INTRODUCTION
Effective cash flow management is crucial for organizations, as it influences decisions on profit distribution Typically, when companies generate positive cash flow, they prefer to reward shareholders through cash or stock dividends However, in recent decades, share repurchase activity has surged, particularly in developed markets like the US and Europe since the mid-1980s This trend has also gained traction in the Asia-Pacific region, with countries like Australia, Hong Kong, Korea, and Japan legalizing share repurchases in the late 20th century As a result, share repurchases are increasingly favored over traditional dividends.
Since the establishment of the State Securities Commission in 1997, Vietnam's emerging securities market has seen significant developments, including the launch of the Ho Chi Minh City Stock Exchange in July 2000 and the Hanoi Stock Exchange in March 2005 These platforms facilitate trading for large corporations and small to medium-sized enterprises (SMEs), respectively As anticipated by its founders, the Vietnamese securities market has effectively stimulated the national economy and supported rapid growth, largely due to the transformation of state-owned enterprises into joint-stock companies through the equitization process.
Since its inception in 1998, the stock market has expanded remarkably, growing from just two traded stocks to nearly 700 listed companies today This significant growth highlights the role of securities markets as a crucial channel for capital mobilization within the Vietnamese economy.
In general, most Vietnamese listed firms prefer using cash dividends, and a few use stock dividends, to distribute funds to shareholders Share repurchase has been applied only recently but
1 Equitization is a Vietnamese English term that denotes the conversion of a state-owned enterprise in Vietnam into a public limited company or a corporation
The government successfully mobilized approximately VND 1,000 trillion (around USD 47.6 billion), while VND 700 trillion (approximately USD 33.3 billion) was raised for enterprises through auctions related to equitization and share issuance As a result, the capitalization of the securities market reached nearly 40% of the GDP by July 2014.
Since 2007, stock buybacks have gained acceptance in Vietnam, with the number of firms engaging in this practice rising from 5-7 in 2005-2006 to 16 in 2007 and 18 in 2010 The period of 2005-2006 marked rapid market expansion, but a recession in 2007 led to significant devaluation of shares and investor losses By 2010, improvements in regulations and economic support policies enabled Vietnamese firms to stabilize their securities markets and resume their development trajectory.
Firms are increasingly opting for share buybacks over dividend payouts due to several key factors One primary reason is the desire to enhance shareholder value by reducing the number of outstanding shares, which can lead to an increase in earnings per share Additionally, buybacks provide companies with greater flexibility in managing their capital, allowing them to adjust their financial strategies without the long-term commitment associated with regular dividend payments Furthermore, tax advantages associated with capital gains from buybacks can make this option more appealing to investors compared to taxable dividend income As a result, many firms are prioritizing share repurchases as a strategic move to optimize their capital allocation and meet shareholder expectations.
Research has primarily focused on two main hypotheses regarding corporate stock repurchases: the signaling hypothesis and the free cash flow hypothesis The signaling hypothesis posits that when managers perceive their company's stock as undervalued, they may buy back shares at a premium to signal to less-informed investors that the stock's true value is not reflected in its current price, indicating improved future prospects In contrast, the free cash flow hypothesis suggests that firms with surplus cash but limited investment opportunities may incur agency costs if they do not return this excess capital to shareholders To mitigate these costs, managers might be tempted to allocate excess funds toward unproductive projects, such as excessive compensation or mergers and acquisitions Therefore, stock repurchases serve as a crucial mechanism for firms to distribute excess free cash flow, thereby reducing the likelihood of inefficient investments.
This study addresses the limited research on share repurchase activities within the Vietnamese market, aiming to deepen the understanding of corporate payout policies in this rapidly developing emerging market By exploring the implications of share repurchases, the research seeks to uncover potential trends, including whether share repurchases can serve as substitutes for dividends in Vietnam These insights are essential for predicting future developments in corporate finance within the region.
LITERATURE REVIEW
Share repurchases
The existing literature on stock repurchases often focuses on determining the validity of two key hypotheses: the free cash flow hypothesis and the signaling hypothesis.
The signaling hypothesis supports the notion of stock undervaluation, where companies perceive their shares as undervalued relative to their true worth To address this, firms often repurchase their own stocks, which decreases the number of outstanding shares and typically leads to an increase in stock prices Consequently, announcements of stock repurchases are generally met with positive market reactions, a concept validated by numerous studies, including those by Vermaelen (1981) and Ikenberry et al (1995) Notably, research indicates that the market response is more pronounced for smaller firms, as highlighted by Vermaelen and Hatakeda and Isagawa (2004) This is attributed to the greater information asymmetry faced by smaller firms, which receive less attention from institutional investors and rating agencies Thus, when these firms announce share repurchases, it signals more significant undervaluation to investors.
