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 M 2.2.2 R 2.3 Prior empirical studies 2.3.1 C 2.3.2 D 2.3.3 M 2.3.4 L SUMMARY CHAPTER THREE: METHODOLOGY 3.1 Hypotheses Development 3.2 Hypothesis testing framework 3.3 Theoretical Methodology 3.3.1 D 3.3.2 D 3.3.3 V 3.3.4 T 3.3.4.1 Testing of Hypothesis 3.3.4.2 Testing of Hypothesis 3.4 Statistical Methodology SUMMARY CHAPTER FOUR: EMPIRICAL ANALYSIS AND RESULTS 4.1 Descriptive statistic 4.2 Test of Hypothesis 1: Earnings persisten 4.2.1 S 4.2.2 R 4.3 Test of Hypothesis 2: Stock return result 4.3.1 S 4.3.2 Resu SUMMARY CHAPTER FIVE: RESEARCH EVALUATION 5.1 Reliability 5.2 Validity CHAPTER SIX: CONCLUSION 6.1 Practice Implications 6.1.1 Impl 6.1.2 Impl 6.1.3 Impl 6.2 Further Study 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 Figure 3.2 The Framewo Figure 3.3 The Logical Structure of the Quantitative Research Process (Alan (1988)) Figure 3.4 Steps of Estim Figure 3.5 Steps of Estim List of Tables TABLE 3.1 Variables Definition 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 TABLE 4.3 Wald Test for Ho: α1 =1 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 TABLE 4.5 Wald test for Equality of coefficient cash flow and accrual TABLE 4.6 Summary coefficients 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 TABLE 4.8 Wald test for Test of market efficiency Ho: α = α * 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 TABLE 4.10 Wald test for Test of market efficiency Ho: γ 1 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; HRIBAR, P & COLLINS, D W 2002 Errors in Estimating Accruals: Implications for Empirical Research Journal of Accounting Research, 40, 105–134 KORMENDI, R & LIPE, R 1987 Earnings Innovations, Earnings Persistence, and Stock Returns The Journal of Business, 60, 323-45 LEV, B 1989 On the usefulness of earnings and earnings research: lessons and directions from two decades of empirical research Journal of Accounting and Economics Research, 17, 153–192 LEV, B & NISSIM, D 2004 Taxable Income, Future Earnings, and Equity Values Accounting Review, Vol 79 LI, F., ABEYSEKERA, I & MA, S 2011 Earnings management and the effect of earnings quality in relation t o stress level and bankruptcy level of Chinese listed firms Working Paper, University of Wollongong LIVNAT, J & ZAROWIN, P 1990 The incremental information content of cashflow components Journal of Accounting and Economics, 13, 25-46 MISHKIN, F 1983 A Rational Expectations Approach to Macroeconometrics: Testing Policy Effectiveness and EfSicient Markets Models., Chicago, IL, University of Chicago Press for the National Bureau of Economic Research OU, J A & PENMAN, S H 1989 Financial statement analysis and the prediction of stock returns Journal of Accounting and Economics, 11, 295-329 PENMAN, S & ZHANG, X.-J 2002 Accounting conservatism, the quality of earnings and stock returns’ The Accounting Review, 77, 237–264 PETIT, R & RICHARDSON 1972 Dividend Announcements, Security Performance and Capital Market Efficiency Journal of Finance, 27, 993-1007 RAYBURN, J 1986 The Association of Operating Cash Flow and Accruals with Security Returns Journal of Accounting Research, 24, 112-133 REMENYI, D., WILLIAMS, B., MONEY, A & SWARTZ, A E 1998 Doing Research in Business and Management – An Introduction to Process and Method, New York, SAGE Publications Ltd 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 No Nation Vietnam Thai Lan Indonesia Singapore Malaysia Philipines Source : Bloomberg APPENDIX LIST OF TICKER NO TICKER DRC SRC CSM BGM BMC KSA DTL DHM FCM 10 KSH 11 HAP 12 HSG 13 HMC 14 HLA 15 LCM 16 NKG 17 KSS 18 NHW 19 PTK 20 POM 21 SMC 22 KTB 23 TLH 24 VID 25 VIS 26 DPR 27 HSI 28 HAI 29 HRC 30 DPM 31 PHR 32 RDP 33 TRC 34 TNC 35 VFG 36 ACC 37 IJC 38 BT6 39 BCE 40 KSB 41 BMP 42 CYC 43 CDC 44 C32 45 C47 46 SC5 47 CTD 48 CCI 49 CTI 50 DXV 51 DIG 52 DAG 53 DCT 54 DLG 55 FCN 56 HT1 57 HAS 58 HVX 59 CII 60 DHA 61 HBC 62 HLG 63 GTN 64 HU3 65 HTI 66 UIC 67 PXL 68 D2D 69 LBM 70 LCG 71 L10 72 LM8 73 MDG 74 NAV 75 NNC 76 PXS 77 PXI 78 PXT 79 PTC 80 TV1 81 SHI 82 SBA 83 SJS 84 TCR 85 THG 86 UDC 87 VNE 88 VSI 89 AGF 90 AGM 91 AVF 92 ABT 93 BBC 94 BHS 95 CMX 96 SCD 97 ACL 98 DHC 99 HVG 100 IDI 101 ICF 102 KDC 103 LSS 104 LAF 105 AAM 106 MPC 107 ANV 108 NSC 109 NHS 110 ATA 111 FMC 112 TS4 113 SSC 114 SPM 115 TSC 116 SBT 117 TNA 118 TAC 119 VNH 120 VTF 121 VNM 122 VCF 123 VHC 124 VLF 125 DCL 126 DHG 127 DMC 128 IMP 129 JVC 130 OPC 131 TRA 132 VMD 133 ALP 134 APC 135 BRC 136 SVI 137 GIL 138 CMV 139 CLL 140 CIG 141 DVP 142 DTT 143 PDN 144 PAC 145 TCO 146 GMD 147 HTV 148 MHC 149 HPG 150 ITD 151 GSP 152 LGC 153 COM 154 MCP 155 PAN 156 PIT 157 PJT 158 PVT 159 REE 160 SAM 161 SBC 162 SMA 163 SFI 164 SRF 165 STG 166 SKG 167 TIX 168 TPC 169 TTP 170 TCL 171 TYA 172 TIE 173 EMC 174 TMT 175 TMS 176 HTL 177 VPK 178 VOS 179 VSC 180 MCG 181 VIP 182 VST 183 VTO 184 VNL 185 VNA 186 ASP 187 PGC 188 PVD 189 GAS 190 SFC 191 CLC 192 DQC 193 GDT 194 EVE 195 HAG 196 KHA 197 LIX 198 KMR 199 PTB 200 RAL 201 GMC 202 SAV 203 TCM 204 GTA 205 TTF 206 VPH 207 VTB 208 BTT 209 HAX 210 PET 211 PNJ 212 PNC 213 SVC 214 SVT 215 TLG 216 CMG 217 ELC 218 CMT 219 MWG 220 SGT 221 ST8 222 FPT 223 DSN 224 HOT 225 RIC 226 STT 227 GTT 228 VNG 229 VNS 230 BTP 231 SJD 232 CLW 233 CNG 234 SEC 235 DRL 236 KHP 237 MTG 238 PGD 239 PPC 240 SHP 241 TIC 242 TBC 243 TMP 244 TDW 245 VSH ...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... 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... estimate the stock? ??s intrinsic value The technical analysis is essentially the making and interpreting of stock charts They interest on the past, and both the movements of stock prices and the volume