE in 2010---------------------------------- 46

Table 17: Estimate results using ROE and TDTE in 2010------------------------------------ 47

Table 18: Estimate results using EB and LTDTA in 2009 ------------------------------------ 50

Table 19: Estimate results using EB and LTDTE in 2009 ------------------------------------ 50

Table 20: Estimate results using EB and TDTE in 2009 -------------------------------------- 51

Table 21: Estimate results using EB and LTDTA in 2010 ------------------------------------ 52

Table 22: Estimate results using EB and LTDTE in 2010 ------------------------------------ 52

Table 23: Estimate results using EB and TDTE in 2010 -------------------------------------- 53

Table 24: Estimate results for market to book using ROE ---------------------------------- 56

Table 25: Estimate results for market to book using EB ------------------------------------- 57

Table 26: Estimate results using EB excluding two dummy variables --------------------- 58

Table 27: Summary of empirical results -------------------------------------------------------- 60

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Market to Book and Firm Performance

1

CHAPTER 1 : INTRODUCTION

1.1 BACKGROUND

The theory of the capital structure is important framework for studies of

the correlation between capital structure and firm performance. It suggests that

in the determined target ratio, firm„s performance has positive correlation with

debt financing ratio and reduce agency cost. In contrast, when the debt ratio

exceeds a certain level, firm‟s performance has negative correlation with

leverage ratio due to that fact that benefits from the increase in borrowing less

than the increase in agency cost. Tran (2008) tested the relationship between

capital structure and firm performance by using data sample of 50 non-financial

companies in Ho Chi Minh Stock Exchange. The results show that firm

performance has negative correlation with capital structure when debt to equity

ratio is more than 1.812; firm performance has positive correlation with capital

structure when debt to equity ratio is less than 1.812. As stated that the MM

theory1

is an important part in firm‟s financing policy. In addition, tradeoff

theory2

and costly external financing theory3

focus on a relation that price to

book ratio plays in making financing decisions. Therefore, the effect of price to

book on firm performance is the focus of this thesis.

Damodaran (2002) provides evidence that the most important determinant

of price to book value is return on equity, and investors should focus on the

mismatch between return on equity and price to book. Block (1995) argues that

there is a good linear between price to book value ratio and earning to book

value ratio (a proxy of profitability). Xu et al (2005) argue that growth

opportunity has strong relation to firm‟s performance, which is measured by

return on equity (ROE).

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