The free cash flow hypothesis is a significant reason behind buyback activities, as companies utilize repurchases to minimize agency costs and align their repurchase strategies with their available cash When ownership and control are separated within a firm, this approach becomes particularly relevant, as noted by Easterbrook.
Research by Jensen (1986) and others indicates that distributing cash flows to shareholders via share repurchases or dividends can reduce agency costs Additionally, a study by Byun et al (2006) reveals that companies with significant free cash flow are more likely to engage in share repurchase activities.
The signaling and free cash flow hypotheses suggest that firms have various motivations for share repurchases A critical question arises: can dividends and share repurchases serve the same purpose? Research by John and Williams (1985), Bernheim (1991), and Allen, Bernardo, and Welch (2000) indicates that management typically employs dividends as a signal of a firm's quality, implying that dividends and repurchases are not interchangeable Additionally, Dittmar (2000) explores the underlying motives behind share repurchases.
The primary motivations for share repurchases include capitalizing on undervalued shares and distributing surplus cash, indicating that repurchases should not be seen as a substitute for dividends Furthermore, research by Jagannathan and Stephens (2003) highlights that firms utilize repurchases and dividends independently, depending on varying stages of the business cycle and distinct characteristics of the companies involved.
The Vietnamese security trading market raises questions about the significance of dividends and share repurchases Several studies have explored dividends, with Yen Nguyen (2011) demonstrating that dividend payments influence stock prices in Vietnam from 2006 to 2009 Kim Thu et al (2013) found a negative correlation between dividend payout ratios and firms’ profitability on the Ho Chi Minh Stock Exchange between 2007 and 2012 Additionally, Quoc Trung & Thu Ha (2014) noted that Vietnamese listed firms exhibit stable dividend policy behaviors In contrast, research on share repurchases is limited, with only Byun & Bao Trung (2016) examining cumulative abnormal returns from 2005 to 2014, supporting the signaling hypothesis in the context of repurchases in Vietnam.
Researchers often analyze announcement-period abnormal returns to assess how stock repurchases impact prices, but there are concerns regarding changes in operating performance related to capital distribution activities Lang and Litzenberger (1989) highlight that market reactions to dividend changes are more pronounced for low-q firms compared to high-q firms Additionally, Tom and Vefa (1997) argue that the operating performance improvements seen in low Tobin's q companies following repurchase activities stem from more efficient asset utilization rather than enhanced growth opportunities, as suggested by the free cash flow hypothesis.
A study by Grullon and Michaely (2002) highlights a strong preference for stock repurchases in the US market, particularly among younger firms, indicating a growing trend in buyback activity In contrast, research by Brown et al (2015) utilizing data from the Australian market demonstrates how tax treatment influences the substitutability of repurchases and dividends.
Repurchase regulations and Tax policy in Vietnam
In Vietnam, regulations facilitating share repurchases have been in place since the establishment of the securities market in 2000 This framework has been enhanced through various legislative approvals, including the Securities Law of 2005, the Enterprise Law of 2014, and Decree 58/2012/NĐ.
Under Decree 60/2015/ND-CP, companies in Vietnam can repurchase their own shares using four methods: open market repurchases, fixed price tender offers, Dutch auctions, and private negotiation repurchases Among these options, the majority of Vietnamese firms prefer open market repurchases as their primary method for stock buybacks.
Under current regulations, companies are permitted to repurchase up to 30% of their total common stock However, the board of directors can only authorize the buyback of a maximum of 10% of outstanding shares, with any purchases exceeding this limit requiring approval from shareholders during a general meeting.
Funds for share repurchases must come from retained earnings or the share premium account, with the possibility of additional sources if they are adequately supported by these funds Repurchases are prohibited during an IPO or rights offering Additionally, listed companies can only buy back shares at or below the market price on the purchase date The repurchased shares can be held as treasury shares for future stock dividends, employee share option schemes, or can be resold in the market after a six-month period from the repurchase date.
Before 2015, Vietnamese investors had two tax options for stock trading: a 0.1% tax on the total trade value at the time of the transaction or a 20% tax on taxable income at the end of the fiscal year, applicable only on gains Choosing the first option meant paying tax regardless of profit or loss, while the second option taxed only profitable trades However, to streamline tax processes, Vietnamese authorities mandated that from 2015 onwards, investors must pay a 0.1% tax on the total trade value for every transaction.
