MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY CHU THI KIM HUONG THE RELATION BETWEEN EARNINGS COMPONENTS AND STOCK RETURN IN VIETNAMESE STOCK MARKET A THESIS OF MASTER OF FINACE AND BANKING Ho Chi Minh City - 2015 MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY CHU THI KIM HUONG THE RELATION BETWEEN EARNINGS COMPONENTS AND STOCK RETURN IN VIETNAMESE STOCK MARKET Major: Finance-Banking Code: 60340201 A THESIS OF MASTER OF FINACE AND BANKING Supervisor: Dr Vo Xuan Vinh Ho Chi Minh City - 2015 Contents Contents Abstract List of Figures List of Tables CHAPTER ONE: INTRODUCTION 1.1 Background 1.2 Research questions 1.3 Purpose of study 1.4 Structure of the thesis CHAPTER TWO: LITERATURE REVIEW 2.1 Vietnam Stock Market 2.2 Theoretical framework 2.2.1 Market efficiency 2.2.2 Random walk 11 2.3 Prior empirical studies 12 2.3.1 Cash flows and accruals information in earnings 12 2.3.2 Definition of earnings quality 14 2.3.3 Measuring earning quality 15 2.3.4 Link between earnings persistence and market pricing 17 SUMMARY 18 CHAPTER THREE: METHODOLOGY 19 3.1 Hypotheses Development 19 3.2 Hypothesis testing framework 20 3.3 Theoretical Methodology 21 3.3.1 Design 21 3.3.2 Data Collection 24 3.3.3 Variables computation 25 3.3.4 Testing of hypothesis 28 3.3.4.1 Testing of Hypothesis 28 3.3.4.2 Testing of Hypothesis 29 3.4 Statistical Methodology 32 SUMMARY 33 CHAPTER FOUR: EMPIRICAL ANALYSIS AND RESULTS 34 4.1 Descriptive statistic 34 4.2 Test of Hypothesis 1: Earnings persistence result 36 4.2.1 Steps for Analyze 36 4.2.2 Result 37 4.3 Test of Hypothesis 2: Stock return result 41 4.3.1 Steps for Analyze 41 4.3.2 Result 42 SUMMARY 47 CHAPTER FIVE: RESEARCH EVALUATION 48 5.1 Reliability 48 5.2 Validity 49 CHAPTER SIX: CONCLUSION 50 6.1 Practice Implications 50 6.1.1 Implication for investors 50 6.1.2 Implication for researcher 50 6.1.3 Implication for policy maker 50 6.2 Further Study 51 References APPENDIX Abstract This study examines the information of earnings quality which is reflected by the persistence of earnings and then investigates the link of earnings quality and stock returns of 245 listed firms in Vietnam stock market beginning from 2007 to 2013 The results are given in research show the earnings persistence rate is average 0.627, meaning that 62,7% current earning will contribute to the next year’s earnings Moreover, the study finds that the cash flow component is more persist than the accruals component in earnings Finally, stock price in Vietnam stock market appears that it not reflect fully the different contribution of cash flow component and accruals components in earnings List of Figures Figure 2.1 Vietnam's inflation - Source : World Bank* Figure 2.2 Market cap in % of GDP - Source : Bloomberg Figure 2.3 Price/Earnings ratio – Source: Bloomberg Figure 2.4 Number of listed companies – Source: HSX and HNX Figure 2.5 VN-index history data – Source: VNDIRECT company Figure 3.1 The Framework for the Hypothesis 20 Figure 3.2 The Framework for the Hypothesis 20 Figure 3.3 The Logical Structure of the Quantitative Research Process (Alan (1988)) 23 Figure 3.4 Steps of Estimation Procedures for Hypothesis 29 Figure 3.5 Steps of Estimation Procedures for Hypothesis 32 List of Tables TABLE 3.1 Variables Definition 27 TABLE 4.1 