Determinants of stock returns on the Ho Chi Minh Stock Exchange: Accounting for unobserved heterogeneity and endogeneity (2010 - 2020)

Abstract:

This study examines the determinants of stock returns in Vietnam’s frontier equity market, with particular emphasis on the relationships among firm valuation, capital structure, and foreign ownership. The empirical findings indicate that time-specific effects predominate, whereas firm-specific effects are relatively insignificant. Profitability, measured by return on assets (ROA), and financial leverage, represented by the debt ratio, exhibit statistically significant positive associations with stock returns. In contrast, firm valuation, measured by Tobin’s Q, demonstrates a significant negative relationship with returns, suggesting potential market overvaluation. Foreign ownership, firm size, and sales growth exhibit no statistically significant effects on stock returns during the study period. These findings highlight the importance of accounting for temporal shocks and endogenous relationships in asset pricing models and contribute to a more comprehensive understanding of stock return dynamics in Vietnam’s frontier equity market.

Keywords: stock returns, firm value, capital structure, foreign ownership, Tobin’s Q, frontier market, Vietnam

1. Introduction

Over the past two decades, the Vietnamese equity market has experienced extraordinary expansion, evolving into a critical nexus for capital allocation and corporate financing in Southeast Asia. As a prominent frontier market, the Ho Chi Minh Stock Exchange (HSX) offers a compelling environment to evaluate asset pricing theories and corporate financial decisions. Investors operating in emerging capital markets continually seek to maximize equity wealth, making the identification of corporate drivers of stock returns a central research priority.

Financial economics posits that market equity returns reflect a synthesis of company valuation, operational efficiency, capital structure choices, and investor profile dynamics. Firm value, frequently operationalized via Tobin Q, encapsulates market expectations regarding future profitability and growth prospects. Concurrently, capital structure-the strategic balance between debt and equity-determines financial distress costs and tax shield benefits. Furthermore, in liberalizing frontier markets like Vietnam, foreign investor equity participation is widely regarded as a potential catalyst for institutional discipline, liquidity, and operational oversight.

Despite extensive global research, prior empirical literature in Vietnam exhibits two critical limitations. First, extant studies overwhelmingly analyze capital structure, firm valuation, or foreign ownership in isolation, failing to examine their joint interactions within an integrated asset pricing model. Second, traditional panel estimators employed in previous Vietnamese studies frequently ignore unobserved temporal shocks and endogenous feedback mechanisms—such as simultaneity and reverse causality between stock returns, financial leverage, and market valuation. Failing to account for endogeneity yields severely biased and inconsistent regression parameters, potentially leading to flawed managerial and policy inferences.

To address these gaps, this study delivers a rigorous econometric investigation into the determinants of stock returns across 158 non-financial listed firms on the HSX over the 2010-2020 period (1,705 firm-year observations). The primary contributions of this paper are twofold. Methodologically, we apply diagnostic F-tests to isolate error structures, multi-way double-clustering panel regressions to ensure robust standard errors against spatial and temporal dependencies, and dynamic System GMM estimations to strictly correct for endogeneity. Empirically, we prove that while static models register positive valuation coefficients, controlling for endogeneity reverses the effect of Tobin Q into a statistically significant negative impact, uncovering a pronounced market overvaluation correction mechanism on the HSX.

2. Literature review

2.1. Firm valuation (Tobin Q) and stock returns

Tobin (1969) formulated Tobin Q as the ratio of market valuation to asset replacement cost, establishing a fundamental gauge of market optimism and firm growth value. In efficient capital markets, higher firm valuation reflects superior investment opportunities and strong investor confidence. However, recent empirical work by Akin et al. (2025) demonstrates that market valuation indicators can embody market overvaluation when stock prices temporarily outpace fundamental earning capacity. When market prices diverge from intrinsic values, subsequent trading periods witness price adjustments, resulting in an inverse relationship between initial valuation and subsequent equity returns. Thus, we hypothesize that market valuation (Tobin Q) significantly affects stock returns, exhibiting a negative relationship under endogeneity-corrected dynamic specifications due to overvaluation adjustment.

