Accepted Manuscript Title: Do foreign investors improve stock price informativeness in emerging equity markets? Evidence from Vietnam Author: Xuan Vinh Vo PII: DOI: Reference:
S0275-5319(17)30302-1 http://dx.doi.org/doi:10.1016/j.ribaf.2017.07.032 RIBAF 722
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Research in International Business and Finance
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Please cite this article as: Vo, Xuan Vinh, Do foreign investors improve stock price informativeness in emerging equity markets? Evidence from Vietnam.Research in International Business and Finance http://dx.doi.org/10.1016/j.ribaf.2017.07.032 This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting proof before it is published in its final form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.
Do Foreign Investors Improve Stock Price Informativeness in Emerging Equity Markets? Evidence from Vietnam
Xuan Vinh Voab
University of Economics Ho Chi Minh City, Vietnam
59C Nguyen Dinh Chieu Street - District 3 – Ho Chi Minh City - Vietnam and b
CFVG Ho Chi Minh City
91 Ba Thang Hai Street, District 10, Ho Chi Minh City Email: [email protected]
Vietnamese Listed firms
Stock Price Informativeness
Abstract Most of previous studies on stock price informativeness tend to focus on the context of mature stock markets while this issue is more acute in emerging equity markets where regulatory and institutional structure are weak. This paper examines the relationship between foreign ownership and stock price informative in Vietnam stock market. We utilize a data set covering firm attributes of non-financial firms listed on the Ho Chi Minh City stock exchange over the period 2007 - 2015. Employing different estimation techniques for panel data, the empirical results indicate that foreign investors improve stock price informativeness in Vietnam stock market. The finding from this paper confirms the important role of foreign investors in emerging equity markets.
Keywords: Emerging equity markets; Foreign ownership; stock price informativeness; Vietnam
JEL Classification: G10, G20, G24, G32, G35
1. Introduction The increased importance of emerging markets are widely documented in the current literature. Recent data show that investors from advanced countries are increasingly shifting their portfolio to emerging markets for higher returns and better portfolio diversification benefits. However, these emerging markets are known to be less liquid and more volatile than markets in the developed economies (Peranginangin et al. 2016). Consequently, further study to provide deeper insight into 2
the emerging markets is important for different stakeholders, from market participants to policy makers. This paper investigates the impact of foreign ownership on stock price informativeness. Specially, we address the question of whether foreign investors induce higher informational efficiency in emerging markets. More importantly, we shed further light into this issue in the context of Vietnam, an important emerging country. We use a data set containing accounting and market information of firms listed on the Ho Chi Minh City stock exchange covering the period from 2006 to 2015. The current paper is motivated by a number of perspectives. Clearly, an important motivation for the paper is that we analyze the critical role of foreign investors in the context of Vietnam, a key emerging economy in Asia. Further, many Vietnamese unique institutional features offer an ideal setting to analyze the impact of foreign ownership on stock price informativeness. Remarkably, Vietnam starts a major comprehensive economic reform to transform from a centrally oriented economy into a market oriented one since mid-1980s. This reform results in a huge success for the country in many perspectives. In the last decade, Vietnam is on the list of high economic growth countries. In addition, Vietnam is a member of the CIVETS countries (Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa), a group of emerging economies. These nations are categorized as emerging markets with young and growing populations and dynamic economies (Batten & Vo 2014). Compelling characteristics of Vietnam financial system and financial markets also offer interesting setting for this study. Even though Vietnam is still considered as a bank-based economy, Vietnam stock market has grown rapidly during the last two decades. Significant improvement is evidenced
in Vietnam equity market in terms of the increasing number of listed firms, market capitalization and liquidity (Vo 2016b). More importantly, Vietnamese government has been undergone constant market structure development and legal improvement. Aiming toward a sound financial system is the objective for many stock market restructuring programs. However, in the academic side, the literature covering insightful equity market development in Vietnamese context is still very limited.1 Stock price informativeness is an important aspect of micro market structure. Stock price informativeness is viewed as the result of aggregating information amongst different types of investors (Huang & Ni 2017). Even though there is a considerable volume of papers addressing stock price informativeness, there remains many surprising results and open questions for further investigation. For example, Chan & Hameed (2006) report that stocks which are covered by more analysts incorporate greater market-wide information and lesser firm-specific information. This finding is contrary to the conventional wisdom that security analysts specialize in the production of firm-specific information. This highlights the importance of further research into the topic of stock price informativeness. More importantly, Fernandes & Ferreira (2009) assert that the stock price informativeness might be different in countries with different institutions. Ben-Nasr & Cosset (2014) also argue that political institutions are important in considering the impact of ownership structure on stock price informativeness because they condition government incentives that are related to the political constraints of the country. Hence, it is clearly relevant to conduct further study in a different country context to provide further insight into this important issue.