Descriptive statistics on earnings, the accrual and cash flow components of income and abnormal stock returns for a sample of 1,470 firm-year observations obtained from VN-Index and Bloomberg terminal during period 2007 to 2013 35 TABLE 4.2 Ordinary Least Squares regressions analyzing the persistence of the current earnings into the future earnings Sample consists of 1,470 firm-year observations obtained from Bloomberg terminal during period 2007 to 2013 38 TABLE 4.3 Wald Test for Ho: α1 =1 38 TABLE 4.4 Ordinary Least Squares regressions analyzing the persistence of the accrual and free cash flow components of earnings Sample consists of 1,470 firmyear observations obtained from VN-Index and Bloomberg terminal during period 2007 to 2013 40 TABLE 4.5 Wald test for Equality of coefficient cash flow and accrual 41 TABLE 4.6 Summary coefficients 41 TABLE 4.7 Iterative Weighted Non-linear least squares estimation of the stock price reaction to information in current earnings about future earnings Sample consists of 2,940 firm-year observations obtained from VN-Index and Bloomberg terminal during period 2007 to 2013 43 TABLE 4.8 Wald test for Test of market efficiency Ho: α1 = α1* 44 TABLE 4.9 Iterative Weighted Non-linear least squares estimation of the stock price reaction to information in the accrual and cash flow components of current earnings about future earnings Sample consists of 2,940 firm-year observations obtained from VN-Index and Bloomberg terminal during period 2007 to 2013 45 TABLE 4.10 Wald test for Test of market efficiency Ho: γ1 = γ1* ; γ2 = γ2* 46 CHAPTER ONE: INTRODUCTION How the earnings quality of listed firms in stock market is and whether stock price correctly reflects the information of earnings are the questions which have been attracted numbers of researchers It is interesting and practical to identify the quality of earnings and how investors response with this information that indicates in the stock price in Vietnamese stock market The answer is meaningful to not only researchers, but also the market involvers who would like to understand and make an investment decision It helps investors see the full picture of market and successfully set up investment strategies The purpose of this research is to analyze the quality of reporting earnings and test the relation of earnings quality and stock return of listed firms in Vietnam stock market Through the thesis, you may have some information about a new emerging market as Vietnam This chapter presents the background of the topic, the research questions, the purpose of the study and the structure of the thesis 1.1 Background The first question is why earnings quality should be analyzed Apparently, participants in financial market are aware that numbers of earnings can be manipulated Despite the shortcomings of earnings, a majority of the market is looking at earnings; therefore, earnings quality issue still makes sense in study work In investors’ perspective, before making an investment decision, except the stock price variable, the best pick would be earnings to look at the value of a security in one financial year or in a quarter Sloan (2006) presented that future earnings are more informative than intrinsic value for those interested in forecasting stock returns over the