2.2. Capital structure (Debt ratio) and stock returns

Corporate financial leverage strikes a balance between interest tax shield benefits and financial distress costs (El-Masry et al., 2024). In rapidly growing frontier markets characterized by high return on capital, debt financing enables profitable companies to expand operating scale without diluting equity ownership. Recent empirical studies by El-Masry et al. (2024) in emerging equity markets and Rujiman et al. (2024) confirm that optimal debt utilization generates positive financial leverage effects, enhancing net shareholder returns. Consequently, we propose financial leverage (Debt Ratio) exerts a statistically significant positive impact on stock returns on the HSX.

2.3. Profitability, growth, size, and foreign ownership

Corporate profitability, operationalized via Return on Assets (ROA), represents the primary accounting signal of asset utilization efficiency. Akin et al. (2025) and Dutiva Br. Ginting & Matondang (2022) show that operational profitability directly drives equity returns by providing cash flows required for reinvestment and dividend distribution. Conversely, while revenue growth (Sales Growth) and company scale (Firm Size) reflect expansion, Aggarwal & Padhan (2017) and Vo & Phan (2023) caution that scale or growth without operational profitability fails to deliver sustainable excess market returns. Furthermore, foreign ownership represents institutional capital; however, its direct effect on returns may be secondary once fundamental earning performance is accounted for. Thus, we hypothesize operational profitability (ROA) positively influences stock returns. In addition, firm size, sales growth, and foreign ownership do not exert significant direct effects on stock returns when operational profitability and endogeneity are strictly controlled.

2.4. Econometric imperatives: Unobserved heterogeneity and endogeneity

A central contribution of contemporary corporate finance econometrics is the explicit treatment of endogeneity and error component structures. Corporate financial decisions-leverage, valuation, and profitability-are jointly determined, creating endogeneity through simultaneity and reverse causality (Barros et al., 2020; Galvao et al., 2018; Yang et al., 2022). Unadjusted OLS or standard fixed effects models produce inconsistent estimates in the presence of endogenous regressors. To resolve these econometric biases, Blundell & Bond (1998) developed the System GMM estimator, which instruments endogenous variables using lagged levels and differences (Ullah et al., 2018). Moreover, panel data models must account for unobserved temporal shocks and entity heterogeneity through formal diagnostic F-tests (Baltagi, 2021), model selection criteria (Papke & Wooldridge, 2022), and multi-way standard error clustering (Millo, 2019; Thach, 2023).

3. Research methodology and data

Building on prior empirical research, this study posits that stock returns are systematically influenced by a firm’s intrinsic value, capital structure, ownership composition, size, growth dynamics, and profitability. To account for unobserved heterogeneity and temporal variation, we extend the baseline model to incorporate both individual (firm-specific) effects and time effects, enabling a more robust panel data estimation. The general model is specified as:

Returns_it = TobinQ_it + DA_it + FO_it + SIZE_it + GROW_it + ROA_it + µ_it + λ_it + ε_it 

Where: Returns_it is the stock return for firm i in year t; TobinQ_it captures firm value; DA_it represents the debt ratio (capital structure); FO_it denotes foreign ownership percentage; SIZE_it is firm size (log-transformed); GROW_it measures sales growth; ROA_it reflects profitability; µ_it captures individual (firm-specific) effects, accounting for time-invariant heterogeneity such as managerial quality or industry positioning; λ_it captures time effects, controlling for macroeconomic shocks, regulatory changes, or market-wide trends; ε_it is the idiosyncratic error term.

The empirical sample comprises 158 non-financial listed companies on the Ho Chi Minh Stock Exchange (HSX) observed continuously from 2010 to 2020, providing a robust panel dataset of 1,705 firm-year observations extracted from the FiinPro database. Financial variables were winsorized at the 1st and 99th percentiles to eliminate extreme outliers.

Table 1. Descriptive statistics

Source: Compiled by authors

Table 1 indicates that Returns, TobinQ, FO, GROW, and ROA all show positive skewness and high kurtosis, suggesting distributions with long right tails and extreme outliers, while DA and SIZE are more symmetric and stable. Overall, SIZE is the most consistent variable with minimal variation, whereas FO and GROW display the widest dispersion, highlighting substantial differences across firms in ownership and growth opportunities.

Table 2. Correlation matrices

Source: Compiled by authors

Overall, the correlation matrix in Table 2 reveals mostly weak to moderate relationships among variables, with notable positive links between ROA and TobinQ (0.547) and negative links between ROA and DA (-0.414), while most other correlations remain low. The VIF results in Table 3 confirm that multicollinearity is minimal, as all values are well below critical thresholds, supporting the reliability of regression analysis using these variables.

