Financial performance of privatized SOEs and newly listed firms: the case of Vietnam

Transcription

1 Financial performance of privatized SOEs and newly listed firms: the case of Vietnam Cuong Duc Pham, Macquarie University, Australia Tyrone M Carlin, The University of Sydney, Australia Abstract: This paper is concerned with financial performance of privatized SOEs and newly listed on the stock market in Vietnam. The study is based on a sample of firms which had been fully or partly privatized from SOEs and newly listed in Vietnam security securities exchange during the period from 2000 to The research investigates the changes of profitability, working capital efficiency, liquidity and solvency, capital structure, and return by comparing the financial position of firms at year one pre-listing with position at year two post-listing. Using a detailed, financially focused methodology and collecting data source from audited financial statements, our data analysis suggests that, on average, after listing firms exhibit reduction in profitability, insignificant changes in working capital efficiency, unchanged in financial leverage accompanied by higher degree of solvency risk, and significant decline in firm returns. Our results contribute to the literature by understanding the effects of ownership structure change, management changes, financial transparency and information disclosure requirement, competition, and legal infrastructure which occurred at listing point. This may assist policy makers in directing the privatization process, and may help managers and investors in running and monitoring the public firms in economies, especially the in developing world. Keywords: Financial performance, Listing and Privatization, SOEs, Vietnam. 1. Introduction Since first application in Britain in 1979 under the Thatcher government, privatization has come to be accepted and employed throughout the world, often under conditions of considerable controversy. Privatization is the process through which government either wholly or partly sells their interests in state-owned enterprises (SOEs) to private sector, generally with the hope that the inefficient performance of these firms can be improved by application of the discipline associated with private ownership (Megginson, Nash et al. 1994). In other few cases, privatization is pursued to solve several social policy agendas, such as wealthy capitalist class creation or empowerment of a particular stratum of society (Pham, Carlin 2008). The widespread-applied privatization phenomenon has attracted considerable attention from researchers. In the very first stage of privatization application, there are a various studies about the ideology of ownership transfer (see for example Hood 1991; Osborn and Gaebler 1992; Nellis 1994; Hood 1995; Kikeri, Nellis 2004). In the later period, there were numerous researches focusing on the entity s performance in developed countries which were the pioneers of privatization application.

2 There is an increase of attention of researchers about the privatization and its impacts on developing world. In such circumstances, a considerable works focus on evaluation of firm performance. However, because of typical conditions of developing countries, the privatization process consists of two different but important points. The first is privatizing point where state ownership totally or partly transfers to private partners. And another milestone is the point that privatized firms going to public by listing on capital market, either internally or internationally. Stemming from these typical features, the researches on performance of firms could be separated into two groups. Many of works investigate the changes in performance which cause by ownership transfer by comparing the firm performance between the pre- and post- privatization years. The others, but fewer, finding the performance changes by comparing performance of year prior listing with that of year post listing. Scholars who follow the second approach have conducted research by hypothesize and test to discover the changes of management, ownership structure, financial transparency, adequate information disclosure, competition, and legal infrastructure which occurred at listing point on firms performance (Chen, Li et al. 2007). Vietnam represents a case in point. It has started privatization program since 1992 with 6,500 SOEs and with strategy of graduation, cautiousness, and keeping key role of SOEs in the economy. Up to date, there have been about 3,800 firms completed privatizing process but the total state capital transferred only 18 per cent (Le 2008). Being a transition economy with underdeveloped financial market, the privatization process in Vietnam consists of two stages: privatizing and listing. In Vietnam, the existing study about performance of firms after privatizing only limit in some spare reports and studies mentioned that privatized firms have increased the sales, profits, total assets and submitted amount of income tax. And, in reality, there has been no study about performance of privatized firms in the period of public operation. This paper contributes to the literature by providing insights into the financial performance and position of a group of former State-Owned enterprises (SOEs) which had fully or partly privatized and newly listed in Ho Chi Minh stock exchange and Hanoi securities trading centre. In doing so, this paper contributes to the development of a better understanding of the impact of financial management reform techniques in settings foreign to those where they originated and were originally implemented (Pham, Carlin 2008). The results may therefore inform policy decisions in economies still in the process of transitioning to greater openness and levels of competition. The remainder of the paper is structured as follows. Section 2 sets out a review of some relevant literature and how this paper relates to previous works in this field. Section 3 sets out relevant details pertaining to the dataset drawn upon for the purposes of the research reported in this paper and the methodology employed. Section 4 sets out key empirical results, while section 5 sets out some conclusions and suggestions for further research.

