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Understanding a behaviour of dividend payout policy in Vietnam from various financial models

By: Dang Huu Loc - VNP 19

Supervisor: Dr. Vo Hong Duc

This study is conducted to examine and understand a behavior of dividend payout policy at Vietnam’s listed firms for the period from 2007 to 2013. In doing so, the four well known models are adopted, known as: (i) the partial adjustment model, (ii) the partial adjustment model under an adaptive expectations hypothesis (the Waud model), (iii) the partial adjustment model under a rational expectations hypothesis, and (iv) the earnings trend model. Each of the models is briefly summarized below for the convenience of the readers.

The first model considers the dividend behavior as a partially adjustable process to the target dividend. The current profit will mainly determine the target dividend through constant desired payout ratio. This model is to provide some evidences in terms of the reluctance in changing dividend and the speed of dividend adjustment. The institutional ownership variable is also embedded into the model to investigate its impact on dividend policies. However, it was argued that the target dividend should be explained mainly by the long-run expected earnings instead of current earnings (Harkins and Walsh, 1971). The adaptive expectations model is employed to determine the long-run expected earnings. This expectation bases on the hypothesis that human can learn from the past experience and apply for life. Accordingly, the model which is integrated by both partial adjustment (Model 1) and adaptive expectation explains better dividend policies (Lee et al., 1987). This new model is also called as the Waud model and known as Model 2 in this study. Through this model, the responsibility of managers to change dividend as well as the relationship between the institutional shareholders and dividends are tested.

Robert Lucas and Thomas Sargen, criticized that the adaptive expectations hypothesis adopted in Model 2 is unrealistic because it purely bases on the past experiences and disregards available information to managements. Therefore, they propagated a hypothesis which is known as rational expectations. This hypothesis states that managers are rational to optimize their forecasts which are incorporated current values and available information into the process of forming expectations. The partial adjustment (Model 1) and rational expectations to consider two dividend characteristics as the Waud model, to be known as Model 3.

As the last model attempted in this study, Model 4, the earning generating process is assumed to follow a random walk with trend. This assumption is consistent with the view from Fama and Babiak. Accordingly, any change in the dividend payout policy will include two parts: (i) the first part is from full adjustment of the expected change of earnings; and (ii) the second part is from partial adjustment of the remainder of earnings. This model is known as Model 4 in this study.

The three hypotheses have been developed and tested in this empirical study, one of its first kind in Vietnam: (i) Firms are more reluctant to decrease the dividend than to increase the dividend; (ii) The speed of adjustment in dividends for Vietnam market is very flexible and higher than for developed markets such as Australia, Austria, Germany, Sweden, and United Kingdom; and (iii) the absence of institutional ownership reduces significantly dividends.

Key findings in this empirical study reveal that three above hypotheses are plausible in the case of Vietnam. First, the empirical results reveal that managers are more afraid of cutting dividends than raising dividends. Second, the listed firms in Vietnam are very flexible to change the dividend policies. Third, the absence of institutional shareholders in the firms will significantly decrease the level of dividend payouts. Fourth, the findings also confirm that the adaptive expectations hypothesis is more appropriate than the rational expectations hypothesis in explaining the dividend behavior for the emerging markets, in particular for Vietnam, regardless of the presence or absence of the institutional ownership in a firm.