The Vietnamese market, like other emerging economies, has a high rate of firms issuing dividend payouts, with approximately 80% of companies doing so between 2006 and 2011, as noted by Alphonse & Tran (2014) In response to this trend, Vietnamese authorities are promoting stock market investment by implementing attractive dividend tax policies Notably, both foreign and domestic corporate investors are exempt from dividend taxes in Vietnam Individual shareholders, however, are subject to a flat personal income tax rate of 5% on cash dividends received, applicable to both Vietnamese and foreign investors, regardless of their tax-resident status in the country.
Table 1 illustrates the varying tax rates on dividends in the Vietnamese market over different periods Notably, the government implemented a 0% dividend tax for individuals during certain times to stimulate more active trading in securities.
Table 1: Tax rate by period in Vietnam
Source: Circular No 160/2009/TT-BTC; Circular No 134/2011/TT-BTC; Decree No 101/2011/ND-CP and Circular No 111/2013/TT-BTC (Kien and Chen, 2020).
Dividend and capital gains taxation significantly influence a firm's payout policy, as highlighted by Jacob & Jacob (2013) Numerous studies, including those by Sarig (2004) and Moser (2007), provide evidence of the positive impact of tax considerations on cash distributions to shareholders across various countries Notably, strong evidence from the U.S market during the high dividend tax rates from 1993 to 2002 supports this notion Similar findings are observed in the U.K through the work of Rau and Vermaelen (2002) and Oswald and Young (2004), as well as in the Asian market, particularly in a study of the Taiwanese stock market by Lee et al (2006) Therefore, examining the effects of different tax periods on payouts can enhance our understanding of the relationship between dividends and repurchase activities in emerging economies like Vietnam.
The characteristics of Vietnamese listed firms
In December 1986, the Vietnamese government launched a socio-economic reform program known as "Renewal," which continues to drive economic development today A crucial component of this initiative has been the establishment and growth of the Vietnamese stock market over the past two decades This market has emerged as the primary channel for mobilizing medium and long-term capital, significantly contributing to national investment and development activities Notably, its remarkable growth has been evident since Vietnam's accession to the World Trade Organization in January.
2007 Within 10 years, the market capitalization of Vietnamese stock market has increased about
From 2006 to the first half of 2019, the stock market's growth surged from 22.7% to 78.5% of GDP, drawing significant interest from both domestic and foreign investors This remarkable increase has led to the opening of approximately 2.28 million accounts in the stock market (Vu, 2019).
As part of the "Renewal" movement in Vietnam's economy, the government has transitioned all State-owned enterprises (SOEs) into publicly listed companies due to their underperformance This shift aims to open the economy to global markets, similar to China's approach, allowing the Vietnamese government to maintain control over key industries while seeking increased profitability Concerns arise regarding the impact of government ownership on capital distribution decisions within these firms Research, including findings by Chen et al (2009), indicates that dividend payouts tend to rise with greater government share ownership, a trend supported by Bradford (2013), who notes that state-controlled firms in China offer higher dividends compared to private businesses.
A study by Brennan and Thakor (1990) indicates that an effective personal income tax policy influences shareholder preferences; smaller shareholders tend to favor dividend payouts, while larger shareholders are more inclined to support stock buybacks Furthermore, firms with government backing experience significant advantages and impacts due to legal and political factors.
Share repurchases enhance ownership concentration and empower controlling shareholders, as noted by Ginglinger and L’her (2011) Managers may engage in share buybacks to bolster their control by increasing their shareholdings and to deter potential takeovers, as highlighted by Mork et al (1988).
The influence of majority or dominant shareholders on a firm's financing decisions has been acknowledged by economists and researchers for many years Due to the fixed costs associated with information and market analysis, majority shareholders often benefit more from stock buyback initiatives, whereas minority shareholders may face risks of expropriation, as noted by Brennan and Thakor (1990).
In Vietnam's Socialist economic system, the government plays a significant role as a market controller, even as many state-owned firms are being equitized and listed on the stock market The dominance of state ownership in these firms remains prevalent, making it challenging for the government to permit takeovers by private investors Consequently, share repurchase strategies to prevent takeover attempts may not be a primary concern for initially listed state-owned companies For state-dominated firms, particularly those where the government holds more than 50% ownership, enhancing managerial power through increased stock holdings is often not a priority, rendering share repurchases less appealing when considering various payout options.
The distribution of cash flows to shareholders by state-owned enterprises (SOEs) raises intriguing questions regarding their preference for traditional dividends versus the flexibility of share repurchases With a significant number of listed firms in Vietnam being initially state-owned and the government retaining substantial ownership, this dynamic presents a unique opportunity to explore the payout policies of the state-owned sector in the Vietnamese stock market Understanding their payout behavior can provide valuable insights for researchers and investors alike.