3 2. Literature review Literature about the effect of privatization on firm s performance A considerable body of literature dealing with the subject of public sector management and financial management reform now exists. Within that, there exists a body of literature focused on the particular phenomenon of privatization. An often cited example of this type of work is embodied in Megginson, Nash and Randenborgh (1994). These authors compared the pre- and post-privatization financial and operating performance of 61 companies in 18 countries spanning 32 industries which had experienced full or partial privatization through public share selling over the period between 1961 and Their results suggested that after being privatized, former SOEs increased real sales, became more profitable, increased levels of capital spending, improved operating efficiency levels, had lower debt and increased dividend payouts (Megginson, Nash et al. 1994). This paper provided a methodological guide helpful for other researchers interested in evaluating financial performance in different nations and in various industries. However, the approach taken by Megginson et al contained several obvious drawbacks, including sample selection bias, simple comparisons based on accounting information prepared according to a variety of incompatible standards frameworks and the lack of controls for potentially significant macroeconomic variables, such as industry changes regulatory frameworks and market-opening initiatives (Megginson and Netter 2001). Furthermore, while providing a range of useful insights, the Megginson et al study sample contained very few firms from developing countries, leading to some concerns about the capacity to meaningfully generalize their results. To overcome this, Boubakri and Cosset used the same basic methodology as had been employed in the Megginson et al study method to conduct two studies. The first examined financial and operating performance of privatized firms in developing countries. Their sample included 79 companies from 21 developing countries and 32 industries which also experienced full or partial privatization over the period 1980 to Their results were consistent with those reported by Megginson et al (Boubakri and Cosset 1998). A second study examined the performance of 16 African firms which privatized during 1986 to This study reported significant increases in capital spending in privatized firms but insignificant changes in profitability, efficiency, output (sales) and leverage (Boubakri and Cosset 1999). These works represented important contributions to the literature, especially the insight that the privatization leads to performance improvement which may result from changes in management teams and style (Megginson and Netter 2001). Nonetheless, these left unexplored niches. For example, none of the firms included in the samples drawn upon in the Megginson et al study or the Boubakri and Cosset studies were from socialist countries undergoing the transition to the embrace of market based principles. Further, while the studies used aggregate financial data to characterize the position of firms after the point of privatization, the datasets drawn upon for the basis of this earlier research were not sufficiently rich to allow detailed drilling into the financial causes of the phenomena these authors observed.

4 Partly filling this gap in knowledge, some authors undertook evaluations of privatization processes in the Czech Republic, Hungary, the former German Democratic Republic, Poland and Russia, all Soviet bloc nations in a process of transition in the post Soviet era. Among these studies Harper (2000) examined privatization in the Czech Republic and concluded that this process resulted in improved profitability, higher efficiency and lower employment levels in divested firms in the second wave of privatization but caused the opposite results in the first divestment round (cited from Megginson and Netter, (2001, p.360)). Other studies by authors, such as Claessens and Djankov (1999), Frydman, Hessel et al (1999), Smith, Cin et al (1997) were not focused on financial performance and contained various drawbacks, such as significant selection bias, omitted variables, and suffered a range of data validity problems resulting from the massive economy-wide changes occurring concurrently with privatization processes (Megginson and Netter 2001). A recent study focused on the impact of privatization on financial performance of Chinese firms divested by the State in privatization processes. Wei, D souza, and Hassan (2003) conducted a study on 208 privatized firms in China, a current socialist country, during the period from 1990 to 1997 and also used the Megginson et al methodology. The results of that study are consistent with those of the earlier studies cited above, save for their conclusions in relation to post privatization profitability. Wei et al documented that, after being privatized, the firms in their sample did not exhibit significant change in profitability (Wei 2003). Again, this research did not aim to discover the reasons for changed/unchanged profitability, for improvement in outputs, for sale efficiency and so forth, so it is not possible to determine from the results any detailed explanation for the observed phenomenon. Another gap in the existing literature has been the failure of existing studies to document the association between privatization and a range of key business metrics such as working capital management efficiency, capital intensity, cashflow profile and the level of free cashflow generated by enterprises. Yet an understanding of factors such as these is important in the context of developing detailed insights into the journey of transition undertaken by firms as they are reconfigured from public to private ownership. Literature about the effects of listing on firms performance There are also considerable studies on the performance of firms after going public. Generally, researchers on this suggest that privatized firms have worse performance after they become public firms. Jain and Kini (1994) used sample of 682 US firms going public during period from 1976 to 1988, and evaluate the operating performance via several variables, including operating return on assets, operating cash flow on assets, sales, asset turnover, and capital expenditure. The authors documented that after becoming public, firms have significant decline in operating performance. Additionally, the authors exhibited a significant positive relation between operating performance and equity retention of original entrepreneurs, and no relation between performance and the level of initial underpricing (Jain and Kini 1994). Explaining for

