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1st National and International Graduate Conference

March 27, 2015, KU Home, Bangkok, THAILAND

A Study of Factors Affecting Dividend Policy Formation


of Business Companies Listed in Vietnam Stock Markets
Viet Anh Cao * and Dr.Sirion Chaipoopirutana **

Abstract
The objective of this research is to investigate the factors affecting dividend policy formation of
business companies listed in Vietnam stock markets-Ho Chi Minh Stock Exchange (HOSE) and Hanoi Stock
Exchange (HNX) using survey to collect managers opinion. The data is collected from 180 respondents
who are at the leadership level such as CEOs, CFOs, directors of finance, controllers and board of
directors, etc of those 60 blue-chip firms in which 30 firms in VN30 of HOSE and 30 firms listed in HNX30
of HNX using a self-administered survey. Pearson correlation coefficient was applied for the data analysis.
The results indicate that profitability, stability of earning, cash flow, firm size and background and
investment opportunities are factors affecting dividend policy formation of business companies listed in
Vietnam stock markets. However, tax system was proved that do not affect the dividend policy formation
of listed firms. Based on these findings, the researcher also provides some recommendation.
Keyword: Dividend Policy, Profitability, Cash Flow, Investment Opportunities, Stability of Earnings, Vietnam

Introduction
In corporate finance, there are three basic types of decisions: investment decisions, financial decisions,
and the decision to pay dividends. All three types must be consistent with the firms objectives to
maximize the enterprise value. Dividend policy is defined as the policy that decides the distribution of
retained earnings for reinvesting in the company and dividend payments to shareholders (Damodaran,
2001). In simple terms, a company dividend policy consist two issues. Firstly, it imposes the optimal
dividend policy of the firm-how the profit after tax of the company is distributed? Secondly, when paying
dividend, how much is retained to reinvest and how much is used to pay dividends to shareholders. Many
researchers have provided theoretical and empirical evidence on different aspects of dividend policy, but
*

Student, Graduate School of Business, Assumption University; E-mail: caoanh19690@gmail.com


Assistant Professor, Assumption University; Email: sirion@gmail.com

**

1st National and International Graduate Conference


March 27, 2015, KU Home, Bangkok, THAILAND
a lot of issues are still unresolved. As a result, dividend policy is still a controversial issue that concerns
management board, as Black (1976) mentioned that the identification of factors that affecting the
corporate dividend policy is like a puzzle with pieces that do not fit together.
The reason for choosing Vietnam stock markets is there are not many studies about dividend
policy and its determinants. Listed companies have not had a clear view about the definition and practice
of dividend policy and not fully aware of the importance and seriousness of the impact of dividend policy
on corporate value. The dividend payment of listed companies is decided with spontaneity, and do not
have long-term strategic. The management board of listed firms in Vietnam stock market does not have
enough understanding about the factors affecting dividend policy and the impact of dividend policy on
their firm operation. Therefore, it is difficult for investors to decide their investing portfolio as they do not
know what is the important factors affecting dividend policy of Vietnam listed firms.
The researcher applied 6 hypotheses and 6 variables to investigate the factors affecting dividend
policy formation of business companies listed in Vietnam stock markets. The variables applied in this
study are profitability, stability of earning, cash flow, tax system, firm size and background and investment
opportunities.