4. Results and Discussion

Table 3. F test

The F-test results in Table 3 reveal that temporal heterogeneity dominates the error structure with a statistically significant F-statistic of 41.000, whereas firm-specific individual effects are statistically insignificant (F = 1.000). While jointly modeling both firm and time effects yields a statistically significant improvement in overall model fit (F = 4.000), this effect is driven primarily by macro-level temporal shocks.

Table 4. Hausman test

In Table 4, the Hausman test yields a statistically significant chi-squared value of 14.000 for the time-effects model, rejecting the random-effects specification in favor of time fixed effects. For the two-way specification, the Hausman test statistic is statistically insignificant (chi-squared = 9.000), indicating that the random-effects estimator remains consistent when both dimensions are modeled jointly. Ultimately, these combined diagnostic tests demonstrate that market-wide temporal shocks dominate unobserved variation on the Ho Chi Minh Stock Exchange, establishing a clear empirical rationale for prioritizing time fixed effects and multi-way clustering.

Table 5. Panel regression

Source: Compiled by authors

Notes: This model runs panel regressions of 158 stock returns on its Tobin’s Q, debt ratio, foreign ownership, sales growth, ROA, and firm size from 2010 to 2020. All coefficients are robust using time clustering and double clustering using R for model (1) and (2), respectively. 

***Significant at the 1% level. **Significant at the 5% level. *Significant at the 10% level.

In Table 5, static panel estimations under Time Fixed-Effects (Model 1) and Two-way Random-Effects (Model 2) demonstrate that Tobin’s Q (0.284 and 0.412, respectively), Debt Ratio (0.230 and 0.307, respectively), ROA (1.284 and 1.678, respectively), and Sales Growth (0.091 and 0.076, respectively) exert statistically significant positive impacts on stock returns. Standard errors are robustly adjusted using time clustering in Model 1 and double clustering in Model 2 to correct for temporal and spatial error dependence (Millo, 2019; Thach, 2023).

In both models, the positive and significant of Tobin’s Q coefficient reflects traditional market valuation theory (Tobin, 1969). Similarly, the positive Debt Ratio in both models supports that leverage provides value-enhancing tax shields (El-Masry et al., 2024; Rujiman et al., 2024). Strong and positive ROA coefficients in both models confirm that operational profitability drives equity returns (Akin et al., 2025; Ginting & Matondang, 2022).

Conversely, Foreign Ownership and Firm Size exhibit specification sensitivity, shifting from insignificant in Model 1 to negatively significant in Model 2 (-0.002 and -1.242, respectively). This instability occurs because static regressions overlook structural specification choices (Papke & Wooldridge, 2022; Vo & Phan, 2023) and endogenous feedback mechanisms like simultaneity or reverse causality (Barros et al., 2020; Galvao et al., 2018; Yang et al., 2022). These static limitations underscore the necessity of applying dynamic System GMM estimations (Blundell & Bond, 1998; Ullah et al., 2018).

Table 6. System GMM results (Endogenous specification)

Source: Compiled by authors

Notes: The model is estimated using system GMM in R (Croissant & Millo, 2018).  Returns, TobinQ, DA, GROW, and ROA are treated as endogenous regressors. Lagged instruments are specified from lags 2 to 3.

***Significant at the 1% level. **Significant at the 5% level. *Significant at the 10% level.

The findings reported in Table 6 align closely with established theories of firm valuation and capital structure. The coefficient on the lagged dependent variable (returns) is small and statistically insignificant, suggesting limited persistence in firm performance once endogeneity is controlled for. The negative and significant coefficient on Tobin’s Q suggests that higher market valuations are associated with lower subsequent returns, consistent with the overvaluation effect highlighted in Tobin (1969) and later studies such as Akin et al. (2025). This result reflects the notion that firms with inflated market value may face diminishing marginal returns, as investors adjust expectations downward. In contrast, the strong positive effect of the debt ratio supports the view that leverage enhances shareholder returns, echoing empirical evidence from El-Masry et al. (2024) and Rujiman et al. (2024), who document that effective debt usage strengthens firm performance and increases stockholder value. The robust positive impact of ROA on returns is consistent with Akin et al. (2025), who show that profitability is a key driver of firm value, reinforcing the view that markets reward operational efficiency and strong cash flow generation. This positive correlation is also consistent with other studies (Ginting & Matondang, 2022; Fama & French, 2006).