5 this phenomenon, the authors suggested three potential reasons, including (1) increased agency cost due to the reduction of management ownership (Jensen and Meckling 1976); (2) window-dress accounting number before listing; and (3) the listing time selection set up by firm s entrepreneurs (Jain and Kini 1994). Mikkelson, Partch et al. (1997) also investigated the performance of firms after becoming public by using sample of 283 US firms going to public in period from 1980 to 1983 but the authors focused more on the impacts of ownership structure change on operating performance, particularly on return on asset (ROA). On the one hand, authors documented as same results as Jain and Kini (1994) that the ROA decreased significantly after listing. On the other hand, contrary to Jain and Kini (1994), the authors believed that the changes of ownership did not lead to changes in operating performance (Mikkelson, Partch et al. 1997). In another study on performance but approaching in a different way, Pagano, Panetta et al. (1998) used a sample of 69 firms going public from 1982 to 1992 in Italy to investigate the determinants for being public decision. They compare performance of going-public firms with ones not going to public. And one of their findings was that companies going to public not for financing future investments and growth but for rebalancing to the high performance in prior listing period (Pagano, Panetta et al. 1998). The most recent study also concerned to the performance of firms after becoming public companies was conduct by Goergen and Renneboog (2007). With a sample of 862 British and 98 German firms went to public from 1981 to 1988, the authors used an econometric model to answer for the question whether the ownership structure impact on firm performance. Having the same results as Mikkelson, Partch et al. (1997), their findings indicate that the separation of control rights, ownership structure which caused by listings does not correlate with firm performance (Goergen and Renneboog 2007). However, the firms examined in these studies had been private firms prior to undertaking capital raisings via public offerings, so the results of these studies may not bear directly on the question of the impact of ownership changes in the context of former SOEs becoming privately held via some public offering process Partly filling this gap, in recent years, there have been a number of empirical studies on performance of Chinese listed companies which privatized from State-Owned enterprises. Qi, Wu et al. (2000) used a sample of whole firms listed in Shanghai stock exchange from 1991 to 1996 to investigate the issue how the shareholding structure affect the firm performance. Their empirical results exhibited that the firm performance has positive relationship with proportion of legal-person shares (shares hold by legal entity) but negative relationship with proportion of shares owned by the state (Qi, Wu et al. 2000). Though this finding is important, this study focused only on the ROE for performance evaluation and its results did not reveal what factors made changes in ROE. Also comparing performance, Chen, Firth and Kim (2000) used a sample of 342 firms which had initial public offering (hereafter IPO) in China in period from 1992 to 1995 and comparing the performance of A-share (shares issue to domestic investors) firms

6 and B-share (shares issues to foreign investors) firms. Though they indicated some findings about the pricing of A-share firms or underperforms of B-share firms they did not address the issue of how public listing affects company performance (Wang, Xu et al. 2004). Going further than Chen, Firth et al. (2000), Wang, Xu et al. (2004) used a sample of 793 firms listed in Shanghai and Shenzhen stock exchange for the period from 1994 to The authors documented that public listing lowers state ownership significantly, lowers debt, increase capital expenditure, and no evidence to conclude about positive effect of listing on profitability (Wang, Xu et al. 2004). Another notable study conducts by Huang and Song (2005) who tried to find the effects on firm performance after listing, and to link the effects of listing with the effects of privatizing. Using a sample of 38 firms listed in Hong Kong stock market, the authors evidenced that listed firms are affected by two opposite influences: the negative effects of listing and positive effects of privatizing. In addition, the authors added that the dominance of negative impacts of listing on firms lead to the overall negative declined performance of firms in post listing period (Huang and Song 2005). Chen, Li et al.(2007) examine similar phenomena. The authors based on a sample of 329 firms listed in Shanghai Stock Exchange and Shenzhen stock exchange during the period from 1998 to Their analysis results indicated of improved performance after listing and the negative relationship between state majority control and performance (Chen, Li et al. 2007). However, this study contained imperfect point in data selection that is equating former SOEs and private originated firms. The stock market of Vietnam was first established in Ho Chi Minh City in 2000, and another trading centre was established in Hanoi in At the beginning in 2000, there were only two firms listed. At the end of 2007, there were total about 260 firms listed in both securities trading centres. However, there is no study on the financial performance of these privatized firms for the post-listing periods. In short, though those empirical studies made important contributions to the literature on privatization they only focused on investigating the changes of firm performance after firms experienced privatization and/or listing events. The common points were that firms had improved performance after divestment and worse performance after listing. However, there is no study in the existing literature which examines in depth the key financial factors which directly caused the changes observed in firms examined for research purposes. The research reported in this paper addresses this gap in the literature by directly and closely examining the key causal financial drivers of performance change in former SOEs in the post listing phase- under the context of Vietnam. 3. Data and methodology Since the objective of this study is to provide detailed evidence pertaining to the impact of the transition from state owned enterprise to private venture, the sample of