Literature Review
Profitability
Pruitt and Gitman (1991) reported that, current and the previous years profits are important
factors in influencing dividend payments. Baker et al. (1985) also proved that a major determinant of
dividend payment was anticipated of future earnings. Additionally, there are many empirical literatures
claimed that profitability has a positive relationship with dividend policy (Pourheydari, 2009; Napompech,
2012) as firms with higher profitability level is located in a better position to pay dividends. Naceur et al.
(2006) insisted that profitability has a positive relationship with dividend payment of Tunisian firms.
Moreover, Baker and Powell (2009) also found out that profitability has impact on dividend policy. AlMalkawi (2007) proved that profitability of the firm is the vital determinant factors that play as the
significant role in corporate dividend policy in Jordan.
Stability of earnings
Lintner (1956) studied about behavioral model of dividends, and proved that the stability of
earnings affects firm dividend policy. In addition, Pruitt and Gitman (1991) suggested that firms with
volatile earnings are less capable of maintaining a high level of dividend, and therefore, those firms who
try to avoid committing to have a high level of dividends. Additionally, Baker et al. (1985) also proved that
the expected level of future earnings is one of the main determinants of dividend policy. Similarly, Higgins
(1972) pointed out that earnings affected dividend policy.
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Cash flow
Amidu and Abor (2006) imposed that cash flow is the significant determinants in deciding
dividend policy of Ghana firms. Pourheydari (2009) proved that one of the most important determinants
of a firms dividend policy is cash flow. Another research of Alli et al. (1993) and Brigham et al. (1999)
disclosed that the availability of cash flow plays an important role in corporate payout. It reflected the
ability to pay dividends of the corporation. Compared to earnings, decisions of dividend payment depend
much more on cash flow position of a firm. Baker et al. (2007) concluded that the higher the cash
reserves of the firms, the more likely the firm pays dividends.
Tax system
The theory of Miller and Modigliani (1961) and another study of Baker et al. (2007) indicated that
the differences in tax rates between capital gains and dividends create the preference for certain payout
policies among different class of investors. As a result, different firms with different payout policy attract
different group of investors (Masulis and Trueman, 1988). Furthermore, in terms of classification of
investors, investors categorize their investment portfolio based on their preferences over time. For
example, investors who do not need cash and pay high tax tend to invest in companies that pay low or
even no dividend. On the other hand, investors who want to receive cash and pay low tax will invest in
high dividend payment firm (Naser et al, 2012).
Firm size and background
Baker and Powell (2009) insisted in their survey that firm size and background is an important
factor affect dividend policy of a firm. Denis and Osobov (2008) who conducted the study from 6
developed countries: the US, Canada, the UK, Japan, France and Germany from 1998 to 2002 showed
that firm size and background is positively related to dividend policy as bigger firm tend to give higher
dividend than smaller firms. Mitton (2004) also had the same conclusion in his research that firm size and
background has positive relationship with dividend policy. Furthermore, various studies of Kowalewski et
al. (2007) in a transition economic country like Poland, Renneboog and Szilagyi (2008) in Belgium, Gugler
(2003) and Gugler and Yurtoglu (2003) on Austrian and Germany firms also supported for the conclusions
that there is a positive impact between firm size and background and dividend policy.
Investment opportunities
Fama and French (2001) who studied about the reason of reduction in dividend policy of listed
companies in New York Stock Exchange came to the conclusions that investment opportunities is one of
the main determinants of dividend policy, as if the firms had lower investment opportunities, they would
paid low dividend. Based on the research of Pandey (2001) on similar topic conducted in Malaysia with
248 listed firms in 1993 2000 periods, the research concluded that investment opportunities affect
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1st National and International Graduate Conference


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dividend policy as firms with profitable opportunities pay fewer dividends. Similarly, Beabczuk (2004) also
suggested that larger and more profitable firms without potential investment opportunities would pay
more dividends through the research in Argentina about dividend policy. Kowalewski and Oleksandr (2007)
also had the same conclusion that larger firms that do not have good investment opportunities pay more
dividends in their study about dividend policy and corporate governance in Poland.

Research Framework and Methodology


Research Framework
Based on previous empirical researches provided evidence, in the conceptual framework,
dividend policy, the dependent variable, is affected by six independent variables: profitability, stability of
earning, cash flow, tax system, firm size and background and investment opportunities.. The framework is
illustrated in Fig.1. There are 6 hypotheses formulated based on the framework and they are shown as
follows:
H1: There is a statistical significant relationship between profitability and dividend policy.
H2: There is a statistical significant relationship between stability of earnings and dividend policy.
H3: There is a statistical significant relationship between cash flow and dividend policy.
H4: There is a statistical significant relationship between tax system and dividend policy.
H5: There is a statistical significant relationship between firm size and background and dividend
policy.
H6: There is a statistical significant relationship between investment opportunity and dividend
policy.

Figure 1 Factors affecting dividend policy formation of business companies


listed in Vietnam stock markets

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Research Methodology
The purpose of this research is to investigate the factors affecting dividend policy formation of
business companies listed in Vietnam stock markets. The primary data collected from 180 respondents of
60 listed business companies in HNX30 Hanoi Stock Exchange and VN30 Ho Chi Minh Stock Exchange
who are at management level of the researched companies to get information about their opinions on
factors affecting dividend policy formation. The questionnaires consisted of three sections that represent
six independent variables, dependent variable and demographic factors. The researcher applied judgment
and non-probability sampling method.
Non-probability sampling
Non-probability sampling is a sampling technique that the sample units are chosen base on the
basic of personal judgment or convenience (Zikmund, 1997). So, non-probability sampling is used in this
research to find sampling unit since the respondents of this research have been clarified, which is firms
listed in VN 30 and HNX 30 of HOSE and HNX which had paid a cash dividends at least one time since Oct
2011 to Oct 2014.
Judgment Sampling
Judgment sampling is applied based on the firms listed in VN30 and HNX30, had paid a cash
dividend at least one time since Oct 2011 to Oct 2014. Additionally, the leadership level of 60 listed firms
such as CEOs, CFOs, directors of finance, controllers and board of directors, etc were asked in order to
collect their different opinions influencing dividend policy in their firms, so that the study can have
various opinions in different perspectives based on the position of the respondents.