next 3–12 months Studying earnings quality is also important because it affects investors’ buyhold-sell action This variable is an indicator to decide which firm is good and bad In Vietnam stock market context, the quality of financial information of listed companies is an existing issue With earnings reports, a bulk of firms are determined has not recorded properly to estimate of interest to be paid, not transfer the entire business management costs incurred during the period in the income statement report Many enterprises also use accounting policies as "the valves" to adjusted earnings, such as changing depreciation from 15 years to 25 years to reduce depreciation expense, as consequence make an increase in their earnings The case of Vitaly Joint Stock Company (code: VTA) is an example In the first half of 2010, to avoid the risk of being delisted, VTA leaders did everything possible to "create" numbers to the lowest losses In the first- half financial year report, VTA were stopped depreciating of production lines with a total cost estimated at 5.99 billion VND Thus, if they added depreciation cost, the after-tax losses on the income statement in months of 2010 would be loss 29.09 billion VND instead of 19.34 billion VND Following is another example: SaiGon Beverages Joint Stock Company (TRI) In the months of 2010 business result, TRI posted 10.6 billion profits; however, many investors remained cautiously with this information, since TRI was named "erratic" stock Because investors were cheated the same case in 2008, TRI released profit at 750 million in months of 2008 but in the fourth quarter of 2008, they announced an unexpected loss of over 146 billion Subsequently, in 2009, TRI set profit target at 17 billion, but they announced a loss at 82.29 billion in the end of this year The story still happened in the first months of 2010, the parent company announced the loss of nearly 40 billion, but in the consolidated financial statements, they posted nearly 42 billion profits, thanks to the transfer of financial investments in subsidiaries Tribeco Binh Duong and Northern Tribeco right on 30th June Within three years, the story of the profit and loss of TRI like a quirky film that investors did not know what they should act with that code And the sad ending of this story was that TRI delisted on 9th April, 2012 Therefore, getting the knowledge of earnings number and underlying of that number is the need for researchers and the investors either in the emerging market as Vietnam stock market 1.2 Research questions According to the problem background, it raises questions how the earning quality of Vietnam stock market listed firms is and whether stock price is reflected correctly the information of earnings, specifically the components of earnings These answers for the following questions can give us some perspectives of the market It can also provide us a better understanding on the Vietnam stock market It can be interesting and useful to set up short and long investment strategies The research questions are as followed:  How is the earnings’ quality of listed firms in Vietnam stock market?  Which components of earning play the major role to contribute to net income?  Do investors use information of earnings quality to apply for their investment action? 