7 organizations examined were all originally configured as SOEs but were subsequently reconfigured as public companies or diversified-ownership enterprises. Unlike other studies where the data relied upon for the purposes of analysis has been drawn from surveys, interviews and other similar sources, this study, focusing as it does on the financial dimension of the public to private transition, requires a richer and more consistent dataset. For that reason, the study is based on disclosures contained in annual audited (and published) financial statements. In Vietnam, under present regulations, these are only readily available from enterprises listed on one of the two official stock exchanges. The biggest one is in Ho Chi Minh City and another one locates in Hanoi capital. At the conclusion of 2007, there were 111 firms listed on the Hanoi exchange. The others operate in Ho Chi Minh City, where 154 firms were listed by the same point of time. Given the key objective of this is to find the impacts on financial performance of privatized firms after listing in stock market. To obtain that objective, we compare the financial position of firms at pre-listing years with that at post-listing years. Thus, the firms selected into sample for analysis need to have audited financial statements available for both directions: pre-listing and post-listing. However, we have a key constraint on collecting more expanded pre-listing data because of financial report availability. Additionally, we face the trade-off in expanding the post-listing data. Particularly, if we choose to have long series of data in post-listing period, we have small sample size and via versa. For inclusion in the research sample, it was necessary that firms had been state owned enterprises prior to privatization (as opposed to private businesses which had taken advantage of an initial public offering process), and that audited financial statements were available for the organization for the year immediately prior to listing and for a period of two years thereafter. These requirements yielded a total research sample of 33 firms. Of these, 5 were listed in 2000, 4 in 2001, 10 in 2002 and 2 in 2003, 3 in 2004 and 9 in Approximately two thirds of the organizations in the sample were from the manufacturing and materials sectors, while the remainders were trading and service enterprises. Details of the set of firms included in the research sample are set out in Appendix 1. Because each listing year yields a research sample too small for meaningful analysis, this study employs a data pooling technique whereby irrespective of the actual calendar year of listing, all data pertaining to each firm s year prior listing, year of listing and each successive year post listing is pooled for the purposes of aggregate analysis. This resulted in a data set comprising 33 observations for the year prior to listing (t-1), the year of listing (t=0), one year post listing (t+1), and two years post listing (t+2). The aggregated (t-1) data set comprised 5 firms year observations drawn from 1999 (relating to the five firms which listed for the first time in 2000), 4 from 2001, 10

8 from 2002, 2 from 2003, 3 for 2004 and 9 from 2005, respectively. Each of the other pooled datasets was constructed in the same manner 1. Given the research objective of capturing and understanding changes in financial performance and position of former SOEs as they went to public, based on the availability of data, we focus on five key factors: profit and cost management, working capital management, liquidity, financing, and returns. The empirical analysis starts with calculating ratios pertaining to each of five factors for each year. It then calculates mean value for all sample firms for the year prelisting, the year of listing, one year post listing, and two years post listing. Beside mean calculation, in order to minimize the effect of firm size, the weighted mean 2 also employed. For each measure, the mean value of the year two post listing is compared with the mean value of the year one immediately prior to listing. To verify the significant level of differences in the mean value over time periods, we use three components of Wilcoxon Signed Rank test: the Z value, the significant level at 5% or 10%, and percentage of firm in sample has the decrease or increase in each measure. Such calculations were also performed for two sub-samples: manufacturing firms, and trading and service firms in order to facilitate the generation of some insight into potential industry effects. The analysis result for each key factor was set out in table formats, as showed below. 4. Empirical Results Changes in cost, pricing and profit Five measures are employed to view the changes in profitability and cost control, including profit margin 3, gross profit margin 4, selling and administrative expenses on sales, and cost of doing business 5 on sales. The mean (weighted mean), the differences, and Wilcoxon test results of these variables for year one immediately prior to listing (t-1) and year two post listing (t+2) are set out in Table 1, below. In general, over two years after going public, the profit margin of former SOEs decreased significantly. The mean (weighted mean) declined from (11.53) per cent at the year one pre-listing to 9.01 (8.32) per cent at the year two post-listing. Within 95% confidence interval, the Wilcoxon signed rank test indicates that there 1 To be more understandable, if one firm listed in 2000, then financial data related to that firm for 2000 would be coded as falling within the t=0 dataset. The financial data for 1999 would be code in t-1 dataset, and the data for 2001 would be in t+1 dataset, and so on. 2 The base used for calculating the weighted mean value is net sales or total assets. 3 To eliminate the effects of tax preference offered by government this ratio is calculated by income before tax (OPBT) divided by net sales. 4 Gross profit divided by net sales 5 Cost of doing business includes selling and administrative expenses and extraordinary expenses

