Essays in empirical finance
Nguyen, Thi Xuan Nhu
We are all aware of the recent world health crisis, namely COVID-19. Every single person experiences the direct impact of this pandemic on their personal life and day-to-day activities. For the first time in our lives, we see government intervention at a global scale with nationwide lockdowns and other preventive measures that may change people’s habits and behaviors. As never before, we feel the immense role of government in our lives that impacts our future. Therefore, the topic of state ownership and political connectedness found throughout this thesis is worthwhile for investigation to embrace the role of national government and its relationship to company performance through share prices, firm-level innovation for future growth and sustainability, liquidity and survival opportunities. From an economic perspective, we see many small businesses collapsing without government support, and we have witnessed the historic price crash on the futures contract for WTI crude oil to as low as -$37.63 per barrel on April 21, 2020 due to travel bans. We have also experienced share prices plummeting due to worldwide instability. Differences in the countries’ policies have resulted in different outcomes for each nation. Surprisingly enough, neither Europe nor the US is dealing with the crisis better than smaller countries that have prompt support from government (for example, New Zealand) or Asian countries (e.g., Vietnam) with its records of strong involvement into company operations. In this sense, the current reality has proven that there is something to learn from smaller countries that deserve attention from academics as a prospective viable economic model where the government has significant influence on businesses. Vietnam is a good example of a small resilient country, going through multiple financial crises with minimal impacts and fast post-crisis recovery. China is chosen for its significant influence on the world’s economic map. Both countries feature prominent government involvement into company operations and represent an emerging market in Asia with impressive economic growth in recent years. This thesis comprises three empirical essays that explore asset pricing models (Chapters 2 and 3) and firms’ value in the emerging markets of Asia where the state is involved actively in financial market development and capital allocation (Chapter 4). Starting from Chapter 2 with different factor models and state ownership, this thesis further explores asset pricing models with time-varying factor loading in Chapter 3 and extends the understanding of state ownership to political connectedness in Chapter 4. Chapter 2 investigates the applicability of different Fama-French (FF) factor models in Vietnam, examines the value factor redundancy and explores the choice of the profitability factor. Empirical evidence shows that the FF five-factor model has more explanatory power than the FF three-factor model. The value factor remains important after inclusion of profitability and investment factors. Operating profitability performs better than cash and ROE profitability as a proxy for the profitability factor in the FF factor modeling. The value (HML) factor and operating profitability have the biggest marginal contribution to a maximum squared Sharpe ratio for the five-factor model’s factors, highlighting HML non-redundancy in describing the stock returns in Vietnam. Chapter 3 studies factor models using both the time-series factors of the Fama and French (2015) approach and cross-sectional factors from the Fama-Macbeth (1973) methodology. The work provides evidence that the cross-sectional factor models have less explanatory power than the time-series factor models with time-varying factor loadings. The superiority of the time series models with time-varying loadings is still prevalent for the Vietnamese market regardless of the profitability factor choice. Chapter 2 is further supported by Chapter 3, as the latter shows that operating profitability still performs better than cash and ROE profitability as a proxy for the profitability factor in the models with time-series and cross-sectional factors. Chapter 4 extends the understanding of state ownership by exploring state impact on company performance and value. Using innovation value-added growth (IVAG), this chapter studies how political connectedness affects firm’s efficiency of capital allocation. By differentiating different forms of political connectedness, the study shows that companies with strong informal political ties take less financial leverage than firms with weak connections, but it is the formal political connection that determines the survivability of a company. By designing a comprehensive innovation index for innovation activities this study provides evidence that informal political interference has stronger influence on corporate innovation activities than formal political ties. By exploring the differences between internally driven innovation activities and market-led innovation performance, this study documents the stronger effects of political connectedness on innovation activities than on innovation performance. This chapter also sheds light on capital allocation by providing evidence that Chinese firms without government-appointed CEOs appear to allocate capital more efficiently than the firms with government-appointed CEOs.
Advisor: Zhang, Jin E.; Ruan, Xinfeng; Zhang, Jing A.
Degree Name: Doctor of Philosophy
Degree Discipline: Accountancy and Finance
Publisher: University of Otago
Keywords: political connections; capital allocation; innovation; investment efficiency; leverage; survival; company performance; China; Fama-French factor model; asset pricing tests; state ownership; SOE; Vietnam; emerging market; value factor redundancy; maximum squared Sharpe ratio; time-varying factor loadings
Research Type: Thesis