THE PERCEPTION OF THE LAO SECURITIES EXCHANGE WITHIN THE LAO COMMUNITY Somphit Souksai1

Abstract: This study focuses on the Lao Securities Exchange (LSX) which was officially opened on October 10, 2010, with two companies listed, EDL-Generation and Banque Pour Le Commerce Exterieur . Specifically, it aims to investigate the perception of the LSX among the Lao community and determine whether an investment culture is developing and capable of supporting the LSX growth through stock investment. This research also seeks to assess the relevance of the government incentives in terms of promoting stock purchasing and determine the perception of the LSX by . The research used a combination of quantitative and qualitative techniques to probe the willingness of Lao people to be more involved in the LSX. All respondents were Lao citizens, representative of the Lao community at large. A mixed methodology consisting of a questionnaire, semi-structures and unstructured interviews, was utilized. The findings indicate that Laotians do not have an investment culture yet. They are also cautious in their approach to investment and lack financial capital knowledge to feel comfortable investing in stocks. Moreover, it was found that they have little confidence in the LSX ability to discipline itself and navigate through the risk of insider trading. While the government has mostly focused on incentives to boost the number of companies listed, it was found it also needs to better communicate the capital- raising role of LSX in the Lao community and better regulate stock brokers so as to instill more confidence in their services. Still, it is believed that, as the Lao government is expanding funds to boost education and raise the country GDP, knowledge, perception and acceptance of the LSX will keep growing.

1. Introduction Business. This research was completed under the supervision of Dr. Ismail Ali Siad. Starting in 1986, Lao PDR (Laos) has engaged in major structural economic reforms which include among others price One clear evidence of the policy shift that deregulation and openness to foreign has taken place since is the establishment investment. With the introduction that of the Lao Securities Exchange (hereinafter same year of the New Economic the ‘LSX’) on 10 October 2010. The LSX, a Mechanism (an extensive transformation joint venture between the Bank of Laos program), the country has been gradually (BOL) and the Korea Exchange (KRX), moving from a centrally-planned economy with the BOL as a majority owner (51%) toward a market-oriented system. and the Korea Exchange a minority one (49%), was set up with a view to raise fund for investors and boost economic growth. The LSX is supervised by the Lao Securities Exchange Commission (LSEC). Out of the 10 ASEAN member states, the 1 Somphit Souksai recently graduated from LSX was the 9th securities exchange to be Assumption University, Graduate School of created (Myanmar has yet to open a securities market). The LSX started trading

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with two stocks; one from EDL made it difficult to have more companies Generation Public Company (EDL- listed on the LSX. Generation), a subsidiary of the state- To measure the performance of the LSX, owned Energy Company Electricity de an index was created. Called the LSX Laos, and the other from Banque pour le Composite Index (Laos Securities Commerce Exterieur (BECL), the largest Exchange Composite Index) and created commercial bank in Laos. with a base value of 1000 as of Jan 11, - EDL-Generation, currently the largest 2011, it is a capitalization weighted index listed company on the LSX operates 7 of the companies listed on the LSX. The hydropower dams. Raising capital for initial index was set at 1,000. With the business expansion was part of the plan to secondary market officially starting turn Laos into “the battery of Asia.” EDL- trading on January 11, 2011, the market Generation initial public offering (IPO) price index kept increasing for 22 consisted of 868.6 million shares; a 75% uninterrupted days, reaching its peak at 1,865 point. It has since then gradually holding by the government with the remaining 25% of the IPO to be purchased stabilized around 1,300 points. by the public, with 10% of them (86.9 The LSX has now been operating for three years with most of the trading conducting million shares) going to foreign investors by foreign investors (both institutional and and the remaining 15% (130.3 million individual). In 2012, they represented shares) to domestic investors.. 58.46% of the traders (29.40% were Lao - BCEL, established in 1976, was individual traders and another 9.93% transformed into a full commercial bank in corporate traders). China, , Japan, 1989. BCEL’s IPO consisted of 27.32 Republic of Korea, Vietnam and the US million shares with 20% of them (5.46 were the main foreign traders on the LSX. million to be purchased by the public, 75 ) % Chinese who initially outnumbered other of which were offered to Lao citizens and foreign investors have since been 25% to BCEL’s staff. Foreign investors overtaken by Thai investors, now the were later eligible to purchase shares but largest group. There has also been a prohibited from partaking in the IPO. significant increase in the number of other At the time the LSX was launched, Laos’ foreign investors. But out of fears of rapid healthy economic growth rate was capital inflows and outflows which could expected to attract investors. However, have a negative impact on currency several factors, which turned out to be management, the government has since more powerful than the attractiveness of a restricted the number of foreign steady growth, impeded the growth of the shareholders. LSX. They included the small size of the Local investors’ participation has been market, young government employees very low. They have yet to seek the LSX lacking technical skills, stringent opportunities even though the government regulations, and a lack of specific research has adopted laws and regulations by brokerage firms on the behavior of Lao governing the securities exchange that are investors. They resulted in low meant to maintain a clear policy international institutional investor interest environment and simplify the listing and have since been affecting investors’ process. Attracting the private sector to decision to invest in the LSX. They also invest in the market in order to raise long term capital has not succeeded yet either.