9 were about 67 per cent of total firms had significant reduction in profit margin over two post-listing years. Table 1: Changes of profit and drivers: year (t+2) versus year (t-1) N t-1 Whole sample Profit margin (11.53) Gross profit margin (19.34) Cost of goods sold on sales (80.86) Selling & Admin expenses on Sales (8.71) Cost of doing business on Sales (8.89) Manufacturing firms Profit margin (11.02) Gross profit margin (19.25) Cost of goods sold on sales (80.75) Selling & Admin expenses on Sales (9.38) Cost of doing business on Sales (9.47) Trade and Service firms Profit margin (12.15) Gross profit margin (19.45) Cost of goods sold on sales (80.55) Selling & Admin expenses on Sales (7.89) Cost of doing business on Sales (8.17) t (8.32) (14.02) (85.36) 8.70 (7.36) 8.91 (7.60) 7.59 (7.28) (13.94) (85.08) 8.61 (8.66) 8.73 (8.75) (9.55) (14.11) (85.69) 8.87 (5.84) 9.24 (6.24) Difference (-3.21) (-5.32) 4.15 (4.70) (-1.34) (-1.29) (-3.74) (-5.31) 2.82 (4.33) 0.52 (-0.72) 0.52 (-0.72) 0.39 (-2.61) (-5.35) 6.46 (5.14) (-2.06) (-1.93) Wilcoxon test for Z (sig level) (0.011) (0.002) (0.013) (0.085) (0.098) (0.001) (0.025) (0.068) (0.794) (0.794) (1.000) (0.028) (0.099) (0.015) (0.015) Proportion of firm has decrease (increase) (%) (33.33) (24.24) (75.76) (30.30) (33.33) (23.81) (28.57) (71.43) (38.10) (42.86) (50.00) (16.67) (83.33) (16.67) (16.67) The separating analysis on industrial sub-sample exhibits the substantial differences. The dataset shows that the decrease of profit margin happened only in manufacturing firms. The Wilcoxon signed rank test shows that, at 5 % significant level, there were about 76 per cent of manufacturing firms had reduction in profit margin. In contrast, the decreasing trend did not occur in trading and service firms. The Z value, significant level and proportion of firms drawn from the Wilcoxon Signed Rank test support the findings found in trading and services firms. In order to find the drivers for the change in profit margin, the pattern of gross profit margin is first investigated. The results show that the gross margin decreased significantly, regardless of industrial types of firm. Specifically, for the whole sample,

10 the mean (weighted mean) of gross margin decreased from (19.34) per cent at the pre-listing year to (14.02) per cent at year two post-listing. In manufacturing sub-sample, these numbers were from (19.25) to (13.94) per cent. More aggressively, in trading and services group, these numbers were (19.45) and (14.11) per cent for pre-listing and post-listing, respectively. The Wilcoxon signed rank test shows that those reductions are statistically significant at the 5% level, accompanied with 70 per cent of total manufacturing firms and more than 80 per cent of total trading and services firms had significant decreases. Since gross profit margin is constituted by net sales and cost of goods sold, the decline in this ratio can be inferred to the changes of these two elements. Examination about the proportion of cost of goods sold on sales indicates the gradual increase in this ratio. The data in the research shows that, in general, the mean (weighted mean) of cost of goods sold on sales increased from (80.66) per cent at pre-listing year to (85.36) per cent at the year two post-listing. The similar phenomenon happened in both industrial sub-samples. The Wilcoxon Signed Rank test shows that such changes are statistically significant at 5% or 10% level. These results suggest the very high possibility is that, after going to public, the listed firms had to reduce their selling price for goods and services. However, they were not able to make the reduction of cost of goods sold at the level which could compensate the loss of sale price. To response to substantial reduction of gross profit margin, firms acted differently. Whereas the trading and services firms had significantly cut their selling and administrative cost as well as cost of doing business, the manufacturing firms did not have effective measure to control these cost lines. Specifically, the proportion of cost of doing business on sales reduced from per cent at pre-listing year to 9.24 per cent at the year two post-listing. The Wilcoxon signed rank test shows that the significant reductions of cost and expenses in trading and service firms at 5 per cent level with more than 80 per cent of total firms had improvement in these expenses. In contrast, the manufacturing firms had increases in this ratio (at the insignificant level) from 8.21 per cent to 8.73 per cent, for pre-listing and post-listing, respectively. In short, after two year going public, the gross profit margin of firms decreased significantly and it is due to the decreases in selling price and the increases or the unchanged of cost of goods sold. Facing with that phenomenon, trading and service firms had success in control their cost lines, including selling and administrative expenses and cost of doing business. Consequently, they kept enjoying with as same profit margin as they had had in pre-listing period. In contrast, in the same comparing time period, though having little decrease in gross profit margin, because of being weak in controlling the cost line the manufacturing firms faced the unexpected situation of significant decrease in net profit margin.

11 Changes in working capital efficiency Conference of the International Journal of Arts and Sciences Four measures are employed to evaluate the working capital efficiency, including account payable days, account receivable days, inventory days and funding gap 6 (also known as cash conversion cycle). The mean (weighted mean), the differences, and Wilcoxon test results of these variables for the year immediately prior to listing (t-1) and year two post listing (t+2) are set out in the Table 2, below. Table 2: Summary of changes of working capital efficiency N t-1 Whole sample Funding gap (110.45) Account payable Days (54.33) Account receivable Days (82.31) Inventory Days (80.22) t (96.61) (54.05) (55.28) (94.62) Difference (-13.84) 3.61 (-0.29) (-27.03) (14.40) Wilcoxon test for Z (sig level) (0.829) (0.201) (0.357) (0.422) Proportion of firm has decrease (increase) (%) (48.39) (63.64) (48.48) (54.84) Manufacturing firms Funding gap (138.19) Account payable Days (32.97) Account receivable Days (86.12) Inventory Days (85.04) Trade and Service firms Funding gap (54.17) Account payable Days (81.50) Account receivable Days (77.46) Inventory Days (70.44) (107.47) (43.63) (61.21) (89.89) (77.02) (66.66) (48.09) (103.14) (-30.72) (10.66) (-24.91) 5.12 (4.85) 6.08 (22.85) (-14.84) (-29.37) (32.70) (0.375) (0.152) (0.715) (0.664) (0.445) (0.875) (0.209) (0.445) (42.86) (66.67) (52.38) (52.38) (60.00) (58.33) (41.67) (60.00) In general, firms in research sample had positive funding gap which indicates that the firms in research sample spent longer time for inventory days and receivable days than payable days. In other words, the listed firms in the research had to pay creditors before they could have cash from selling inventory and from collecting customers debts. Over two years under public operation, there were some improvement in this variable but the change was at minor level. Specifically, the mean (weighted mean) of 6 Funding gap is equal to Receivable days plus (+) Inventory days and minus (-) Payable days

