Payout policies, government ownership, and financial constraints: Evidence from Vietnam

• Published date: 01 December 2022
• Author: Nha Duc Bui,Yun‐Yi Wang,Jin‐Ping Lee
• Date: 01 December 2022
• DOI: http://doi.org/10.1111/irfi.12375

ORIGINAL ARTICLE

Payout policies, government ownership, and

financial constraints: Evidence from Vietnam

Nha Duc Bui

1

| Yun-Yi Wang

2

| Jin-Ping Lee

2

1

Faculty of Finance and Banking, Ton Duc

Thang University, Ho Chi Minh City, Vietnam

2

Department of Finance, Feng Chia

University, Taichung, Taiwan

Correspondence

Nha Duc Bui, Faculty of Finance and Banking,

Ton Duc Thang University, Ho Chi Minh City,

Vietnam.

Email: buiducnha@tdtu.edu.vn

Yun-Yi Wang, Department of Finance, Feng

Chia University, 100 Wenhwa Rd., Taichung,

Taiwan.

Email: yyiwang@fcu.edu.tw

Abstract

This study investigates the impact of government ownership

on payout policies, cash holdings, capital expenditures, and bor-

rowing costs for firms in Vietnam. Using the central hypothesis

that state-owned firms (SOEs) are less financially constrained

than privately-owned firms, we provide several main findings.

First, we reveal that SOEs typically pay higher dividends, have

higher total payouts, but undertake lower repurchases than

privately-owned firms. Second, we find that SOEs have less

need to hoard cash and spend less of their cash flow on capital

expenditures than non-state-owned firms. Finally, our research

indicates that SOEs have lower borrowing costs than privately

owned firms. These findings support the view that, in frontier

markets, firms with non-state ownership can mitigate the

adverse effects of financial constraints by decreasing total pay-

outs to shareholders and instead using their cash flow to

increase cash holdings or capital spending.

KEYWORDS

cash dividends, cash flows, cash holdings, financial constraints,

government ownership, repurchases, total payouts

JEL CLASSIFICATION

G30, G32, G35

1|INTRODUCTION

The relationship between ownership type and finance policies has received significant attention in academic

research, and several researchers have focused on the impact of state ownership on payout policies. For instance,

Received: 9 August 2020 Revised: 30 December 2021 Accepted: 18 January 2022

DOI: 10.1111/irfi.12375

© 2022 International Review of Finance Ltd.

600 International Review of Finance. 2022;22:600–636.

wileyonlinelibrary.com/journal/irfi

Wang et al. (2014) investigate the impact of state ownership on Chinese corporate dividend payouts, while Lam

et al. (2012) examine how ownership structure affects both cash dividends and stock dividends in China. Ben-

Nasr (2015) uses a multinational sample of newly privatized firms from 43 countries to investigate the correlation

between government ownership and dividend policy. In this study, we extend this strand of literature by examining

the impact of state ownership on payout policies (cash dividends, share repurchases, and total payouts), cash hold-

ings, capital expenditures, and borrowing costs for a sample of firms in the Vietnam stock market, which represents a

frontier market.

We hypothesize that if firms without state ownership are likely to be financially constrained, they will tend to

distribute less of their cash flow. Moreover, because dividends are a more long-term commitment, when non-state-

owned firms (NSOEs) distribute cash to shareholders, we hypothesize that they will use share repurchases to fund

cash payouts more than state-ownership enterprises (SOEs). State-owned firms have easier access to low-cost exter-

nal funds than firms without state ownership because they can borrow from state-owned banks for investment

opportunities and use their free cash flow to pay cash dividends. Hence, we hypothesize that they will employ cash

dividends for distributions to their shareholders more than NSOEs.

Agency theory suggests that managers will be more likely to distribute cash to their investors if monitoring costs

are lower (Grinstein & Michaely, 2005). Jensen (1986) argues that when the conflicts of interest between share-

holders and managers are severe, firms that generate substantial free cash flow are more likely to distributetheir free

cash. Borisova et al. (2012) argue that greater government ownership in firms leads to improve governance in general

and better monitoring in particular because of the government's monopoly on employing coercive power. This

implies that firms with state ownership will distribute more in total payouts (the sum of dividends and repurchases)

than firms with non-state ownership. Second, we test the hypothesis that firms with state ownership have less need

to hoard cash or use their cash flow for capital expenditures than firms with non-state ownership. Finally, we exam-

ine whether firms with state-ownership have lower borrowing costs than firms with non-state-ownership due to the

former having easier to access state-ownership banks for loans than the latter. The evidence presented in this paper

supports each of these hypotheses.

Corporate managers can distribute free cash flows to their shareholders either by paying cash dividends or mak-

ing stock repurchases (Jagannathan et al., 2000). Jagannathan et al. (2000) show that dividends and stock repurchase

are employed by different types of firms and at different times. In this study, we investigate how state ownership

affects payout policy choices (dividends, repurchases, and the sum of dividends and repurchases).

Our study contributes to the literature by exploring the role of state ownership in the choice of payout policies

in a frontier market. We extend the current literature by examining a frontier market rather than an emerging market

(Lam et al., 2012; Wang et al., 2011).

