Does state ownership matter to stock returns?

Abstract

Background and Objectives: Asset pricing models underpin the global economy, and as such this field has enjoyed popular attention. However, most literature on this topic is derived from developed economies such as the US, leaving a research gap in emerging markets. Moreover, the political economic realities of developing markets have many structural differences from the developed, chief of which is the dominance of state-owned enterprises (SOEs). These differences are often not accounted for when testing models in developing nations. Given these gaps, this thesis aims to contribute to the literature by testing an adjusted Fama-French five-factor (FF-5) model with a government ownership factor on the Vietnamese stock market. Specifically, this paper focuses on whether this adjusted FF-5 model outperforms the Capital Asset Pricing Model, the Fama-French three-factor model, and the FF-5. The FF-5 was chosen for adjustment since it is the latest Fama-French model, introduced in 2015. Given the mixed results on the FF-5 so far, it should be valuable to test a modified FF-5 to see if market-specific modifications, a government ownership factor for the Vietnamese market in this case, could improve the model’s performance.

Data and Methodology: This thesis studies the monthly returns of common stocks listed on Ho Chi Minh Stock Exchange and Hanoi Stock Exchange from January 2015 to December 2021, totalling 84 months. The sample is rebalanced annually in March. The sample size amounts to 722 companies after the last rebalance. The Ownership factor is constructed as thus: the sample is divided into two portfolios of SOEs and non-SOEs at each rebalance; the difference between non- SOE portfolio returns and SOE portfolio returns is the Ownership factor. This study employs asset pricing tests and factor spanning tests. The asset pricing tests are to determine and compare the performance of each model by regressing excess returns of test portfolios on factor returns. The factor spanning tests are to see whether the added Ownership factor has any meaningful contribution; this is done by regressing the Ownership factor on the other factors, individually and jointly, and by individually regressing the other factors back onto the Ownership factor. All regressions use the ordinary least squares (OLS) method.

Results: On the asset pricing tests, by the average adjusted R2 and the GRS statistics, the adjusted FF-5 model performs the best; the adjusted FF-5 is also the second-best model by average |t-value| and % of |t-value| >2. However, the factor spanning tests reveal that Market, Profitability, and Investment factors can fully explain the Ownership factor, and that the Ownership factor cannot fully explain the other factors, except for the Market factor. In conclusion, the case for an adjusted FF-5 model with government ownership factor for the Vietnamese stock market is weak and inconclusive, with asset pricing test results supporting the adjusted FF-5, while the factor spanning test shows that this Ownership factor can be explained by 3 out of 5 FF-5 factors, and thus does not warrant the addition to the model.