MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HOCHIMINH CITY
--- oOo ---

NGUYEN TUONG PHUONG

EVIDENCE ON MARKET-TO-BOOK VALUE
AND FIRM PERFORMANCE:
A STUDY OF LISTED FIRMS IN VIETNAM

MASTER THESIS

Ho Chi Minh City – 2011


MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HOCHIMINH CITY
--- oOo ---

NGUYEN TUONG PHUONG

EVIDENCE ON MARKET-TO-BOOK VALUE
AND FIRM PERFORMANCE:
A STUDY OF LISTED FIRMS IN VIETNAM

MAJOR:
FINANCE & BANKING
MAJOR CODE: 60.31.12

MASTER THESIS
INSTRUCTOR

performance, which is consistent with the results of Modigliani and Miller
(1958), Robichek and Myers (1966), Jensen and Meckling (1976), Frank et al
(2005). Firm size has negative and significant correlation with firm‟s
performance, which contrasts with Titan & Zeitun (2007). Beta has negative
influence to market to book ratio. This finding is consistent with Damodaran
(2002), Myers and Majluf (1984), Baker and Wurgler (2002), Harris and
Marston (1994). Firm performance in 2009 has positive influence to growth
opportunity (Pb) in 2010. This result favours Damodaran (2002), Block (1995).
Industry has influence to firm‟s performance.
Keywords: Market to book value, corporate performance, Vietnam, HOSE,
HNX.

ii


TABLE OF CONTENTS
ACKNOWLEDGEMENT -------------------------------------------------------------------------------- i
ABSTRACT ------------------------------------------------------------------------------------------------- ii
TABLE OF CONTENTS---------------------------------------------------------------------------------- iii
LIST OF FIGURES ---------------------------------------------------------------------------------------- iv
LIST OF TABLES ----------------------------------------------------------------------------------------- v
CHAPTER 1: INTRODUCTION ----------------------------------------------------------------------- 1
1.1 BACKGROUND --------------------------------------------------------------------------------------- 1
1.2 RATIONALE ------------------------------------------------------------------------------------------- 2
1.3 RESEARCH PROBLEMS ---------------------------------------------------------------------------- 6
1.4 RESEARCH OBJECTIVE ---------------------------------------------------------------------------- 7
1.5 RESEARCH METHODOLOGY AND SCOPE---------------------------------------------------- 8
1.6 STRUCTURE OF THE STUDY --------------------------------------------------------------------- 9
CHAPTER 2: LITERATURE REVIEW -------------------------------------------------------------- 10
2.1 INTRODUCTION -------------------------------------------------------------------------------------- 10

APPENDIX A
APPENDIX B

iii


LIST OF FIGURES
Figure 1: Distribution of Sectors ------------------------------------------------------------------------ 31
Figure 2: Distribution of Market to Book and Leverage ratios ----------------------------------- 38

iv


LIST OF TABLES
Table 1: Mid-cap property and casualty companies evaluation ----------------------------- 3
Table 2: Summary of Statistics of Market to Book of other Countries in 2010 --------- 11
Table 3: Summary of Statistics of Return on equity of other Countries in 2010 --------- 11
Table 4: Summary of Variables for model ------------------------------------------------------ 24
Table 5: Summary of Statistics and Correlation of the Variables for Year 2009--------- 31
Table 6: Summary of Statistics and Correlation of the Variables for Year 2010--------- 33
Table 7: Classification by ROE in 2009 --------------------------------------------------------- 39
Table 8: Classification ROE in 2010 -------------------------------------------------------------- 40
Table 9: Classification by EB in 2009 ------------------------------------------------------------ 40
Table 10: Classification by EB in 2010 ----------------------------------------------------------- 40
Table 11: t-test for Two-Sample Assuming Unequal Variances ----------------------------- 42
Table 12: Estimate results using ROE and LTDTA in 2009 --------------------------------- 43
Table 13: Estimate results using ROE and LTDTE in 2009 ---------------------------------- 44
Table 14: Estimate results using ROE and TDTE in 2009------------------------------------ 45
Table 15: Estimate results using ROE and LTDTA in 2010 --------------------------------- 45
Table 16: Estimate results using ROE and LTDTE in 2010---------------------------------- 46

structure when debt to equity ratio is less than 1.812. As stated that the MM
theory1 is an important part in firm‟s financing policy. In addition, tradeoff
theory2 and costly external financing theory3 focus on a relation that price to
book ratio plays in making financing decisions. Therefore, the effect of price to
book on firm performance is the focus of this thesis.