A number of papers provide a brief overview of the Vietnam stock market (Batten & Vo 2014; Batten & Vo 2015; Vo 2015)
Stock informativeness is potentially determined by both the precision and use of private information in trading (Wei 2017). Previous studies document that there might be a few channels that foreign investors provide better stock price informativeness. Foreign investors might improve stock price informativeness because they are sophisticatedly equipped investors. Further, they are motivated to be active monitors once they invest in firms. Foreign investors in emerging markets are able to do that because they are normally institutional investors with well-equipped techniques in firm monitoring. They are also experienced investors with sophisticated management skills. Hence, these large foreign investors are capable of mitigating agency problem and promoting better governance (Ding et al. 2013; Shleifer & Vishny 1986, 1997; Smith 1996). These lead to improved information content and credibility of firm’s disclosure and hence, improved stock price informativeness. In addition, a number of previous studies suggest that lower stock price informativeness is associated with poor corporate governance and a lack of firm-level transparency (Khanna & Thomas 2009). For example, Chung, Hrazdil, et al. (2016) suggest that longer and larger annual reports are associated with reduced information asymmetry and improved stock price efficiency. Lin et al. (2015) postulate the link between government quality and information environment. To this end, foreign investors could improve stock price informativeness by installing high standard of corporate transparency and world-class disclosure practices2. This results in improvements in internal or external governance mechanisms which in turn pressure firm managers to disclose high quality information (Armstrong et al. 2012; Beasley 1996; Dimitropoulos & Asteriou 2010; Hou et al. 2012). Further, Huang & Shiu (2009) provide evidence that foreign investors who enjoy a
See Ferreira et al. (2011) for a discussion on the relation between corporate governance and stock price informativeness.
long-run information advantage over domestic investors. Gider & Westheide (2016) examine whether corporate insiders trade when asymmetric information is high. Leuz et al. (2010) assert that foreign investors have preference for firms with good corporate governance practices and information environment. In summary, previous studies highlight that higher foreign ownership is associated with better stock price informativeness. Benefits of increased foreign investors’ participation have been recoginized in many papers. For example, it is expected that foreign investors in emerging markets like Vietnam promote corporate governance and management expertise in firms. This is explained by the proposition that foreign investors are normally effective in influencing corporate management and boards towards the utmost aim of maximizing shareholder value (Batten & Vo 2015). Many papers investigate the stabilizing effects of foreign investors (Schuppli & Bohl 2010; Vo 2015). In a small emerging market context, foreign investors are expected to play a crucial role in creating liquidity and stabilizing the stock market volatility. A number of previous papers present the role of foreign investors in emerging markets. More specially, previous papers address the impact of foreign investors on a number of aspects. For example, Vo (2015) examine the role of foreign investors in stabilizing stock market volatility. Paramati et al. (2016) confirm the importance role of foreign investors on firm clean energy consumption. A number of authors analyze the role of foreign investors in providing stock market liquidity (Ng et al. 2015; Peranginangin et al. 2016; Rhee & Wang 2009; Vo 2016d). Chung, Kim, et al. (2016) analyze the relationship between foreign investors trading and information asymmetry in Korea. More importantly, the incentives to collect information might be different in emerging markets in comparison to those in developed markets (Chan & Hameed 2006). Moreover, Morck et al. (2000) show that firms’ returns are more synchronous in emerging markets than in developed 6
countries. Hence, further investigation is important to provide further understanding on the role of foreign investors in incorporating information in stock prices. This paper is related to previous papers in the sense of examining the role of foreign investors in emerging markets. However, this paper fundamentally differs from previous foreign ownership studies in the sense that we focus on the link between foreign ownership and stock price informativeness. Investigating this important link is critical to provide further insight into the role of foreign investors in emerging markets. Further, analyzing stock price informativeness is important aspect of market microstructure which is more acute in emerging markets where regulatory framework is weak. More importantly, an in-depth analysis of whether foreign investors promote stock price informativeness is critical to minimize the possible adverse effect on domestic financial markets in emerging economies. The current paper offers a number of contribution to the literature. Firstly, it adds to the literature by providing further insight into the role of foreign investors in stock price informativeness in the context of Vietnam. Further understanding on this link is clearly important for the policy formulation process in emerging markets. Secondly, we employ a number of econometric technique to provide a more comprehensive analysis into the question at hand. Finally, we add to the light literature with a few recent papers examine the role of foreign investors in different angles relating to stock markets in the context of Vietnam, for example, liquidity (Vo 2016d), volatility (Vo 2015) and corporate risk taking (Vo 2016c). The remainder of the paper is outlined as follows. Section two introduces the method and data for the empirical analysis. Section three presents the results and discussions of results. Finally, section four offers some concluding remarks.
