A Three Variable Model on the Risk Level of Viet Nam Wholesale and Retail Industry During and After the Global Crisis

Over recent years, wholesale and retail industry in Viet Nam has reached a lot of achievements. Under the volatility of stock price, and changes in macro factors such as inflation and interest rates, the well-established wholesale and retail market in Viet Nam has many efforts to recover and grow from the crisis 2008. This study analyses the impacts of 3 factors: competitor size, tax rate policy and leverage on market risk for the listed firms in the wholesale and retail industry as it becomes necessary. First, by using quantitative and analytical methods to estimate asset and equity beta of total 9 listed companies in Viet Nam wholesale and retail industry with a proper traditional model, we found out that the beta values, in general, for many companies are acceptable. Second, under 3 different scenarios of changing tax rates (20%, 25% and 28%), we recognized that there is the largest dispersion in equity beta value (0, 22), if tax rate is up to 28%, leverage up to 30% and doubling size competitors. Third, by changing tax rates in 3 scenarios (25%, 20% and 28%), this study identified that the risk dispersion level in this sample study could be minimized in case the competitor size slightly smaller, tax rate up to 28% and financial leverage up to 30% (measured by asset beta var of 0,022). Finally, this paper provides some outcomes that could provide companies and government more evidence in establishing their policies in governance.

Throughout many recent years, Viet Nam wholesale and retail market is evaluated as one of active markets, which has certain positive effect for the economy. There are many components which affect the risk level of these firms including, but not limit to, external factors (tax rates, interest rates, competitors…) and internal factors (management, leverage, technology, strategy,…), in the context of most global stock markets including Vietnam stock market experienced a downturn in the year 2009 (see exhibit 1). The scope of this paperwork covers the influence of 3 factors on the market risk of these listed companies, including: tax rates, financial leverage or external financing, and the competitive firm size. The organization of paper contents is as following. As our previous series of paper, the research issues and literature review will be covered in next sessions 2.1 and 2.2, for a short summary. Then, methodology and conceptual theories are introduced in session 2.3 and 2.4. Session 3.1 describes the data in empirical analysis. Session 3.2 presents empirical results and findings. Then, session 4 will conclude with some policy suggestions. This paper also supports readers with references, exhibits and relevant web sources.

Research issues

Among the research areas of the paperwork are:

Issue 1: Whether the risk level of wholesale and retail firms under the different changing scenarios of tax rates increase or decrease so much?

Issue 2: Because Viet Nam is an emerging and immature financial market and the stock market still in the starting stage, whether the dispersed distribution of beta values become large in the different changing scenarios of leverage estimated in the wholesale and retail industry.

Issue 3: Whether the risk level of wholesale and retail firms under the different changing scenarios of competitive firm size increase or decrease so much?

The Merton model (1980) mentions the market equity premium is a positive function of the market risk which can be measured by the variance of premium. Regarding to researches on financial crisis, risk and cost of capital, financial crises are results from bubbles in real estate industry. And during crisis the borrowing amount against various collateral types can vary significantly [1].

The three factor model that “value” and “size” are significant components which can affect stock returns [2]. They also mentioned that a stock’s return not only depends on a market beta, but also on market capitalization beta. The market beta is used in the three factor model, developed by Fama and French, which is the successor to the CAPM model by Sharpe, Treynor and Lintner. Then implies the challenge is building a risk management strategy while market participants know all the assumptions behind market risk models and measures [3]. Findings on market risk of real estate can be useful for practitioners achieving a more accurate portfolio risk management [4]. On the other hand, mentions a two-rate tax system where land is taxed at a higher rate than structures in his research on two-rate property tax effects on land development. Mentions in Chicago, properties located in a designated TIF (tax increment financing) district will exhibit higher rates of appreciation after the area is designated a qualifying TIF district when compared to those properties selling outside TIF districts, and when compared to properties that sell within TIF district boundaries prior to designation. Recognized that the user cost tax elasticities are relatively small while the expected house price inflation elasticity is substantially larger and therefore plays a greater role in affecting housing market demand. Transaction taxes have no impact on house price growth. And their findings suggest that capital gain taxes on real estate are not suitable measures to prevent excessive house price growth.