1.3 Purpose of study The objectives of the research are: - To figure out the quality of earnings of listed firms in Vietnam stock market; - To find out which part of earnings is major contribution to earnings; - To find out how investors react toward the information of earnings and toward the information of components of earnings; RICHARDSON, S A., SLOAN, R G., SOLIMAN, M T., & TUNA, A I 2005 Accrual reliability, earnings persistence and stock prices Journal of Accounting and Economics, 437–485 SCOTT A RICHARDSON, RICHARD G SLOAN, SOLIMAN, M T & TUNA, I 2001 Information in Accruals about the Quality of Earnings Working Paper, University of Michigan Business School, Ann Arbor, MI 48109 SLOAN, R G 1996 Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings? The Acccounting Review, 71, 289-315 SLOAN, R G 2006 Earnings Quality Analysis and Equity Valuation CFA Institute Conference Proceedings Quarterly, 23 VOGT, W P 2007 Quantitative Research Methods for Professionals, New York, Pearson/Allyn and Bacon WILSON, G P 1986 The Relative Information Content of Accruals and Cash Flows: Combined Evidence at the Earnings Announcement and Annual Report Release Date Journal of Accounting Research, 24, 165-200 APPENDIX APPENDIX 1 Vietnam Market Cap (USD mil) 39,949 Thai Lan 350,224 387,252 90.44% 14.59 Indonesia 324,548 868,346 37.38% 19.72 Singapore 406,487 297,941 136.43% 13.64 Malaysia 318,032 313,159 101.56% 17.59 Philipines 143,225 272,067 52.64% 17.31 No Nation Market Cap in % of GDP as of December 2013 171,390 23.31% GDP (USD mil) P/E as of December 2013 12.27 Source : Bloomberg APPENDIX LIST OF TICKER NO TICKER NAME SECTOR DRC DANANG RUBBER JS Consumer SRC SAOVANG RUBBER Consumer CSM SOUTHERN RUBBER Consumer BGM BAC GIANG EXPLOI Materials BMC BINH DINH MINERA Materials KSA BINH THUAN MINER Materials DTL DAI THIEN LOC Materials DHM DUONG HIEU TRADI Materials FCM FECON MINING JSC Materials 10 KSH HAMICO GROUP Materials 11 HAP HAPACO GROUP JSC Materials 12 HSG HOA SEN GROUP Materials 13 HMC HOCHIMINH CITY M Materials 14 HLA ASIA HUU LIEN JSC Materials 15 LCM LAO CAI MINERAL Materials 16 NKG NAM KIM STEEL JS Materials 17 KSS NA RI HAMICO MIN Materials 18 NHW NGOHAN JSC Materials 19 PTK PHU THINH METALL Materials 20 POM POMINA STEEL COR Materials 21 SMC SMC INV TRADING Materials 22 KTB TAY BAC MINERALS Materials 23 TLH TIEN LEN STEEL C Materials 24 VID VIDON CORP Materials 25 VIS VIETNAM – ITALY Materials 26 DPR DONG PHU RUBBER Materials 27 HSI MF JSC Consumer 28 HAI HAI AGROCHEM JSC Materials 29 HRC HOA BINH RUBBER Materials 30 DPM PETROVIETNAM FER Materials 31 PHR PHUOC HOA RUBBER Consumer 32 RDP RANGDONG PLASTIC Materials 33 TRC TAY NINH RUBBER Materials 34 TNC THONG NHAT RUBBE Consumer 35 VFG VIET NAM FUMI Materials 36 ACC BECAMEX ASPHALT Materials 37 IJC BECAMEX INFRASTR Industrials 38 BT6 BT6 CORP Materials 39 BCE BINH DUONG CONST Industrials 40 KSB BINH DUONG M & C Materials 41 BMP BINH MINH PLASTI Industrials 42 CYC CHANG YIH CERAMI Industrials 43 CDC CHUONG DUONG Industrials 44 C32 CONSTRUCTION 3-2 Industrials 45 C47 CONSTRUCT JSC 47 Industrials 46 SC5 CONSTRUCTION JSC Industrials 47 CTD COTECCONS JSC Industrials 48 CCI CUCHI COMMERCIAL Industrials 49 CTI CUONGTHUAN IDICO Materials 50 DXV DA NANG CONSTRUC Materials 51 DIG DEVELOPMENT