From a creditor-oriented governance perspective, Sáez and Gutiérrez (2015) highlight the risks posed by the absence of legal regulations that monitor the power of dominant shareholders, who may exploit payout policies to disadvantage minority shareholders through lower dividend payout ratios in firms with concentrated ownership To safeguard creditors, governments may impose restrictions on cash distributions to shareholders until debts are settled, encompassing all forms of distributions, including dividends and share repurchases Successful repurchases can significantly impact a firm's financial structure by depleting available cash and increasing leverage ratios (Bagwell and Shoven, 1988; Opler and Titman, 1996) Additionally, Sáez and Gutiérrez (2015) suggest that a firm's current leverage level can influence its decisions regarding share repurchases.
According to Lie (2002), firms with high leverage tend to engage in fewer stock buybacks However, Brown et al (2015) found no significant correlation between leverage and the repurchase practices of listed companies when they reexamined the impact of debt ratios Consequently, the influence of capital structure was further analyzed through explanatory variables.
Researchers are investigating the relationship between changes in firms' capital redistribution policies using a comprehensive dataset of Vietnamese listed firms This study aims to either support the free cash flow hypothesis, as found by Lang and Litzenberger (1989), or align with the signaling hypothesis proposed by Byun & Bao Trung (2016) Additionally, the research seeks to uncover any unique movements in this area and determine whether a substitution or complementary effect is present.
DATA AND METHODOLOGY
Data collection
The study analyzes all stock repurchases conducted on the Vietnamese Stock Exchange from 2008 to 2017, utilizing data on repurchase dates, cash availability, market and book values, total assets, leverage ratios, dividend payouts, repurchase volumes, and firm ownership This information was sourced from the Vietnamese Stock Exchange database, the financial platform Fiinpro, and reputable online analysis sources such as Vietstock.vn and Cophieu68.com To account for multiple dividend payouts within a year, the total annual dividend payout was calculated Data accuracy was ensured through cross-verification with company financial statements and careful checks of payout amounts from business announcements After removing missing and unclear data, the final sample comprises 174 observations.
This study examines the significance of past repurchases, anticipated future buybacks, and subsequent changes in dividend value to distinguish between the signaling hypothesis and the free cash flow hypothesis By doing so, it establishes a link between share buyback activities and dividend payouts, particularly focusing on a firm's motivations when announcing a repurchase.
If a firm signals improved prospects, we can expect a noticeable reduction in dividend payouts as retained earnings are redirected towards buybacks Conversely, if management aims to distribute free cash flow instead of investing in perks or unprofitable projects, investors should respond accordingly.
10 the repurchase announcement but the repurchasing firms may or may not exhibit improved performance In short, signaling implies an improvement in performance, but a performance improvement need not imply signaling.
Methodology
This study builds upon the research by Brown et al (2015) by examining the relationship between share repurchase activities and changes in dividend payouts It will utilize the variance between actual dividends and expected dividends to indicate shifts in dividend policy, while repurchase yield will measure the extent of buybacks in the company's financial activities.
The increasing trend of share repurchase among companies in the Vietnamese market, while still relatively young compared to dividend activities, creates a notable gap in these financial decisions over time Therefore, this study focuses exclusively on companies that have completed share repurchases to better understand their financial payout behaviors Insights gained from this analysis may provide a clearer perspective on share buybacks in Vietnam Previous research has explored the relationship between repurchase and dividend payouts using various methodologies, including the multinomial logit model by Jagannathan (2000), transition probability and cross-sectional regression by Grullon and Michaely (2004), and time series vector autoregression by Lee and Rui.
Research by Brown et al (2015) and others has shown varied results regarding payout methods, primarily indicating a linear observation pattern However, considering that payouts represent the distribution of a firm's after-tax earnings, the annual payouts can fluctuate, exhibiting a time-varying (nonlinear) relationship with stock returns (Kanas, 2005) This necessitates that boards of directors seek an optimal disbursement strategy to balance profit sharing with firm growth Consequently, the existence of a nonlinear relationship among financial payout methods raises important questions Given the unique characteristics of the Vietnamese market and the lack of consistent studies on repurchase practices, there is a compelling need for further research utilizing nonlinear panel regression Additionally, robustness tests will be conducted under various conditions to validate the findings.
