MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HO CHI MINH CITY
--------------------
BUI KIM PHUONG
INVESTOR SENTIMENT, EARNINGS QUALITY AND
DIVIDEND POLICY: EVIDENCE FROM VIETNAM
SUMMARY OF PHD THESIS
Ho Chi Minh City – 2019
MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HO CHI MINH CITY
--------------------
BUI KIM PHUONG
INVESTOR SENTIMENT, EARNINGS QUALITY AND
DIVIDEND POLICY: EVIDENCE FROM VIETNAM
Major: Finance – Banking
Major code: 9340201
SUMMARY OF PHD THESIS
SUPERVISOR:
Assoc. Prof. Dr. Nguyen Thi Ngoc Trang
Ho Chi Minh City – 2019
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CHAPTER 1: INTRODUCTION
1.1 Introduction
The decision to pay dividends is one of the most important financial decisions in a firm. Therefore, the
investors and the policy makers always pay attention to this decision. There are many theories that have been
proposed to explain the dividend policy of the firm, such as the theory of tax, agency costs and signaling. In
addition, from the behavioral finance perspective, Baker and Wurgler (2004a) proposed the catering theory
of dividends based on investor sentiment. This theory was developed and tested by Baker and Wurgler
(2004a) with data from US listed firms. This theory is tested in other developed markets such as the United
Kingdom, Australia, European countries and OECD countries. In addition, a few studies that use data of
emerging markets such as Brazil, Thailand or Taiwan also investigate the effect of investor sentiment on
dividend policy. However, these studies have not reached a consensus on results in general. In recent years,
there are many studies that conducted in Vietnam on determinants of the firms’ dividend policy. Specifically,
these studies focus on analyzing the effect of profitability, firm size, growth, risk, financial leverage, firm life
cycle, and cash holdings on dividend policy. Do the firms pay dividends to cater to the preference of
investors when the Vietnamese market has many different features compared to developed markets? To
answer this question, the thesis studies the relationship between investor sentiment and dividend policy in
Vietnam with data of listed firms on HSX and HNX. Besides, the thesis continues to study whether
Vietnamese firms have the incentive to signal to investors about the earnings quality through dividend
payment policy. To clarify this issue, the thesis studies the relationship between earnings quality and
dividend policy in Vietnam.
1.2 Objectives
The thesis is conducted to explain the motivation for dividend payment of listed firms in Vietnam. To
achieve this general objective, the thesis aims at two specific objectives:
1. Test the catering theory of dividends through investigating the relationship between investor
sentiment and the firms’ dividend payment policy.
2. Study the effect of earnings quality on the firms’ dividend payment policy.
1.3 Research questions
To achieve the above research objectives, the thesis focuses on addressing the following two research
questions:
1. Do firms make decisions to pay dividends to cater to the investors' preference?
2. Do firms make decisions to pay dividends to signal about the earnings quality to investors?
1.4 Subject and scope of the study
In order to distribute earnings to shareholders, besides cash dividend, the firms can also buy back shares.
However, compared to cash dividends, share repurchases are less common. Therefore, the thesis only
focuses on cash dividend policy of the firms. Specifically, the thesis studies the dividend payment policy of
460 firms listed on HSX and HNX between 2010 and 2016. The data is collected from 2009 to 2017. The
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data needed for research is extracted from the Datastream database. The final sample includes 2,653 firm-
year observations.
1.5 Methodology
The thesis uses many different measures for both dependent and independent variables to ensure the
robustness and reliability of the research results. In addition, other factors that may affect the dividend policy
of the firms are also controlled. Besides, the thesis uses the system generalized method of moment to
estimate the relationship between investor sentiment and dividend policy as well as the relationship between
earnings quality and dividend policy. This method can help solve endogenous problems as well as other
defects of the research model.
1.6 Structure of the thesis
The thesis is structured into 5 chapters. Specifically, the introduction is presented in chapter 1. The next
chapter presents the theoretical framework and literature review. Methodology is clarified in chapter 3.
Chapter 4 presents and discusses research results. Finally, the conclusions and some policy implications are
presented in chapter 5.