2. Methodology and Data Measuring Stock Price Informativeness Stock return synchronicity is commonly used as a major measure for the amount of firm-specific information impounded in stock prices in the financial literature (Bai et al. 2017). In this article, we use the firm-specific return variation as a measure of stock price informativeness. Ferreira et al. (2011) state that there is strong empirical evidence in the current literature supporting the use of firm-specific return variation as a measure of stock price informativeness. More specially, this indicator is also viewed as a useful measure of private information about firms. The argument to support this view is based on the evidence from a large number of papers suggesting a significant portion of stock return variation is not fully explained by stock market movements (French & Roll 1986; Roll 1988). These studies argue that firm specific return variation is a good proxy which reasonably measures the rate of private information incorporated into prices via trading. Similar to Morck et al. (2000) and Roll (1988), we estimate annual firm specific return variation using the market model. Particularly, we obtain firm specific return variation which is 1-R2 from the following regression: 𝑟𝑖,𝑡 = αi + βi 𝑟𝑀,𝑡 + 𝜀𝑖,𝑡 using daily return data, where 𝑟𝑖,𝑡 is the return of stock i in day t and 𝑟𝑀,𝑡 is the market return. Similar to previous studies in the literature, given the bounded nature of R2, we conduct our tests using a logistic transformation of 1- R2. The aim of the log transformation is to replace a bounded dependent variable (0 ≤ R2 ≤ 1) with an unbounded continuous variable (Brockman & Yan 2009; Xing & Anderson 2011).
𝑅𝑖2 𝛹𝑖 = log ( ) 1 − 𝑅𝑖2 This indicator serves as an important proxy for stock price informativeness in the context of emerging markets. Ferreira et al. (2011) assert that Ψ is a proxy for firm-specific stock return variation relative to market-wide variation where higher value for this variable indicates higher firm-specific stock return variation relative market-wide and industry-wide variation or higher stock price informativeness. Alternatively, this variable measures the lack of synchronicity with the market for a specific stock. In other words, higher value of Ψ indicates lower synchronicity with the market and the industry. Model the link between foreign ownership and stock price informativeness
Similar to Brockman & Yan (2009), we include several control variables which have been used as information proxies in previous research to isolate the impact of foreign ownership on stock price informativeness. These control variables have been widely used in previous papers (Heflin & Shaw 2000; Jin & Myers 2006; Morck et al. 2000; Piotroski & Roulstone 2004).
𝑆𝑃𝐼𝑛𝑓𝑜𝑖,𝑡 = α + β𝐹𝑜𝑟𝑒𝑖𝑔𝑛𝑖,𝑡 + ∑ γj 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝑖,𝑡−1 + 𝜃𝑛 + 𝛿𝑡 + 𝜀𝑖,𝑡
where 𝑆𝑃𝐼𝑛𝑓𝑜𝑖,𝑡 presents stock price informativeness, which is Ψ as discussed in previous section. In this paper, 𝐹𝑜𝑟𝑒𝑖𝑔𝑛𝑖,𝑡 measures the level of foreign ownership in firm i at the end of year t, which is calculated as the proportion of total shareholdings by foreign investors in firm i at the end of year t.
Other control variables, which potentially affect stock price informativeness, include the followings:
SIZE is the logarithm of the total assets of firm i in year t. This variable is widely used as a control variable for the information variable of the firm (Brockman & Yan 2009; Chan & Hameed 2006). Larger firms tend to have more publicly available information so that stock price tend to be less specific firm specific information (Easley et al. 2002).
VALUE is a measure of firm value. Similar to Xing & Anderson (2011), in our analysis we use Tobin’s Q as a proxy for firm value. This is calculated as the ratio of market value of assets divided by the book value of assets where the market value of assets is the sum of the market capitalization and the book value of total liabilities.
LEVERAGE is a measure of firm leverage. This is calculated as the ratio of total debts at the end of the fiscal year to total assets of the firm.