Then, also indicated that business property values are more responsive to changes in tax rates as compared to residential property [5]. Next, said liquid markets can enable investment in long-term investment projects while at the same time allowing investors to have access to their savings at short-term notice. Stated financial institutions and markets allow cross-sectional diversification across projects, allowing risky innovative activity. Mentions equity volatility increases proportionally with the level of financial leverage, the variation of which is dictated by managerial decisions on a company’s capital structure based on economic conditions [6]. And for a company with a fixed amount of debt, its financial leverage increases when the market price of its stock declines. Pointed the history of finance is full of boom-and-bust cycles, bank failures, and systemic bank and currency crises. Company can also proactively vary its financial leverage based on variations on market conditions. Stated that safer assets must offer higher risk-adjusted returns than riskier assets and that consuming the high risk-adjusted returns of safer assets require leverage, creating an opportunity for investors to apply leverage. Also mentioned using financial leverage increases the total risk of the firm by increasing the volatility of a corporation’s net income and return on equity.

Last but not least, showed that the impact of Basel III on the regulator’s welfare depends on the regulator’s strength, and the implementation of an identical leverage ratio across countries would decrease the welfare of regulators with strong powers [7]. Next, identified a safe regime, in which excessive leverage does not result in an increase of systemic risk, and a risky regime, in which excessive leverage cannot be mitigated leading to an increased systemic risk [8]. And revealed that in different industries in Sri Lanka, the degree of financial leverage has a significant positive correlation with financial risk.

Beside, found out the intensity of product market competition increases, principals unambiguously provide stronger incentives to their agents to reduce costs, and hence agents work harder [9]. At the same time, more intense competition also leads to a higher volatility of both firm-level profits and manager’s compensation. Group constructed the market shares of insured competitor banks for any given bank, and analyse the impact of this variable on banks' margins and risk-taking behaviour, using a large sample of banks from OECD countries. Their results suggest that government guarantees to some banks strongly increase the risk-taking of the competitor banks not protected by such guarantees. In this paperwork, the total combined effect of three (3) factors: tax rates, financial leverage, and competitor size on market risk of listed whole sale and retail companies will be estimated [10-12].

Conceptual theories

The impact of competition or the size of competitor, leverage and tax rates on the economy and business. The central bank and government or Ministry of Finance could use two tools: fiscal and monetary policies to perform macro-economic goals [13,14]. Tax rate is one of fiscal policies, either expansion or contraction, can affect quickly the aggregate demand and good market and industry growth. Beside, on the one hand, using leverage with a decrease or increase in certain periods could affect tax obligations, revenues, profit after tax and technology innovation and compensation and jobs of the industry. On the other hand, using financial leverage and changing capital structure offers firms better economic conditions. Firms can vary the capital structure with leverage and change the structure of fixed costs and variable costs. Although leverage can help a firm to increase return, the firm will prefer to increase debt up to a point to be not so nervous about risk because of too much debt financing. During the firm life, leverage can contribute to its performance and growth. Furthermore, Porter’s theory shows us the basic unit of analysis for understanding competition is the industry. And Porter stated that the industry is the arena in which the competitive advantage is won or lost [15]. Beside, competition can help to raise the value of a company by eliminating or reducing monopoly. Sources of competition include, but not limit to, training. Increasing training can help competition raising productivity [16,17].

We use the data from the stock exchange market in Viet Nam (HOSE and HNX) during the 2007-2011 period to estimate systemic risk results. In this study, analytical research method and specially, tax rate scenario analysis method is used. Analytical data is from the situation of listed wholesale and retail firms in VN stock exchange and current tax rate is 25%. Finally, we use the results to suggest policy for both these enterprises, relevant organizations and government.

General data analysis

The research sample has 9 listed firms in the wholesale and retail market with the live date from the stock exchange. Firstly, we estimate equity beta values of these firms and use financial leverage to estimate asset beta values of them, and the results are estimated under effects of another variable: competitive firm size (changed from approximate size to doubling size and slightly smaller). Secondly, we change the tax rate from 25% to 28% and 20% to see the sensitivity of beta values. In 3 cases (rate = 20%, 25%, and 28%), with current debt financing, asset beta mean is estimated at 0.35, 0.34 and 0.32. Also in 3 scenarios, we find out var of asset beta estimated at 0,031, 0,032 and 0,032 (almost the same). Tax rate changes almost have no effect on asset beta var under financial leverage.

Empirical research findings and discussion

In the below section, data used are from total 9 listed wholesale and retail industry companies on VN stock exchange (HOSE and HNX mainly). In the scenario 1, current tax rate is kept as 25% then changed from 20% to 30%. Then, three (3) FL scenarios are changed up to 30% and down to 20%, compared to the current FL degree. In short, the below table 1 shows three scenarios used for analysing the risk level of these listed firms (Table 1).Table 1: Analyzing market risk under three scenarios.

Table 2: Market risk of listed companies on VN wholesale and retail industry market under a 3 factors model (case 1) (source: VN stock exchange 2012).