12 funding gap decreased from (110.45) days at the pre-listing year down to (96.61) days at the year two post-listing. The Wilcoxon Signed Rank test suggests that these changes are statistically insignificant. The further analysis of funding gap suggests the opposite movements occurring within two industrial sub-samples. While the manufacturing firms had shortening funding gap, the trading and services firms had lengthening in this variable. Though the changes in these two groups were statistically insignificant, they exhibit the tendency of convergence which may be the results of competition the emerging event caused by public listing. The changes in funding gap were caused by the changes of three factors. The first is account payable days. Generally, the listed firms in the research improved their funding gap by delaying the payments. The dataset of whole sample exhibits that the payable days increased from days at the pre-listing year to days at the year two post-listing. However, this variation was statistically insignificant and happened only in the manufacturing firms. The second factor affecting the variations in funding gap is the account receivable days. The analysis results exhibit that the listed firms in research had saving in collection days. For the whole sample, mean (weighted mean) of receivable days decreased from (82.31) days to (55.28) days. The declined phenomenon occurred in the manufacturing firms as well as the trading and services firms. However, the Wilcoxon Signed Rank test indicates that these reductions are not significant at any statistical level. The last factor driving the changes in funding gap is the inventory days. Unlike the receivable days and payable days, the data related to inventory days reveals that, after going to public, the listed firm spent longer time for selling goods and services. Specifically, for the whole sample, the mean (weighted mean) of inventory days increased from (80.22) days at pre-listing year to (94.62) days at the year two post-listing. The finding related to inventory days is partly consistent with above discovery of lowering selling price in post-listing years. This state of affairs occurred in the manufacturing firms as well as the trading and services firms. The Wilcoxon Signed Rank test shows that those changes are insignificant. In short, the listed firms in the research had some improvements in funding gap- the variable measure the period of time which the firms have cash available for use. The analysis found that, after going to public, the shortened funding gap is resulted from the shortening in debt collections, the lengthening in paying obligations, and negative effects accompanied by longer time for turning over inventory. Changes in liquidity The current ratio and quick ratio are employed to measure the liquidity of the listed firms in the research over two years under the public. Besides these ratios, the net

13 working capital 7 on sales is also used to measure the ability of using current assets and current liabilities in generating sales. The mean (weighted mean), differences, and results drawn from Wilcoxon signed rank test are set out in the Table 3, below. Table 3: Summary of changes in liquidity: year t+2 versus year t-1 N t-1 Whole sample Current Ratio (2.73) Quick ratio (1.81) Net working capital on Sales (0.20) t (2.42) 1.70 (1.58) 0.22 (0.16) Difference (-0.31) (-0.23) (-0.04) Wilcoxon test for Z (sig level) (0.235) (0.043) (0.155) Proportion Of firm has decrease (increase) (%) (39.39) (30.30) (36.36) Manufacturing firms Current Ratio (3.63) Quick ratio (2.41) Net working capital on Sales (0.25) Trade and Service firms Current Ratio (1.61) Quick ratio (1.05) Net working capital on Sales (0.15) 3.08 (1.74) 2.07 (2.13) 0.24 (0.18) 1.82 (1.53) 1.06 (0.92) 0.18 (0.13) (-1.90) (-0.29) (-0.07) 0.20 (-0.09) 0.11 (-0.13) 0.02 (-0.02) (0.073) (0.039) (0.409) (0.433) (0.583) (0.530) (23.81) (28.57) (19.05) (66.67) (33.33) (66.67) Theoretically, the high value of current ratio and quick ratio reflect the safe level of firms in paying the short term debts when they come due. Using the rule of thumb as an instructive measure, one specific firm should keep current ratio and quick ratio at 2:1 and 1:1, respectively. However, it is widely warned that using this rule of thumb should be under very much caution (Carlin 2008). For the whole samples, the mean (weighted mean) of current ratio and quick ratio were very high at the pre-listing year. This represents the safe level of firms in paying back the short-term obligations. After two years going public, it seems that the listed firms had some adjustments in current assets and current liabilities so that the current ratio and quick ratio decreased from very high value to more reasonable value. Specifically, in general, the mean of current ratio decreased from 2.85 times at prelisting year down to 2.61 times at the year two post-listing. Similarly, quick ratio declined from 1.87 times down to 1.70 times. However, the Wilcoxon Signed Rank test does not suggest the such changes in these two ratios at the significant level. 7 This is measured by current assets minus current liabilities