LIQUIDITY is a measure of the firm trading activities. This variable is calculated as the total number of shares traded in a year divided by the average number of shares outstanding in a firm. Brockman & Yan (2009) argue that both market and firm specific information is higher for actively traded firms. Moreover, Chan & Hameed (2006) suggest that firm specific information is associated with stock trading volume.
VOLATILITY is the stock return volatility measure. Similar to a number of previous papers (Bae et al. 2004; Chen et al. 2013; Li et al. 2011)(Vo 2015, 2016a), the measure of stock return volatility is calculated as follows:
VOLATILITY𝑖,𝑡 = √ n−1 ∑n1(returni,k – MEANi,t )2 ; where returni,k is the daily return of stock i in day k of year t, MEANi,t is the annual average of all daily stock returns of firm i in year t, n is the number of trading days in year t. Data
Our data sample includes accounting and market information of firms listed on the Ho Chi Minh City stock exchange. To be included in the sample, firms must satisfy the following criteria: i) firms must be listed and remain listed during the period from 2007-2015; and ii) firms must be non-financial corporations, bank and insurance companies due to their unique nature of business. Data are collected from Vietstock Database, which belongs to Tai Viet Corporation, a leading financial information and data supplier in Vietnam.
3. Results and Discussion of Results Table 1 summarizes the descriptive statistics of the data sample in our analysis.
Correlation amongst variables Table 2 shows the correlation coefficients amongst variables employed in this study. At first glance it can be seen that the foreign ownership measure is positively correlated with the stock price informative indicator. This suggests that increased foreign ownership in a firm helps to provide more information in the stock price.
Of particular note here is the high value of the correlation coefficient between VALUE and LEV (0.9439). To avoid the problem of multicollinearity, we do not simultaneously control for the two variables in the same regression. Table 3 reports the regression results of panel data estimation using different estimation approach. We first estimate the model using least squared regression estimator. In addition, we use the fixed effects panel estimators as extra robustness test. Overall, this table shows that the estimates for the foreign ownership variable is positive and significant in all regressions. Hence, we conclude that foreign ownership positively affects stock price informativeness. This result confirms that foreign investors improve the informational efficiency in equity market in emerging economies. In order to further ensure the robustness of the regression results, we estimate the regression again using the first difference estimator (ie. all the variables enter the regression in differenced forms). The use of this approach allows us to address the problem of omitted variables in econometrics with panel data. The specification of first differenced form of the estimation model allows us to control for time invariant firm attributes, which are unobservable but could potentially affect both firm stock price informativeness and foreign ownership. In addition, this specification takes into account the variations of the first differences over time. More specially, the dependent variable is now the change of stock price informativeness. The independent variables include the differences in foreign ownership variable and other control variables. The results from this table also indicate a positive and significant link between foreign ownership and stock price informativeness.
4. Conclusion A growing volume of literature focus on examining the information aggregated and transmitted into stock prices via the trading activities of different speculators and investors in equity markets (Ben-Nasr & Alshwer 2016). However, the question of whether foreign investors improve stock price informative remain an open in the finance literature. This has drawn strong interest from different stakeholders in financial markets, from financial managers, investors to supervisory agencies. More importantly, the issue of stock price informativeness is even more critical in emerging markets where stock markets are normally at an early age of development. Further, examining stock price informativeness in emerging markets is interesting on its own merit because these markets are normally characterized by volatile nature. This paper investigates the impact of foreign ownership on stock price informativeness in Vietnam equity market employing a panel data set including both the firm characteristics and market data. Employing a number of techniques for panel data estimation, our result confirms a positive and significant link between foreign ownership and stock price informativeness. The paper has potential policy implications for emerging market economies. Firstly, a clear understanding of the role of foreign investors in emerging market is important for policy setting. Secondly, our result indicates the improvement of foreign investors in the invested firms with respect to stock price informativeness. Thirdly, the finding suggests that restructuring approach of government should aim at attracting greater foreign ownership in local firms.
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Table 1 Descriptive Statistics of variables SPInfo
-2.2730 Median Maximum Minimum
Table 2 Correlation coefficients amongst variables SPInfo
Table 3 Regression Results Panel Least Squared
Panel Fixed Effects
0.1599 -0.0147 105.6366***
F-Statistics Prob statistics
Note: *, **, *** indicates significance at the 10%, 5% and 1% respectively
Table 4 Regression Results using first difference estimator Variable
Adjusted R-Squared F-Statistics Prob F-statistics
Note: *, **, *** indicates significance at the 10%, 5% and 1% respectively