The insignificance of foreign ownership and firm size in our model may reflect contextual differences in ownership structures or market maturity. Similarly, the lack of significance for sales growth suggests that expansion alone does not guarantee higher returns, in line with Aggarwal & Padhan (2017) and Vo & Phan (2023), who caution that growth must be accompanied by profitability to enhance firm value.

5. Conclusion

The research provides a comprehensive analysis of the factors driving stock performance on the HSX, offering both methodological and empirical contributions. Methodologically, the study demonstrates that temporal heterogeneity (time effects) is the primary source of variation in Vietnamese stock returns, whereas firm-specific individual effects play a minor role. By applying double-clustering techniques and System GMM, the study ensures that the estimated coefficients are robust against serial correlation, heteroscedasticity, and endogeneity.

Empirically, the findings highlight that leverage and profitability are the most critical drivers of shareholder value, supporting the view that effective debt usage and operational efficiency are rewarded by the market. The observed negative relationship between Tobin’s Q and stock returns suggests that highly valued firms may face diminishing marginal returns as investors adjust for overvaluation. Furthermore, the lack of significance for foreign ownership and sales growth indicates that these factors do not guarantee higher returns without accompanying profitability, contrasting with some findings in more mature markets. Ultimately, this study underscores the importance of utilizing dynamic panel estimation and multi-way clustering to capture the complex dynamics of a rapidly evolving frontier market like Vietnam.

The study is exclusively focused on the Ho Chi Minh Stock Exchange, which is characterized as a frontier market with distinctive structural features. In addition, the research covers the period from 2010 to 2020. This window concludes at the onset of the global COVID-19 pandemic, meaning the results do not capture the potential structural shifts, heightened volatility, or changes in investor behavior that occurred in the post-2020 recovery period.

References:

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Akin, I., Akin, M., Satiroglu, H., & Jhamb, M. (2025). Influence of Growth, Capital Structure, Profitability, and Size on FTSE 100 Enterprise Value. Journal of Corporate Accounting & Finance, 36(2), 157-168. https://doi.org/10.1002/jcaf.22761

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Dutiva Br. Ginting, E., & Matondang, S. (2022). Effect Of Macroeconomic Factors (Exchange, Inflation, Sbi Interest Rate, World Oil Price) On Stock Returns With Profitability As Intervening Variables In Mining Sector Companies In The Indonesia Stock Exchange 2015-2019. International Journal of Educational Research & Social Sciences, 3(4), 1577-1586. https://doi.org/10.51601/ijersc.v3i4.459

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Các yếu tố ảnh hưởng đến tỷ suất sinh lời của cổ phiếu
trên Sở Giao dịch Chứng khoán TP. Hồ Chí Minh:
Xem xét tính không đồng nhất không quan sát được và vấn đề nội sinh (giai đoạn 2010 - 2020)

Tóm tắt:

Nghiên cứu phân tích các yếu tố ảnh hưởng đến tỷ suất sinh lời của cổ phiếu trên thị trường chứng khoán Việt Nam, tập trung vào định giá doanh nghiệp, cấu trúc vốn và tỷ lệ sở hữu nước ngoài. Kết quả cho thấy tác động theo thời gian chiếm ưu thế, trong khi tác động đặc thù của từng doanh nghiệp không đáng kể. Khả năng sinh lời (ROA) và đòn bẩy tài chính có mối quan hệ cùng chiều, có ý nghĩa thống kê với tỷ suất sinh lời của cổ phiếu. Ngược lại, chỉ số Tobin’s Q có mối quan hệ ngược chiều, cho thấy khả năng tồn tại hiện tượng định giá quá cao. Tỷ lệ sở hữu nước ngoài, quy mô doanh nghiệp và tăng trưởng doanh thu không có tác động có ý nghĩa thống kê. Kết quả nghiên cứu nhấn mạnh sự cần thiết phải xem xét các cú sốc theo thời gian và vấn đề nội sinh khi phân tích các yếu tố quyết định tỷ suất sinh lời của cổ phiếu trên thị trường chứng khoán Việt Nam.

Từ khóa: tỷ suất sinh lời của cổ phiếu, giá trị doanh nghiệp, cấu trúc vốn, sở hữu nước ngoài, chỉ số Tobin’s Q, thị trường cận biên, Việt Nam

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