The disparity in payout levels among firms leads to significant variations in capital distribution practices, with some companies opting for generous payouts while others maintain minimal spending on their payout policies Additionally, firms often allocate different amounts of cash for dividends versus share buybacks This raises questions about the ranking of different groups within the conditional population based on their payout strategies.
11 to review, in which quantile regression is a suitable statistical tool to answer it (Koenker & Bassett,
In this study, we focus exclusively on completed share repurchase activities, making quantile regression an effective method for analyzing the censored data (Lin, 2009) Additionally, nonlinear quantile regression is appropriate for handling clustered data (Geraci, 2018) To address the question of whether the relationship between dividends and repurchases varies based on the size of the buyback program, we will employ a quantile regression model for further analysis to ensure the accuracy of our findings.
Dividend change measurement
In their 2015 study, Brown et al analyzed the discrepancies between actual dividend payments and projected expenditures based on prior dividend per share data The calculation for changes in dividend payout will be conducted accordingly.
DDiv (t) = [ Div (t) – dps (t-1) * Outstanding (t) ] / MV (t-1) (1)
DDiv(t) represents the dividend change between year t and year t-1
Div(t) is the total money that company has spent for dividend payout at year t, dps(t-1) stands for the dividend per share in the previous year (t-1),
Outstanding(t) is the total outstanding share of the firm at year t
MV(t-1) is simply the market value of the firm in the last year
The author examines the relationship between repurchase yield and changes in dividend payouts by analyzing the differences between current and previous dividend distributions By focusing on completed repurchases, the study aims to uncover significant correlations between variations in dividend spending and the company's financial practices.
The following multivariate regression model was used to test the insign relationship between capital distribution methods of listed companies in Vietnamese security market
Ryield t = a1+ a2 DDiv t + a3 DDiv t ^2 + a4 Cash t-1 + a5 MB t-1 + a6 Log(TA) t-1 + a7 Lev t-1 + error term(2)
Ryield Repurchase yield, defined as the total value of conducted repurchase divided by market value of equity in the corresponding year;
DDiv Change in dividend = (Current Dividend– Previous
Dividend)/Market capitalization in current year
Cash (Cash + Cash equivalent + short-term investment)/Total
MB_ratio Market to Book ratio = (Market value of Equity + Total
Asset – Book value of Shareholder equity) / Total asset
Log(TA) Logarithm value of Firm’s total asset -
Lev (Short-term debt + Long-term debt)/ Total Asset -
Table 2 provides definitions for the variables used in this study The research aims to test the substitution hypothesis between share repurchases and dividend payouts, anticipating a negative correlation between the yield variable (Ryield) and the primary independent variable (DDiv) This suggests that increased share repurchase activities may lead to reduced dividend distributions in the current year compared to previous yields Conversely, a significant positive coefficient could indicate an independent relationship or a complementary effect between these two variables within a firm's capital payout policy Additionally, the model will include the squared DDiv to explore the potential for a nonlinear relationship between dividend payouts and repurchase practices.
A positive cash variable indicates support for the free cash flow hypothesis, while share buybacks signal to investors that a firm is undervalued, leading to a significant negative coefficient for Log(TA) Larger firms tend to provide clearer business information, which enhances shareholder confidence and reduces undervaluation in the market The market-to-book ratio (MB_ratio) reflects a firm's future growth potential; if firms retain more cash for investment, payouts decrease, resulting in a negative relationship between MB_ratio and repurchase activity Additionally, firms with a high debt ratio have fewer resources available for share buybacks, as evidenced by the expected negative sign for the Lev variable.
This article examines the impact of state control and tax policy on firms' capital distribution decisions, specifically by analyzing the role of government ownership To gain a comprehensive understanding, firms will be categorized into two groups based on whether the government acts as a blockholder, defined as having at least 5% of outstanding shares according to Vietnamese security law Blockholders possess significant voting rights and influence over business and managerial decisions A group termed "Gov5" will be established, consisting of firms where the government holds more than 5% of shares Notably, among 174 completed share repurchases, over half (92 buybacks) were conducted by enterprises with government investment, highlighting the significant role of state ownership in capital distribution practices.
Approximately 90 to 98% of the firms analyzed had the state as a blockholder, owning at least 5% of outstanding shares Notably, around 90% of these state blockholders (82 out of 90) held more than 10% of voting rights To enhance the robustness of the analysis, the group Gov10 was utilized, which comprised all state blockholders with at least 10% of outstanding stock The impact of taxation will be assessed by comparing market reactions during the pre- and post-tax issue periods.