Damodaran (2002) provides evidence that the most important determinant
of price to book value is return on equity, and investors should focus on the
mismatch between return on equity and price to book. Block (1995) argues that
there is a good linear between price to book value ratio and earning to book
value ratio (a proxy of profitability). Xu et al (2005) argue that growth
opportunity has strong relation to firm‟s performance, which is measured by
return on equity (ROE).
1


Market to Book and Firm Performance

There is a lack of empirical evidence on a relationship between market
price to book value ratio and firm performance for Vietnam. Accordingly, the
first objective of this study is to examine possible correlation between firm‟s
performance and market to book value. Tran (2008) finds an insignificant
correlation between growth opportunity and firm‟s performance for 50 nonfinancial companies in Ho Chi Minh Stock Exchange in September 2008. Thus,
the second objective of this study is to examine the effect of growth
opportunity, which is measured by market to book ratio, on firm‟s performance.

1.2 RATIONALE

This study contributes to literature in two directions: (1) by using
ordinary least square regression model and quantile analysis to investigate the

Beta

1996

1997

1998

1999

2000

average

AFC

1.0

1.1

1.4

1.4

1.6

1.3

0.8


1.1

0.8

0.9

1.0

1.1

10%

1.05

ORI

1.4

1.6

1.4

0.6

1.6

1.3

1.2



When comparing AFG to ORI, market to book of AFG is lower than one of ORI
by 0.2, a higher forcasted ROE than ORI, only a 0.05 higher than ORI in beta.
So, we conclude that AFG is relatively undervalued with ORI, and we should
choose AFG for investment.

For managers, they may consider market to book as a proxy of growth
opportunity to improve their firm‟s performance. Firms with high growth
opportunity have more chance to access cheap equity; accordingly, reduce
leverage ratios to maximize profit. From viewpoints of investors, they tend to
favor high growth companies and they are willing to finance firms‟ profitable
projects. In addition, if a company has a high leverage ratio, investors incline to
reduce their investment to firm‟s project because benefits to creditors exceed
benefits to investors. Because of high growth opportunity, companies attract to
sources of funds should gradually reduce its reliance on debt and reduce
leverage. When keeping lower current target ratios, they easily take advantages
of arising future opportunities and have a good firm performance. For instance,
Ho Chi Minh City Infrastructure Investment Joint Stock Company (stock code:
CII) has successfully issued 40 million convertible bonds with a 5 year term for
Goldman Sachs. Why does Goldman Sachs invest in a firm in Vietnam such as
CII? Firstly, the construction industry in Vietnam has high potential to grow
associated with the urbanization rate. Issues of infrastructure and urbanization
are the challenges for Vietnam. More than ever, to attract and to promote the
efficiency of all resources in society, Vietnam needs to invest huge amounts of
capital into this sector, while the ODA loans are decreasing. Therefore,
developing internal resources, efficient use of indirectly invested resources in
the form of BOT (build-operate-transfer), BOO (build-operate-own) is
encouraged more than ever. Secondly, CII is a leading enterprise in the field of
4


a firm with good performance during the given period could take advantage of
future opportunities.

5


Market to Book and Firm Performance

In summary, this study provides implications for investors regarding the
relationship between market to book and firm‟s performance. For managers,
they may consider market to book value as a proxy of growth opportunity to
improve their firm‟s performance.

1.3 RESEARCH PROBLEMS

There is a lack of empirical evidence on the relationship between market
price to book value ratio and firm performance. Tran (2008) tested the
relationship between capital structure and firm performance by using data
sample of 50 non-financial companies in Ho Chi Minh Stock Exchange in
September 2008. The results showed that there was an insignificant correlation
between growth opportunity and firm performance, which was measured by
average of return on assets and return on equity. The author did not use the price
to book value as a proxy of growth opportunity, and used growth of total assets
as a proxy of growth opportunity.