INVE Industrials 52 DAG DONG A PLASTIC G Industrials 53 DCT DONAC Industrials 54 DLG DUC LONG GIA LAI Industrials 55 FCN FECON FOUNDATION Industrials 56 HT1 HATIEN CEMENT Materials 57 HAS HACISCO Industrials 58 HVX HAI VAN CEMENT Materials 59 CII HO CHI MINH CITY Industrials 60 DHA HOA AN JSC Materials 61 HBC HOA BINH CONSTRU Industrials 62 HLG HOANG LONG GROUP Consumer 63 GTN HOANG NHAT PRODU Consumer 64 HU3 HUD3 INVEST & CO Industrials 65 HTI IDICO INFRA DEVT Industrials 66 UIC IDICO URBAN Utilities 67 PXL IDICO-PETROLEUM Industrials 68 D2D INDUSTRIAL URBAN Financials 69 LBM LAM DONG BUILDIN Materials 70 LCG LICOGI 16 JSC Industrials 71 L10 LILAMA 10 JSC Industrials 72 LM8 LILAMA 18 JSC Industrials 73 MDG MIEN DONG Industrials 74 NAV NAM VIET JSC Materials 75 NNC NUI NHO STONE JS Materials 76 PXS PETROLEUM EQUIPM Energy 77 PXI PETROLEUM INDUST Industrials 78 PXT PETROLEUM PIPELI Energy 79 PTC POST AND TELECOM Industrials 80 TV1 PECC NO Industrials 81 SHI SON HA INTERNATI Industrials 82 SBA SONG BA JSC Utilities 83 SJS SONGDA URBAN & I Real estate 84 TCR TAICERA ENTERPRI Industrials 85 THG TIEN GIANG INV Industrials 86 UDC URBAN DEVELOPMEN Industrials 87 VNE VIETNAM ELECTRIC Industrials 88 VSI WATER SUPPLY SEW Industrials 89 AGF AGIFISH Consumer 90 AGM AN GIANG IMPORT- Consumer 91 AVF ANVIFISH JSC Consumer 92 ABT BENTRE AQUA PROD Consumer 93 BBC BIBICA Consumer 94 BHS BIEN HOA SUGAR Consumer 95 CMX CAMIMEX Consumer 96 SCD CHUONG DUONG BEV Consumer 97 ACL CUULONG FISH JSC Consumer 98 DHC DOHACO Materials 99 HVG HUNG VUONG CORP Consumer 100 IDI INTL DEV & INV Consumer 101 ICF INVESTMENT COMME Consumer 102 KDC KINH DO CORP Consumer 103 LSS LAM SON SUGAR JS Consumer 104 LAF LAFOOCO Consumer 105 AAM MEKONG FISHERIES Consumer 106 MPC MINH PHU SEAFOOD Consumer 107 ANV NAM VIET CORP Consumer 108 NSC NATIONAL SEED JS Consumer 109 NHS NINH HOA SUGAR Consumer 110 ATA NTACO CO Consumer 111 FMC SAO TA FOODS JSC Consumer 112 TS4 SEAPRIEXCO NO.4 Consumer 113 SSC SOUTHERN SEED CO Consumer 114 SPM SPM CORP Health Care 115 TSC TECHNO-AGRICULTU Consumer 116 SBT THANH THANH CONG Consumer 117 TNA THIEN NAM TRADIN Consumer 118 TAC TUONG AN VEGETAB Consumer 119 VNH VIET NHAT SEAFOO Consumer 120 VTF VIET THANG FEED Consumer 121 VNM VIET NAM DAIRY P Consumer 122 VCF VINACAFE BIEN Consumer 123 VHC VINH HOAN CORP Consumer 124 VLF VINH LONG CEREAL Consumer 125 DCL CUU LONG PHARMA Health Care 126 DHG DHG PHARMACEUTIC Health Care 127 DMC DOMESCO MEDICAL Health Care 128 IMP IMEXPHARM PHARMA Health Care 129 JVC JAP VIET MED INS Health Care 130 OPC OPC PHARMA Health Care 131 TRA TRAPHACO Health Care 132 VMD VIMEDIMEX MEDI-P Health Care 133 ALP ALPHANAM INVESTMENT Health Care 134 APC AN PHU IRRADIATI Industrials 135 BRC BEN THANH RUBBER Industrials 136 SVI BIEN HOA PACKAGI Materials 137 GIL GILIMEX Consumer 138 CMV CAMAU TRADING JS Consumer 139 CLL CAT LAI PORT JSC Industrials 140 CIG COMA18 JSC Financials 141 DVP DINH VU PORT Industrials 142 DTT DO THANH TECHNOL Materials 143 PDN DONG NAI PORT JS Industrials 144 PAC DRY CELL & STORA Industrials 145 TCO DUYENHAI MULTI M Industrials 146 GMD GEMADEPT CORP Industrials 147 HTV HA TIEN TRANSPOR Industrials 148 MHC HANOI MARITIME Industrials 149 HPG HOA PHAT GRP JSC Materials 150 ITD INNOVATIVE TECHN Industrials 151 GSP INTL