EMPIRICAL ANALYSIS
General Statistic
Table 3 provides a comprehensive overview of the characteristics of Vietnamese firms that implemented repurchase policies during the observation period Panel A highlights significant variability in repurchase yields (Ryield), indicating that firms exhibit diverse buyback strategies, with some repurchasing nearly 27% of their market value while others invest minimally This disparity may stem from managerial intentions, such as facilitating the management of outstanding shares or supporting employee stock option plans, rather than prioritizing distribution Additionally, the analysis of dividend changes (DDiv) reveals a negative mean and median, suggesting that, on average, firms are likely to reduce dividend payments, potentially reallocating these funds towards alternative payout methods like share repurchases.
The analysis of substitute relationships in payout policies reveals that key explanatory variables—Cash, Mb_ratio, Ln_TA, and Lev—exhibit median fluctuations around their means However, the significant distance between their maximum and minimum values indicates a wide range of financial ratios among firms, suggesting that the observed sample effectively represents the entire market This finding enhances the reliability of future research outcomes.
Variables Mean Median Maximum Minimum Std Dev Observations
- The dependent variable Ryield denotes Dividend Yield
- The key testing variable DDiv denotes Change in dividend = (Dividend t – Expected Dividend t)/Market capitalization
The controlling variable for cash is calculated by dividing the sum of cash, cash equivalents, and short-term investments by total assets Additionally, the Market to Book (MB) ratio is determined by taking the market value of equity, adding total assets, subtracting the book value of shareholder equity, and then dividing by total assets.
Log(TA) denotes Log value of Firm’s total asset; Lev : (Short-term debt + Long-term debt)/ Total Asset
Other information such as industrial and market distribution may be observerd from Panel
Table 3 indicates that buybacks are favored by listed firms on the Ho Chi Minh Stock Exchange (HOSE), accounting for approximately 75% of total share repurchase activities.
130 completed repurchases conducted in HOSE while its numberwas only 44 in HNX With the
In the Vietnamese market, larger firms are primarily listed on the HOSE, while SMEs tend to be listed on the HNX, suggesting that companies with greater capital are more inclined to engage in share repurchase activities Industrial firms lead in share buyback initiatives across both markets, accounting for 62 out of 174 observations Following them, consumer service enterprises on the HNX completed 10 share repurchase campaigns, whereas consumer goods firms on the HOSE executed a significantly higher number of 44 repurchase activities.
The p-value are reported in parentheses
- The dependent variable Ryield denotes Dividend Yield
- The key testing variable DDiv denotes Change in dividend = (Dividend t – Expected Dividend t)/Market capitalization
The controlling variable for cash is calculated by the formula (Cash + Cash equivalents + short-term investments) divided by total assets Additionally, the Market to Book (MB) ratio is determined using the equation (Market value of equity + total assets - book value of shareholder equity) divided by total assets.
Log(TA) denotes Log value of Firm’s total asset; Lev : (Short-term debt + Long-term debt)/ Total Asset
Table 4 reveals the correlation coefficients between the dependent variables and key testing variables, highlighting a significant negative correlation of -0.451 between cash and leverage (Lev) This strong relationship indicates that as leverage increases, the firm's cash reserves tend to decrease due to the heightened responsibility of managing debt Additionally, the market-to-book ratio (MB_ratio) demonstrates the strongest correlation among the explained and tested variables, further emphasizing the intricate dynamics between capital structure and financial performance.
Variables RYIELD CASH(-1) MB_RATIO(-1) LN_TA(-1) LEV(-1) DDIV
16 connection to explained variable, Ryield, at -0.269 In detail, MB_ratio is negative significantly to repurchase yield (Ryield), while it is insignificant for the main tested variable, DDiv
Table 5 illustrates the distribution of completed share repurchases based on varying degrees of change in dividends (DDiv) Among the 174 completed buybacks, the data reveals two distinct groups represented by inverted U-shaped trends The left group, characterized by a decrease in dividends (DDiv < 0), indicates that firms paid less than expected dividends, while the right group reflects an increase in dividend payouts Notably, firms adopting a lower dividend strategy account for the largest share, with 55% of repurchasing firms engaging in 44.25% of repurchase activities when dividends decrease by 0% to 10% Activity then levels off at 0%, leading to a second inverted U-shape on the right, where firms increasing dividends from 0% to 10% of the expected value peak at 32.76% of total repurchases.