14 Detailed analysis about liquidity in two sub-samples, the data suggest the opposite movements between firms. Firms in manufacturing cohort had significant decreases in current ratio and quick ratio. The firms in trading and services groups, in contrast, had increases in these variables. Though there are opposite movements between firms in different groups, the dataset provides the tendency of convergence in liquidity. According to detailed numbers, the manufacturers adjust their ratios from very high value to more reasonable level. And the trading and services firm moved from low value to more safe rate. The movements in current assets and current liabilities are also reflected in the net working capital on sales. Generally, the firms in the research had saving the amount of working capital on generating the net sales. The data for the whole sample indicates that the amount of net working capital on sales decreased from 0.24 at prelisting down to 0.22 at the year two post-listing. However, the amount of savings was insignificant and happened only in the manufacturing firms. Like the current ratio and quick ratio, there was a tendency of convergence between the manufacturing firms and trading and services firms in related to net working capital on sales. In relation with the above analysis, the changes in liquidity are essentially resulted from the changes in management of account receivables, account payables, and inventory. Specifically, the improvement of liquidity within the manufacturing firms were resulted from (1) positive changes in receivables and payables, and (2) minor negative effects of slow selling process. Differently, the shortened receivables days as well as payables days, and the lengthened inventory days are the factors determining the variations of liquidity in the trading and services firms. Change in capital structure Three factors are used to evaluate the capital structure of firms after going public, including total debts on equity, financial leverage 8, and total current liabilities on total debts 9. The results of the year two post listing are also compared with the results of the year one pre-listing. The Wilcoxon signed rank test is also used to evaluate the significant level of changes, if any. The results for whole samples and two sub-groups are set out in the Table 4, below. Table 4: Changes in capital structure: year t+2 versus year t-1 N t-1 Whole sample Debt on Equity (1.23) Financial Leverage (2.36) Current liability on total debts (81.28) t (1.21) 2.17 (2.19) (82.19) Difference (-0.02) (-0.07) 2.23 (0.91) Wilcoxon test for Z (sig level) (0.837) (0.768) (0.400) Proportion Of firm has decrease (increase) (%) (54.55) (57.58) (57.58) 8 Financial leverage is calculated by average total assets divided by average total equity. 9 This ratio is calculated to measure the proportion of short-tern debt on total debts.

15 Manufacturing firms Debt on Equity (0.87) Financial Leverage (1.81) Current liability on total debts (81.54) Trade and Service firms Debt on Equity (1.56) Financial Leverage (2.71) Current liability on total debts (80.96) 1.02 (1.08) 2.02 (2.05) (82.26) 1.44 (1.39) 2.46 (2.38) (82.10) 0.05 (0.21) 0.09 (0.24) 4.39 (0.72) (-0.17) (-0.34) (1.14) (0.708) (0.205) (0.117) (0.638) (0.272) (0.480) (61.90) (66.67) (66.67) (41.67) (41.67) (41.67) Theoretically, there are several rules of thumb for magnitude of debt on equity and financial leverage. For instance, it is often suggested the robust ratio of debt equity should be 1:1, while the ratio above 2:1 indicate the financial risk. However, it is also widely warned that the rules of thumb should be used as intuitive measure and with very much caution (Carlin 2008). In general, there was a shift in debt on equity ratio and financial leverage in listed firms. For whole sample, the debt/equity ratio decreased from 1.28 times at pre-listing year to 1.16 times at the year two post-listing. Similarly, the financial leverage declined from 2.32 times down to 2.17 times, pre-listing and post-listing, respectively. The Wilcoxon Signed Rank test shows that these changes are not significant at a statistical level. The intensive analysis on two industrial groups exhibits that the reduced phenomenon occurred only in the manufacturing firms, also at insignificant level. For trading and services firms, the debt/equity and financial leverage moved in opposite direction. It is obvious that the structure of debt and equity reflects the financial risk as well as the profitability. In the point of risk perspective, the dataset indicates that the listed firms in the research sample contains some inherent risks resulted from the high proportion of current debts in the total debts. This means the listed firms likely used more current debts to finance their assets, and this approach does not seem to be reduced in the post-listing period. Particularly, over two years under the public operation this rate increased from around 82 per cent up to about 84 per cent. This phenomenon happened similarly for most of firms, irrespective of industrial categories the firms are belonging to. In relation to the profitability, the structure of debt and equity also reflects the degree of profitability of the listed firms in the research sample. The analysis shows that the manufacturers financed half of their assets by debts, the trading and service firms used more than 60 per cent. As a result, the firms in trading and services group seem to have higher profitable rate than the firms in the manufacturing sub-sample. In short, the listed firms in the research sample financed their assets by nearly equal debt and equity. This structure does not change significantly over two and three years after listing, irrespective of industrial types of firm. The analysis also reveals that