1

First, we reveal that SOEs typically pay higher dividends but engage in fewer

repurchases than privately owned firms. We also extend the literature on repurchase policies by investigating the

role of state ownership in determining repurchase policies and answering the following research question: How does

state ownership affect repurchase payouts? Answering this question is important for at least two reasons. First, as

Allen et al. (2000) report, repurchases decrease free cash-flow concerns and mitigate conflicts of interest between

outsiders and managers. Second, the government is a unique shareholder in a firm and is in a position to influence

the firm's repurchase decisions. This study therefore seeks to demonstrate how state ownership affects repurchase

policies. Second, this study also contributes to the literature by examining how state ownership affects total payout

(dividends plus repurchases). We reveal that state ownership positively affects total payout; in other words, firms

with greater state ownership distribute more free cash flow to their investors.

In addition, we extend the literature by investigating the impact of state ownership on cash flow retention and

capital expenditures, and borrowing costs in Vietnam's stock market. To the best of our knowledge, this study is the

first to investigate this relationship in a frontier market. First, our study considers whether SOEs use less of their free

cash flow than firms with non-state ownership. Here, we reveal that SOEs are less financially constrained and there-

fore have less need to hoard their cash flow than NSOEs. These findings support the view that firms are able to

BUI ET AL.601

mitigate the adverse effects of financial constraints by increasing their cash holdings, consistent with Almeida

et al. (2004) and Denis and Sibilkov (2010).

Second, we provide evidence that SOEs use less of their cash flow for capital expenditures than NSOEs. Our

findings reveal that firms with non-state ownership must choose to decrease cash dividends to be able increase capi-

tal expenditures from their cash flow. This result is related to the existing literature on the sensitivitiesof firm invest-

ments to their cash flow. Fazzari et al. (1988) argue that firms may pay low cash dividends to their shareholders if

they require financing for investments that exceeds their internal cash flow and retain all the low-cost internal funds

they can produce. Moyen (2004) also suggests that constrained firms have to choose between using their cash flow

to pay cash dividends or using it for investing. Lewellen and Lewellen (2016) provide evidence that financially con-

strained firms spend more of their free cash flow on fixed investments and working capital than unconstrained

firms.

2

In extending prior studies, our paper lends support to the view that in frontier markets firms with non-state

ownership can mitigate the adverse effects of financial constraints by decreasing total payouts from cash flow and

increasing cash retention or capital spending. Finally, our paper contributes to the literature on how state ownership

affects the firm's borrowing costs. We provide new evidence that firms with state ownership have lower borrowing

costs than firms with non-state ownership. Here, we contribute to several prior studies that have examined the

impact of government ownership on the cost of debt (Borisova et al., 2015; Borisova & Megginson, 2011).

This study's analysis is related to prior studies that examine how to classify the level of financial constraints firms

face. For instance, Lewellen and Lewellen (2016) show that firms that are most likely to be financially constrained, can be

identified as those with persistently negative free cash flow and low profits, working capital, dividends, and equity, as the

most sensitive to cash flow.

3

However, our study hypothesizes that NSOEs are more likely to be financially constrained

than SOEs. Thereby, we introduce a novel way of identifying the level of financial constraints firms face.

Our study also complements and expands the recent work of Denis and Sibilkov (2010), who demonstrate that

cash holdings are related to higher investments for constrained firms than unconstrained firms. They also indicate

that the marginal investments of constrained firms are related to higher value increases than those of unconstrained

firms. Incorporating a novel constraint classification, we find that financially constrained firms have lower payout

ratios, hold more cash, and spend more of their cash flow on capital expenditures. In contrast, financially

unconstrained firms have higher payout ratios, hold less cash, and spend less of their cash flow on capital

expenditures.

The remainder of the paper is organized as follows. Section 2discusses the institutional background relevant to

the study. Section 3presents our empirical hypotheses based on prior literature and theoretical models of payout

policies. The sample, models, and variable measures employed in this study are described in Section 4. Section 5dis-

cusses the empirical results regarding payout policies. Section 6concludes the paper.

2|INSTITUTIONAL BACKGROUND

State-owned enterprises have operated under the Law on State-Owned Enterprises since 1995. Hence, they have

been able to autonomously engage in market transactions with other firms. Their managers have stronger decision-

making powers for hiring employees, and it is easier for them to obtain loans from state-owned banks. However, in

the 2000s, state-owned enterprises experienced restructuring episodes that took place via equitization. The Unified

Enterprise Law of 2005 established that all SOEs must operate in the form of limited liability companies or joint-

stock firms to ensure they have modern governance systems. When the state is a partial owner, SOEs are organized

as joint stock firms, which may be listed or non-listed and can be considered to be “privatized.”The government con-

trols firms after their privatization to ensure implementation of its primary political objectives. When the government

controls a proportion of shares, a government representative is elected to the Board of Directors, and the agent has

a relative advantage in affecting the firm's decision-making. In Figure 1, we show that the 2015 ratios of government

ownership for three firms (the Ho Chi Minh Infrastructure Investment Joint Stock Corporation, Cu Chi Commercial

602 BUI ET AL.