Block (1995) used a sample of 30 Dow-Jones Industrial Average stocks
from 1949 to 1962 to investigate the price to book relationship. The author used
scatter graph to show that there was a good linear between price to book value
ratio and earning to book value ratio. Damodaran (2002) used the
COMPUSTAT database from 1987 to 1991 to investigate the price to book

7


Market to Book and Firm Performance

 Based on Xu et al (2005), Frank et al (2005), Titan & Zeitun (2007),
this study determines the effect of market to book on firm
performance after controlling for firm size (ln(sales)), firm leverage
(long-term debt-to-total debt, long-term debt to total assets, total debt
to total equity).
 Based on Damodaran (2002), Block (1995), this study determines if
lagged firm earnings (earnings-to-book value, ROE) on firm growth
opportunities (proxied by market-to-book) after controlling for firm
risk (beta).

1.5 RESEARCH METHODOLOGY AND SCOPE

The study collects 70 samples, which are listed companies in Ho Chi
Minh Stock Exchange and Ha Noi Stock Exchange in the year 2009 and the
year 2010.

Quantitative research method based on ordinary least square regression
and quantile analysis to test hypotheses relative to the relationship between
firm‟s performance and growth opportunity. Models were used in the previous
studies of Tian & Zeitun (2007), Margaritis & Psillaki (2007), Rajan and
Zingales (1995), Damodaran (2002).

This study also uses data analysis tools such as descriptive statistics,
multiple regression conducted by eview 6 for window and quantile analysis
with t-test for difference of population means performed by excel.


Chapter 5 presents conclusions, recommendations, the limitations of this study.

9


Market to Book and Firm Performance

CHAPTER 2: LITERATURE REVIEW
2.1 INTRODUCTION
Chapter 2 includes the topic of cashflow into emerging markets and the
literature reviews which focus on market to book value and firm‟s performance.
2.2 CASHFLOW INTO EMERGING MARKETS

In 2010, Robin Brooks, a senior specialist of foreign exchange strategy
and an editor of a new report, said capital flowing into emerging markets was
575 billion dollars per year, higher than ever and reached 20% higher than
average level at the moment in which the financial crisis of the world had
happened. EPFR Global, a research firm in Massachusetts, announced that the
stock companies of all emerging markets attracted an amount worth 3.8 billion
dollars in week ending on October 20th. Investors invested $ 1.4 billion in bond
funds of emerging markets and withdraw money from stock funds in Japan for
16 consecutive weeks. U.S. stock market also lost $ 1.9 billion. Total amount of
money flowing into stock funds in emerging markets exceeded the record of
44.2 billion dollars in 2009. The causes are: firstly, U.S. dollar relatively weaker
than other currencies make money flow into emerging markets; secondly,
policies in purpose of maintaining low interest rates in the developed countries
encourage investors to seek higher returns in faster growing markets; thirdly,
basic investments in developed countries has remained modest growth, this has
promoted investors to invest money into emerging markets for higher returns.

CANADA

JAPAN

CHINA

USA

3.52
1.53
263.64
0.07
12.13
1083

2.59
1.28
233.36
0.09
11.27
541

1.86
1.11
61.07
0.13
4.13
241

2.02

0.00
21.78
5399

Note: PB = market price / book value per share.
Source: />
Table 3: Summary of Statistics of Return on equity of other Countries in 2010
UK

FRANCE

ITALY

GERMANY

CANADA

USA

JAPAN

CHINA

Mean
Median

0.05
0.01

-0.06

2.14

19.00

7.26

11.92

Minimum
Obs.

-18.80
1071

-12.42
563

-30.36
251

-3.29
554

-610.55
1771

-376.00
5380

-19.65

quantitative regression of book to market (the inverse of price to book) against
variables for growth and risk (beta) for the large sample of companies over the
period July 1982 to the period December 1989. The results showed that
expected growth is negatively related to book value to market, accordingly,
positively related to price to book value. Risk is positively related to book value
to market and thus negatively related to price to book value. Fairfield (1994)
also found that price to book value is related to return on equity. Xu et al (2005)
also shows that there is a strong positive correlation between growth
opportunity and return on equity (ROE).