Table 5: Distribution of Share repurchases by the Change in dividend (DDiv)
DDIV No of Repurchase % Rep Average Ryield % firm
- The dependent variable Ryield denotes Dividend Yield
- The key testing variable DDiv denotes Change in dividend = (Dividend t – Expected Dividend t)/Market capitalization
A better imagination may be revealed through Figure 1 as belows, for a clearer overview of their relationship It may be a preliminary evidence of non-linear results
Figure 1: Distribution of Share repurchases by the Change in dividend (DDiv)
Substitution and Complementary effects between share repurchases and dividends
The Hausman test indicates an insignificant P-value at the 10% level, suggesting that the null hypothesis, which states that individual specific effects are random, cannot be rejected Therefore, it is appropriate to use a random effects model for the panel regression analysis.
The ten-year period is significantly smaller than the cross-section, which includes approximately 174 repurchase observations, making it statistically inadequate for implementing the Period Random Effect Consequently, Cross-section Random Effects are more appropriate for examining the coefficients between the explanatory variables in this study The primary analysis of the nonlinear relationship through panel regression will be presented in Table 6.
Table 6 reveals a significant positive nonlinear relationship between changes in dividends (DDiv) and share repurchases, with coefficients for DDiv and DDiv^2 at 0.051 and 0.212, respectively, significant at the 5% and 1% levels This finding supports the complementary hypothesis, indicating that dividends and share repurchases are independent methods of distributing earnings The F-statistic's P-value is below 1%, confirming that the explanatory variables collectively influence the dependent variable While most explanatory variables align with expected signs, Cash displays a negative sign, and only the MB_ratio is significantly negative at -0.015, suggesting that firms may limit cash payouts to support future growth.
Table 6: Panel regression for the relationship between share repurchase and dividend payout
Variable Coefficient Std Error t-Statistic Prob
Hausman Test Chi-Sq Statistic Chi-Sq d.f Prob
Note: ***, **, and * denote statistical significance at the 0.01, 0.05, and 0.1 levels, respectively.
- The dependent variable Ryield denotes Dividend Yield
- The key testing variable DDiv denotes Change in dividend = (Dividend t – Expected Dividend t)/Market capitalization
The controlling variable for cash is calculated by the formula (Cash + Cash equivalents + short-term investments) divided by total assets Additionally, the Market to Book (MB) ratio is determined using the equation (Market value of equity + total assets - book value of shareholder equity) divided by total assets.
Log(TA) denotes Log value of Firm’s total asset; Lev : (Short-term debt + Long-term debt)/ Total Asset
The result then be rechecked by several robustness as follow.
Robustness test
To enhance the accuracy of the panel regression test results, several robustness conditions were incorporated, as shown in Table 7 The first model (1) analyzes a subsample of firms with a dummy variable indicating dividend payments (Dummy_Div = 1), focusing on companies that engage in both dividend payouts and share repurchases within the same year Model (2) further examines the impact of varying tax levels (Tax_0 = 1 and Tax_0 = 0) alongside Dummy_Div = 1 This model accounts for a special economic period when the Vietnamese government implemented a zero tax policy to support individual investors, who often face disadvantages compared to dominant blockholder investors due to their limited voting rights Additionally, the influence of government control on a firm's payout policy is assessed through the lens of state blockholders.
In tests (3) and (4), the study examines groups with outstanding shares of 5% and 10% (Gov 5 and Gov 10) To ensure consistency, Tobit regression is utilized in test (5) due to the censored nature of the dependent variable's observation range The robustness tests presented in Table 5 reveal that the coefficient signs and qualitative results closely align with those obtained from the panel regression test across most conditions.
The significant positive relationship between DDiv and DDiv^2 and repurchase yield in models (3), (4), and (5) suggests that, even during periods of higher tax rates, Vietnamese state enterprises maintain a preference for high dividend payout policies This approach aims to bolster shareholder confidence and signal that the firm is performing well and capable of generating returns on investments (Kien and Chen, 2020).
To enhance the understanding of repurchase activity, the Repurchase Ratio (Rep_ratio) will be introduced as the dependent variable in the primary model, providing a broader perspective on the relationship between share repurchases and dividend payouts The Repurchase Ratio is calculated by dividing the total volume of shares repurchased by the outstanding shares of the firm prior to the buyback This straightforward ratio is commonly utilized by investors and researchers to gain immediate insights into the impact of financial announcements on a company's situation The test results are presented in Table 8 below.
Table 7: Robustness by different conditions for the relationship between share repurchase and dividend payout
Note: ***, **, and * denote statistical significance at the 0.01, 0.05, and 0.1 levels, respectively.