GAS PDT SHP Energy 152 LGC CII BRIDGES & RO Industrials 153 COM COMECO Industrials 154 MCP MY CHAU PRINTING Materials 155 PAN PAN PACIFIC CORP Industrials 156 PIT PETROLIMEX INTER Industrials 157 PJT PETROLIMEX JOINT Energy 158 PVT PETROVIET TRANSP Energy 159 REE REE Industrials 160 SAM SACOM DEVELOPMEN Industrials 161 SBC SAIGON BEER TRANSPORTATION Industrials 162 SMA SAIGON MACHINERY Industrials 163 SFI SEA AND AIR FREI Industrials 164 SRF SEAPRODEX REFRIG Industrials 165 STG SOUTH LOGISTICS Industrials 166 SKG SUPERDONG FAST F Industrials 167 TIX TAN BINH IMPORT Financials 168 TPC TAN DAI HUNG PLA Materials 169 TTP TAN TIEN PLASTIC Materials 170 TCL TANCANG LOGISTIC Industrials 171 TYA TAYA VIETNAM ELE Industrials 172 TIE TELECOMMUNICATIO Information Technology 173 EMC THU DUC ELECTRO Industrials 174 TMT TMT AUTOMOBILE Consumer 175 TMS TRANSIMEX-SAIGON Industrials 176 HTL TRUONG LONG ENG Consumer 177 VPK VEGETABLE OIL PA Materials 178 VOS VIET NAM OCEAN S Industrials 179 VSC VIETNAM CONTAINE Industrials 180 MCG VIETNAM MECHANIZ Industrials 181 VIP VIETNAM PETROLEU Industrials 182 VST VIET NAM SEA TRANSPORT AND CHARTERING Industrials 183 VTO VIETNAM TANKER Industrials 184 VNL VINALINK INTERNA Industrials 185 VNA VINASHIP JSC Industrials 186 ASP AN PHA PETROLEUM Energy 187 PGC PETROLIMEX GAS J Energy 188 PVD PETROVIETNAM DRI Energy 189 GAS PETROVIETNAM GAS Utilities 190 SFC SAIGON FUEL JSC Consumer 191 CLC CAT LOI Consumer 192 DQC DIEN QUANG JSC Industrials 193 GDT DUC THANH WOOD P Consumer 194 EVE EVERPIA VIETNAM Consumer 195 HAG HAGL JSC Real estate 196 KHA KHAHOMEX Industrials 197 LIX LIX DETERGENT Consumer 198 KMR MIRAE JSC Consumer 199 PTB PHUTAICO Real estate 200 RAL RANGDONG LIGHT S Industrials 201 GMC SAIGON GARMENT Consumer 202 SAV SAVIMEX Consumer 203 TCM THANH CONG TEXTI Consumer 204 GTA THUAN AN WOOD PR Materials 205 TTF TRUONG THANG FUR Consumer 206 VPH VAN PHAT HUNG Real estate 207 VTB VIETTRONICS TANB Consumer 208 BTT BENTHANH TSC Industrials 209 HAX HANG XANH MOTORS Consumer 210 PET PETROVIETNAM GEN Industrials 211 PNJ PHU NHUAN JEWELR Consumer 212 PNC PHUONG NAM CULTU Industrials 213 SVC SAIGON GENERAL Consumer 214 SVT SAIGON VIEN DONG Consumer 215 TLG THIEN LONG GROUP Industrials CMC CORP Information Technology ELECTRONICS COMM Information Technology 218 CMT INFORMATION AND Information Technology 219 MWG MOBILE WORLD INV Consumer 220 SGT SAIGON TELECOM & Information Technology 221 ST8 SIEU THANH JSC Industrials FPT CORP Information Technology 216 CMG 217 ELC 222 FPT 223 DSN DAM SEN WATER PA Consumer 224 HOT HOI AN TOURIST Consumer 225 RIC ROYAL INTERNATIO Consumer 226 STT SATRACO Consumer 227 GTT THUAN THAO CORP Industrials 228 VNG VIETNAM GOLF TOU Consumer 229 VNS VIETNAM SUN CORP Industrials 230 BTP BARIA THERMAL Utilities 231 SJD CAN DON HYDRO PO Utilities 232 CLW CHO LON WASUCO Utilities 233 CNG CNG VIETNAM JSC Energy 234 SEC GIA LAI CANE SUG Consumer 235 DRL HYDRO POWER JSC Utilities 236 KHP KHANH HOA POWER Utilities 237 MTG MT GAS JSC Utilities 238 PGD PETROVIETNAM LOW Utilities 239 PPC PHA LAI THERMAL Utilities 240 SHP SOUTHERN HYDROPO Utilities 241 TIC TAY NGUYEN ELECT Utilities 242 TBC THAC BA HYDROPOW Utilities 243 TMP THAC MO HYDROPOW Utilities 244 TDW THU DUC WATER Utilities 245 VSH VINH SON - SONG HINH Utilities