Damodaran (2002) uses the COMPUSTAT database from 1987 to 1991
to investigate the price to book relationship. The author uses quantitative
regression analysis with cross sectional data for each year to show that the most
important determinant of price to book value is return on equity. The author also
12


Market to Book and Firm Performance

demonstrates that the price to book value is determinded by its expected payout
ratio, its expected growth rate in earnings and its riskiness. An interesting
finding is the mismatch between return on equity and price to book value. It
means that stocks, which have high price to book value and low return on
equity, are overvalued and the others, which have low price to book value and
high return on equity, are undervalued.
The tradeoff theory argues that a firm with a higher market to book ratio
expect to replace debt financing with equity financing on a net basis for their
new investment opportunities because this replacement adjusts the target ratio in
a downward trend. In contrast, the costly external financing cost theory argues
that a firm with a higher market to book ratio favours equity issuance because it


2.4 FIRM PERFORMANCE

Previous studies used different measures of firm performance to test
hypotheses. These measures included financial ratios from balance sheet and
income statements4; stock market returns and their volatility5; and tobin‟s q6,
which mixes market values with accounting values; profit efficiency7, which is
superior to cost efficiency for evaluating the performance of managers; current
profitability8; earning per share, PE9.

Firm performace may also affect the price to book ratio. A study
Damodaran (2002) provides evidence that the most important determinant of
price to book value is return on equity. Another study by Block (1995) also
shows that there is a good linear between price to book value ratio and earning
to book value ratio. According to Block (1995) earning to book ratio ( a proxy
of profitability) may influence to price to book ratio. The result shows that price
to book ratio is earning to book ratio multiplied by price to earning ratio.
14


Market to Book and Firm Performance

Tran (2008) finds that firm performance has negative correlation with
capital structure when debt to equity ratio is more than 1.812; firm performance
has positive correlation with capital structure when debt to equity ratio is less
than 1.812. Therefore, firms could use debts to improve firm performance when
debt to equity is less than 1.812.

Titan & Zeitun (2007) find that firm size has a positively and
significantly effect on firm‟s performance such as ROA, PROF and Tobin‟s Q.

relationship is found between ownership concentration and accounting profit
rates.

Gorton & Rosen (1995) use quarterly observations of commercial banks
from the second quarter of 1985 until the first quarter of 1990 to find that swaps
are very profitable for dealer banks which may mitigate the incentives for large
banks with entrenched managements to take on risk.

Mehran (1995) uses 153 randomly-selected manufacturing firms in 1979–
1980 to examine the executive compensation structure, ownership, and firm
performance. The results show that firm performance is positively related to the
percentage of equity held by managers and to the percentage of their
compensation that is equity-based.

16


Market to Book and Firm Performance

CHAPTER 3: RESEARCH METHOD

3.1 INTRODUCTION

Following two previous chapters, this chapter presents data, research method,
research sample, variables used in models, hypothesis and emperical model in
the study.

3.2 DATA

This study exploits the accounting and market data of 70 listed companies in Ho

firms. If removing

the financial sector, three sectors which have large

proportion on the market are consumer goods, basic merials, industrials.
According to simple random sample, each element of the population has an
equal probability of being selected

to the sample. Assuming that market

(population) includes only three sectors: Consumer goods, basic merials,
industrials, the sample consists of three elements (food, metal, transportation).
Based on collection criteria that the company has good performance during the
period 2009 and the period 2010, the author chooses firms with good
performance in each of three industries.

At the beginning of 673 observations including 289 firms in Ho Chi Minh
Stock Exchange (HOSE) and 384 firms in Ha Noi Stock Exchange (HNX), the
author excludes all firms in financial sector including industries: real estate,
nonlife insurance, general financial, banks, life insurance. The author chooses
three sectors: basic materials, consumer goods and industrials because of a large
number of companies in three sectors besides financial sector. In each sector,
the author chooses one industry: food producers in consumer goods,
18