- The dependent variable Ryield denotes Dividend Yield
- The key testing variable DDiv denotes Change in dividend = (Dividend t – Expected Dividend t)/Market capitalization
- The controlling variable Cash: (Cash + Cash equivalent + short-term investment)/Total asset; MB_ratio denotes Market to Book ratio = (Market value of Equity
+ Total Asset – Book value of Shareholder equity) / Total asset; Log(TA) denotes Log value of Firm’s total asset; Lev : (Short-term debt + Long-term debt)/ Total Asset
Cross-section random Yes Yes Yes Yes Yes
Table 8: Robustness test using Repurchase ratio as explained variable
(2) Dummy_Div = 1 Variables Coef t-value Sig (P) Coef t-value Sig (P)
Cross-section random Yes Yes
Note: ***, **, and * denote statistical significance at the 0.01, 0.05, and 0.1 levels, respectively.
- The dependent variable Ryield denotes Dividend Yield
- The key testing variable DDiv denotes Change in dividend = (Dividend t – Expected Dividend t)/Market capitalization
The controlling variable for cash is calculated as the sum of cash, cash equivalents, and short-term investments divided by total assets The Market to Book (MB) ratio is defined as the market value of equity plus total assets minus the book value of shareholder equity, all divided by total assets.
Log(TA) denotes Log value of Firm’s total asset; Lev : (Short-term debt + Long-term debt)/ Total Asset
Table 8 demonstrates consistent results in the panel regression test, whether using repurchase yield (Ryield) or repurchase ratio (Rep_ratio) as the dependent variable Specifically, DDiv and DDiv^2 show positive significance at 5% and 10% levels (0.034 and 0.063, respectively), while MB_ratio has a negative significant coefficient of -0.01 at the 1% level Additionally, the repurchase ratio test indicates a negative significant coefficient of -0.031 for the Leverage (Lev) variable at the 10% significance level, suggesting that firms with higher liability obligations may reduce their repurchase spending Furthermore, applying a restricted condition where firms practice both dividends and repurchases in the same year (Dummy_Div = 1) yields results quantitatively similar to the original group.
22 confidence to the found result about the complementary relationship between firm's share repurchase and dividend payout
The discovery of nonlinear effects in the model raises questions about whether different treatments exist across various groups or ranges of the observed sample To uncover any hidden movements, quantile regression is utilized for further investigation.
Quantile regression analysis reveals a significant negative relationship between the DDiv variable and repurchase yield at higher quantiles, specifically at the 10% significance level for the 65th quantile and at the 1% level for the 70th quantile and above This indicates that for firms with high repurchase yields, there is an inverse relationship with dividend payouts, suggesting that these companies may prioritize balancing their fund distribution strategies between dividends and share repurchases.
It may become the evidence for the existence of substitution relationship between share repurchase and dividend payout applied by Vietnamese firms
The analysis reveals a strong complementary effect in firms with lower repurchase yields, evidenced by the positive correlation of DDiv and DDiv^2 across the full sample Additionally, the negative-positive sign observed in the upper-level quantile reinforces the dominance of this complementary approach in understanding share repurchases within the Vietnamese stock market.
The market to book ratio (Mb_ratio) consistently demonstrates a significant negative impact on repurchase yield across all quantiles, reinforcing the notion that Vietnamese firms prioritize future investment plans over buyback activities Additionally, the cash variable reveals a negative significance at the 70th quantile, contradicting the anticipated positive correlation and thereby failing to support the free cash flow hypothesis in this analysis.
Table 9: Quantile regression for the relationship between share repurchase and dividend payout
Note: ***, **, and * denote statistical significance at the 0.01, 0.05, and 0.1 levels, respectively.
- The dependent variable Ryield denotes Dividend Yield
- The key testing variable DDiv denotes Change in dividend = (Dividend t – Expected Dividend t)/Market capitalization
- The controlling variable Cash: (Cash + Cash equivalent + short-term investment)/Total asset; MB_ratio denotes Market to Book ratio = (Market value of Equity
+ Total Asset – Book value of Shareholder equity) / Total asset; Log(TA) denotes Log value of Firm’s total asset; Lev : (Short-term debt + Long-term debt)/ Total Asset
CONCLUSION
This study addresses the previously unexamined non-linear relationships among various capital distribution policies of Vietnamese listed firms Through panel regression analysis, it reveals a dominant complementary effect between share repurchase and dividend payout policies Robustness tests further validate these findings However, quantile regression indicates that firms with high repurchase yields exhibit a substitution relationship, where dividends and repurchases are interchangeable In contrast, the complementary approach significantly influences firms in the lower quantile group.
The signaling and free cash flow hypotheses appear to have minimal impact on the relationship between payout methods However, the study indicates that Vietnamese firms carefully consider their future growth when making share repurchase decisions Ultimately, there is still potential for improvement, which warrants further investigation in future research.
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