16 most of firms debts are from short-term and therefore listed firms contain several potential risks of paying back the obligations. The high proportion of short-term liabilities on total debts might reflect the difficulties which the listed firms faced in mobilizing the long-term capital. These might also suggest that the listed firms took advantages of using the free-interest bearing debts from creditors and customers 10 other than other types of liabilities. Changes in returns The final component of the analysis is returns profile generated by the listed firms in the research sample. Four variables were employed, including return on assets (ROA) 11, return on equity (ROE) 12, asset turnover 13, fixed asset turnover, and profit margin. To have clear relationship between variables, the DuPont technique was employed. The results of the analysis are set out in Table 5, below. For whole sample, the mean (weighted mean) of ROE decreased sharply from (29.25) per cent at pre-listing year to (23.84) per cent at year two post-listing. The Wilcoxon Signed Rank test shows that the reductions in ROE are statistically significant at 5% level. The test also exhibits that there are more than 63 per cent of total firms in sample had such reductions. Since the ROE composed by two compositions, in the situation of unchanged financial leverage, it could be deductive that the decrease in ROA was the source for the reduction of ROE. Similarity with the ROE, in general, the ROA also decreased gradually after firms went to the public. The data in the research shows that, after two years going to the public the mean (weighted mean) of ROA declined significantly from (15.86) per cent to (12.87) per cent. The Wilcoxon Signed Rank test also exhibits that these reductions are statistically significant at 5% level, and there are more than 64 per cent of firms in the research have substantial decreases. Table 5: Summary of return changes: (t+2) versus (t-1) N t-1 Whole sample Return on Equity (ROE) (29.25) Financial Leverage (2.36) Return on Asset (ROA) (15.86) Asset turnover (1.38) Fixed asset turnover (5.63) Profit margin (11.53) t (23.84) 2.17 (2.19) (12.87) 1.72 (1.55) (6.60) 9.01 (8.32) Difference (-5.42) (-0.07) (-2.99) 0.01 (0.17) 3.34 (0.97) (-3.21) Wilcoxon test for Z (sig level) (0.033) (0.768) (0.037) (0.503) (0.017) (0.011) Proportion Of firm has decrease (increase) (%) (36.36) (57.58) (36.36) (57.58) (72.73) (33.33) 10 The advance payment- the popular transaction in Vietnam context. 11 ROA is measured by OPBT divided by average total assets 12 ROE is measured by ROA times financial leverage 13 Measured as total revenue divided by average total assets

17 Manufacturing firms Return on Equity (ROE) (24.18) Financial Leverage (1.81) Return on Asset (ROA) (13.92) Asset turnover (1.35) Fixed asset turnover (6.03) Profit margin (11.02) Trade and Service firms Return on Equity (ROE) (35.70) Financial Leverage (2.71) Return on Asset (ROA) (16.70) Asset turnover (1.41) Fixed asset turnover (5.21) Profit margin (12.15) (19.74) 2.02 (2.05) (10.57) 1.59 (1.53) (6.91) 7.59 (7.28) (28.80) 2.46 (2.38) (13.74) 1.95 (1.57) (6.27) (9.55) (-4.45) 0.09 (0.24) (-3.34) 0.00 (0.17) 1.43 (0.88) (-3.74) (-6.90) (-0.34) (-2.97) 0.03 (0.16) 6.68 (1.06) 0.39 (-2.61) (0.073) (0.205) (0.012) (0.434) (0.149) (0.001) (0.239) (0.272) (0.937) (0.814) (0.050) (1.000) (38.10) (66.67) (28.57) (57.14) (71.43) (23.81) (33.33) (41.67) (50.00) (58.33) (75.00) (50.00) However, the changes of ROE, ROA, and financial leverage are much different between firms in different industry. The data in the research reveals that the manufacturing firms had significant ROE reduction over two post-listing periods. In numbers, after two year under the public, on average, the ROE decreased from per cent at pre-listing year down to per cent at the year two post-listing. The Wilcoxon Signed Rank test suggests that the significant reduction of ROE in this firm group at 10% level. These declined means of ROE in manufacturing firms are caused concurrently by insignificant increases of financial leverage and substantial reduction of ROA. The data related to ROA indicates that, over two years under the public the mean of ROA of the manufacturers reduced from down to per cent and significant at 5% statistical level. In contrast, while the manufacturers have the significant decreases in ROE due to the reduction of ROA, the trading and services firms have very minor reduction in ROE and its compositions. The data indicates that the insignificant decrease of ROE in trading and services firms was caused simultaneously by the nearly unchanged leverage and minor decrease of ROA. Employing again the DuPont technique, ROA is decomposed into two components: asset turnover and profit margin. Theoretically, asset turnover is the measure used to evaluate the firm s ability in generating sale from one unit of total assets. The high asset turnover a firm has the better performance of firm is in creating the sale. In fact of analysis, in general, the data shows that the listed firms hold this value at about 1.80 and they do not seem to have any change in asset turnover after two years under