CHAPTER 2: THEORETICAL FRAMEWORK AND LITERATURE REVIEW
2.1 DIVIDEND POLICY
John Lintner is considered to be the founder of the modern perspective on dividend policy. Specifically,
Lintner (1956) proposed the target payout hypothesis, which suggests that dividends are a function of long-
term sustainable income. According to Lintner, dividend smoothing is common because managers believe
that the market places a premium on firms that have a stable dividend policy. Subsequent research by Miller
and Modigliani (1961) suggests that in perfect and efficient capital markets, dividend policy does not affect
the value of a firm. By relaxing some of the assumptions made by Miller and Modigliani models, four major
theories have been developed to explain the firm's dividend policy, including the theory of tax, signaling,
agency cost and behavior. In particular, the behaviorial theory on dividend preference of investors was
developed by Shefrin and Statman (1984) based on psychological reasons such as regret aversion, mental
accounting, prospect theory and self-control to explain why individual investors find dividends attractive.
From the ideas of Shefrin and Statman (1984), Baker and Wurgler (2004a) developed the catering theory of
dividends. According to this theory, firms choose payout policies to cater to investors' preference.
Specifically, when investor's preference for dividends declines, firms respond by not paying dividends and
vice versa.
2.2 INVESTOR SENTIMENT AND DIVIDEND POLICY
2.2.1 Investor sentiment
Investor sentiment is how investors formulate expectations about future earnings. Investors' decisions can be
affected by sentiment and betting against sentimental investors is costly and risky. Investor sentiment is not
easy to measure accurately. A number of measures have been proposed to measure investor sentiment,
including dividend premium. Based on dividend premium, Baker and Wurgler (2004a) developed the
catering theory of dividends. This theory will be presented in more detail below.
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2.2.2 The relationship between investor sentiment and dividend policy
The catering theory of dividends was developed by Baker and Wurgler (2004a) that based on the ideas of
Shefrin and Statman (1984), whereby firms choose a dividend payment policy to cater to the preference of
the investors. In particular, firms cater to investors by paying dividends when investors place a share price
premium on firms that pay dividends. In contrast, firms will not pay dividends when investors prefer firms
that do not pay dividends. To measure the relative prices of firms that pay dividends and firms that do not
pay dividends, Baker and Wurgler (2004a) use dividend premium. It is the relative market valuation of
dividend payers versus dividend nonpayers. Many empirical studies support the catering theory of dividends,
such as those by Li and Lie (2006), Bulan et al. (2007), Kale et al. (2012), Liu and Chen. (2015), Ferris et al.
(2006), Lee (2010). However, a number of other studies find no evidence to support this theory (Julio and
Ikenberry, 2004; Hoberg and Prabhala, 2009; Li and Zhao, 2008; Renneboog and Trojanowski, 2011; Geiler
and Renneboog, 2015; von Eije and Megginson, 2008). In addition, an international study by Ferris et al.
(2009) and Kuo et al. (2013) find that firms in common law countries cater to the dividend preference of
investors while firms in civil law countries do not. Other studies in emerging markets such as Brazil,
Thailand and Taiwan show that firms cater to the dividend preference of investors (Boulton et al., 2012;
Tangjitprom, 2013; Wang et al. (2016).
2.3 EARNINGS QUALITY AND DIVIDEND POLICY
2.3.1 Earnings quality
The earnings quality is an indicator of the quality of financial reporting. Earnings are of high quality when
they accurately reflect the firm's long-term performance. In contrast, earnings are of low quality when they
are manipulated. The manipulated earnings are the result of intentional intervention of managers in the
preparation of financial statements through accounting options in order to gain benefits either for themselves
or for the firm.
2.3.2 The relationship between earnings quality and dividend policy
The outcome view of Jensen (1986) and La Porta et al. (2000) contends that dividends are the result of
effective governance. Thus, the relationship between earnings quality and dividend policy is positive.
Meanwhile, the substitute view of Rozeff (1982) and La Porta et al. (2000) suggest that dividend policy will
substitute for strong governance. Therefore, the substitute view predicts a negative relationship between
earnings quality and dividend policy. In addition, the information asymmetry between managers and outside
investors causes reverse selection problems and limits the firm's ability to access external capital markets
(Myers and Majluf, 1984). Therefore, from the information asymmetric view, the relationship between
earnings quality and dividend policy is positive, similar to the outcome view of the free cash flow problem.
Besides, under the quiet life hypothesis, managers can abandon positive NPV investment projects when they
are not closely monitored. Assessing the quality of a firm's earnings can motivate managers to work harder.
Thus, the relationship between earnings quality and dividend policy is negative, similar to the substitute view
of the free cash flow problem. Some studies examine the information content of dividends by investigating
whether dividend policy provides information about the quality of earnings. Specifically, Tong and Miao
(2011) find that dividend payment status is an indicator of the quality of a firm’s earnings and a piece of