Findings
The hypotheses testing, is supported by the conceptual framework. There are total six
hypotheses which were tested in this research. Based on the research objectives, Pearson Correlation
Coefficient was used in this study. After analyzing the hypotheses, five the null hypotheses were rejected.
The results are summarized as follows:

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Null Hypothesis
Correlation Significant Test result
H1o: There is no statistical significant relationship between
0.950
.000
Reject Ho
profitability and dividend policy.
H2o: There is no statistical significant relationship between
0.617
.000
Reject Ho
stability of earnings and dividend policy.
H3o: There is no statistical significant relationship between
0.858
.000
Reject Ho
cash flow and dividend policy.
H4o: There is no statistical significant relationship between tax
-.032
.665
Failed to
system and dividend policy.
reject Ho
H5o: There is no statistical significant relationship between
0.468
.000
Rejected Ho
firm size and background of firm and dividend policy.
H6o: There is no statistical significant relationship between
0.421
.000
Rejected Ho
investment opportunity and dividend policy.

Summary and conclusion


Demographic factors
The highest of position in firm who participated in this research was controller (59 of 180 respondents
or 32.8%). For the involvement in firms dividend policy decision, the majority of respondents had active
involvement (171 of 180 respondents or 95% of all). For firm industry group, the major group is
manufacturing (69 of 180 respondents or 38.3% of all). For whether firm has an explicit target payout
ratio, the highest percentage in this research is yes (177 of 180 respondents or 98.3% of all). Moreover, 99
of 180 respondents or 55% of all indicated the most influential person in developing firm dividend policy
is CEO. For the frequencies of firm examination in their dividend policy, the majority is annually (163 of
180 respondents or 90.6% of all).
Hypotheses testing
In addition, hypothesis testing was conducted with the help of SPSS program to get the specific
number with reliable results. Five null hypotheses were rejected with the significant number is less than
0.01. Only one hypothesis regarding to tax system failed to reject. Based on the result of hypothesis 1,
hypothesis 2, hypothesis 3, hypothesis 5 and hypothesis 6, the researcher found that there is a
relationship between profitability, stability of earnings, cash flow, firm size and background and
investment opportunity and dividend policy, respectively. However, in hypotheses 4, the researcher
proved that there is no relationship between tax system and dividend policy.

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Recommendations
The researcher would like to recommend for finding more independent variables and expand the
research to the whole Vietnam stock markets in order to improve and to have more accurate result as
the survey research is conducted only on six independent variables and there might be more variables
that have greater value to conclude the final comment. Moreover, the response may be bias as the
whole market that consist many other listed companies.
Based on the result from hypothesis one, business companies listed in Vietnam stock markets
should focus on more profitability in the formation process of dividend policy. It is suggested that listed
firms should keep their profit increasing sufficiently through having appropriate long-term and short-term
strategy for the business to develop and improve with the actual situation of the domestic and foreign
economies.
Based on the result from hypothesis two, in order to keep stable dividend policy, listed
companies should maintain their earnings in a stable mood through having a stable PE ratio and having a
target given fraction of earnings. Furthermore, some recommendations to maintain stable PE ratio can be
increasing firm profit, reduce the total capital stock, especially reducing the non-floating stock (stateowned share and legal-person share).
Based on the result from hypothesis three, to keep the stable cash dividend payments, cash flow
of listed firms should be maintained significantly. The growth of cash flow, liquidity and stability of
operating net cash flow and free cash flow to equity should be controlled strictly.
Based on the result from hypothesis five, listed firms should consider increasing their reputation
in the market, their market capitalization and their background and history of firms to make shareholders
have more belief in investing in listed firms. Moreover, the listed firms also should have a careful
consideration about the dividend practice of their industry sector and dividend policy in comparative
companies to set their dividend policy so that it can have competitive advantages with other listed
companies in the same industry sector and in Vietnam stock markets.
Based on the result from hypothesis six, listed firms should consider carefully their decisions in
future investing opportunities to balance the liquidity and the desire to pay cash dividend to satisfy the
shareholders. The listed firms should base on actual situation of the firm such as current available
profitability investment opportunity, financing decisions, and available sources of capital, cost of capital as
well as preference to take risk of the shareholders to set the most effective and efficient dividend policy.
Moreover, to overcome the potential problems in dividends payment of listed companies in
recent times and contribute to help listed companies to form the most effective and efficient dividend
policy some general recommendations are suggested such as listed company's dividend policy should be
associated with specific long-term and short-term investment strategy in future. Management board needs
to avoid retain too much profit and then have surplus cash to limit the use of unnecessary and
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inefficiency purpose.
Each listed company will have different characteristics and activities in their different industry
sector in separate region and being affected by different factors. Therefore, in specific situation and
business conditions, the listed company has their own strategic and business perception. Thus, each listed
company need to build and adjust their dividend policy at the specific time to have the most effective
dividend policy. There is no single standard dividend policy that can be applied for all listed companies.
Further research
Further research should focus in more possible variables such as P/E, beta rate, historical
dividend payout, agency cost, financial leverage, stockholder character, etc. which have not been
included in this study. Moreover, further study may extend the research to investigate how the factors
affecting dividend policy formation in other countries in the same region and other countries over the
world to see whether or not there is different perception in other countries. Further surveys can be done
in different levels such as small and medium enterprises, stock market for unlisted public companies or
focused more on different industry sectors such as: financing, real estate, manufacturing, services, retail,
etc.

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