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Two distinct and interrelated questions - Community arise from this persistent problem: why is Broadly speaking, a community consists of the volume of trade stagnating? What a group of people living in the same would it take for it to pick up? distinct locality and sharing similar One way to address these issues is to fundamental values (Rifkin et al, 1988). It examine the perception of the LSX among is a cluster of citizens who have something the Lao Community. This study attempts to in common (Lee, 1992). However, while do just that. It aims to deepen geographic proximity is often emphasized understanding of how the Lao community as the main factor in the formation of a perceives the LSX. More specifically, it community, there must also be a bond aims to assess the level of interest among created by shared blood, language, history, the general public in investing in the LXS, religion and above all, culture (Upadhya determine the level of awareness and (2006). For the purpose of this study, the understanding of the LXS and acceptance term ‘Lao Community’ includes the general of risk (risk tolerance) among Lao people, population (students, working people, examine current investors’ perception of retirees, etc), some of whom may own the LXS, and consider how to increase LSX securities. Some may be aware of the participation of both investors and LSX’s existence; some may not. It also companies listed on the LXS. encompasses urban and rural people To do so, it seeks to answer the following regardless of their demographic traits five research questions: (gender, income, types of job, etc). 1. Is there an investor culture within the

Lao community? - Perception 2. What is the average Lao investor’s Perception can be defined as the way attitude toward the LSX? people distinguish or understand events, 3. Do investors have confidence in the objects, and humanity (Sirgal and LSX and/or in stockbrokers? Ramanauskas, 1989). People often take 4. What should the Lao government do to action (for example buy stocks) on the increase the number of investors and make basis of their perceptions without investing in the LSX attractive to the Lao considering whether those perceptions community at large? truthfully or incorrectly reflect reality. 5. Is there a need to educate companies Most of the dissimilarities in perception with regard to their attitude about being stems from how people choose and listing on the LSX? systematize sensory information (Kotler, The operative concepts used in this study 2003 As Huang 2003 pointed out, are discussed first. Attention then turns to ). ( ) perception and feelings are interconnected the research methodology. Next, the data . Human s behavior is based on the collected is analyzed. This paper ends with ’ a discussion of the research questions and perception of a real situation, not on reality itself Investors actions on the stock some recommendations. . ’ market are thus a combination of perception, sensation and community 2. Literature Review influences (Naveed et al., 2011). Investors This section discusses the operative often surrender to behavioral inclinations concepts used in this study to address the while making investment decisions. They research questions. can be illogical as demonstrated by a

number of financially-disastrous

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inclinations (fear, ravenousness, or action, which may be triggered by emotional responses) to price variations or perceived opportunities (Ashen, 1992). changes in an investor’s wealth (Andrew et There is a strong association between al, 2005). intention and action. As Beck and Ajzen (1991) pointed out: “as a general rule, the - Risk Perception and Risk Tolerance more favorable the attitude and subjective norms with respect to behavior and the Risk is one of the most important greater the perceived behavioral control, determinants of investment decisions (Ozer the stronger an individual’s intention to et al., 2004). Investors are conventional in perform the behavior under consideration.” that they are fearful of losing money Focusing on the Nigerian capital market, (Chambers and Rogers, 2004). Risk Obamuyi (2013) determined that the main perception is the maximum amount of factors influencing investment decisions risks that one would like to take and be are the history performance of the company stock, dividend policy, expected comfortable with. One way to reduce risk corporate earnings, and expectations of a is to make portfolio mix by conducting high profit. These factors can be ratio among stocks and fixed income significantly influenced by the gender, age, (Kendirl and Tuna, 1999). The general marital status, and educational assumption is that risk is a negative qualification of the investors. preference that has bad consequences. Risk enhances when gambling is part of the  Institutional/Private Investors equation and shrinks when there are positive explanations (Brachinger and Investors can be classified as private or Weber, 1997). As McConnel et al. (1985) institutional investors, regardless of observed, one’s risk preference determines whether they are domestic or foreign specific return preferences. One’s investors (Bassen, 2002). Typically willingness to take risk depends on one’s institutional investors include insurance level of risk tolerance. Yin (2000) views companies, mutual funds, banks, and investment firms (Brigham and Ehrhardt, risk tolerance as an emotional characteristic. Grable and Lytton (1999) 2002). They generally actively trade shares studied the different levels of risk in order to keep their portfolio attractive. tolerance in relation to demographics and On any given day, in most stock markets, determined that in terms of risk-taking and the bulk of the transactions is conducted financial strategies, the number of males by institutional traders (Rose and Marquis). willing to take risks is high and the Individual investors buy or sell securities numbers of females low. Males are more for their own private accounts. Barber and willing to take risk than females. Odean (2008), found that when purchasing stock, individual investors have a tendency  Intention to Invest to focus on shares with large one-day profits and shares in the news. This Intention can be defined as “a path of collective tendency to buy attention- action that one intends to follow [and] an grabbing stock, however, often leads to endeavor that guides action and purpose” poor subsequent returns. According to (www. thefreeictionary.com, accessed on Kaniel et al. (2008), private investors also March 12, 2014). Intention is assumed to tend to buy stock when the prices decrease be a necessary condition for voluntary in the earlier month and sell when the

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price increases. Unlike institutional - Securities Regulations investors, who actively traded shares, Securities regulations are meant to help individual investors tend to buy and hold prevent fraud (e.g. insider trading) and shares for long periods (Rose and Marquis, encourage investor confidence (Mbatua, 2005). In Lao PDR, the bulk of investors 1994). Rules and regulations are the most are institutional investors and most of important objects of market surveillance. them foreign investors. Risk management and surveillance are keys to preserving elevated values and  Securities Exchange stimulating investors’ confidence A securities exchange) is a financial market (Mungoma, 1995). Legislation governing “where securities (bonds, notes, shares) are stock markets generally include listing regulations as well as licensing regulations bought and sold at prices governed by the for brokerage services. Rules and services of demand and supply” (Keown et regulations governing the activities of the al, 2010). Simply put, they are markets market (disclosure, accounting and listing where corporations can raise capital and standard, etc) should be re-evaluated from investors can sell their securities to other investors (Di Giorgio and Di Noia, 2001). time to time (Osei, 2001). One important Stock markets may be divided into activity regulated by laws is information primary markets and secondary markets. disclosure, which is critical for the effective operation of securities markets. - A primary market is a marketplace for the Inflexible disclosure requirements boost issuance of new securities. For this reason incentives to list on the stock market (Teye it is also called the ‘new issue market.’ Its and Jeroen, 2000). principal function is to raise capital from

the public by selling a company’s initial  Initial Public Offering shares to the public through an initial public offering (Ojo and Song, 2009). An initial Public Offering (IPO) is the issue Securities can be directly bought from the of shares from companies that have never issuer. As soon as the initial sale is done in before sold shares to the general public the primary market, any further transaction (Rose and Marquis, 2006). It refers to the of buying and selling securities will be first time a company sells stocks to the traded on the secondary market (Keown, public (Kumar and Beattie, 2004). Raising 2010). capital is the main reason for a firm’s - A secondary market thus deals with going public (Li et al., 2007). As they grow, securities previously issued. It is a many businesses find that private sources marketplace in which formerly-issued of funding are inadequate for their future securities are sold from one investor to growth and turn to investment bankers another, which means that the profits from (Roell, 1996). The likelihood of conducting selling on secondary market will go an IPO increases with an increase in a directly to the previous investors; the company’s size (Pagano et al., 1998). initial issuer will not get any profit from Another IPO benefit is the capability to selling securities. The main function of the diversify holdings (Ritter & Welch, 2002). secondary market is to provide liquidity to It provides an opportunity to partake in the security investors (Rose and Marquis, rewards of the increase of the firm (Wei, 2006). 2006). Going public also allows firms to gain from a bullish market. They might

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issue shares in an IPO to benefit from insurances for firms in the security short-term overestimation, which is called industry have been determined to have market timing (Baker & Wurgler, 2002). decreased risk and increase market Firms tend to go public when market-to- constancy. book ratios are high (Lowry, 2002) and use - Dividend Policy private forms of financing when equity estimate are low (Lerner, 1994). When the There are two ways investors can earn a return; dividend and capital gain A stock market declines companies tend to . withdraw their IPOs (Lowry, 2002). dividend can be defined as a return on a share Dividends are an important factor .  Stock Brokers for investors when investing in equity shares (Foong et al., 2007). Many Stockbrokers are regulated professionals companies pay dividends on their stock who perform as negotiators for the buying regularly, thus offering shareholders a or selling of stocks or other securities. relatively steady source of income (Rose They are required to obtain a license to and Marquis, 2006). One of the main operate in the stock market (Malathi and objectives of a firm is to maximize Muthappan, 2013). As an agent, a broker shareholder value (Brigham and Ehrhardt, can charge a fee or take commission for 2002). In theory, corporations do not need the requested stock activities. Generally, to pay dividends to their stockholders. for any private investor deciding to Some never have as they prefer to retain participate in the stock market, the broker all after-tax earnings (Miller, 1999). An is the first place where to go The broker . example in case is Apple which until will generate an account for clients to recently and much pressure by investors perform on the securities exchange. There had a policy of reinvesting its gains or are currently two registered stock brokers holding on to them. The tax rate on in Laos: BCEL-KT Securities Co. Ltd, and dividend income has been shown to have Lanexang Securities Public Company. an effect on shareholders’ demand for dividend-paying shares (Rose and Marquis, - Stock Market Incentives 2006). Any provision reducing tax rates is Incentive schemes are critical to capital likely to stimulate demand for dividend- market development. Incentives fortify paying stocks, driving their prices investor confidence in the stock exchange substantially higher as a result. Still, a and encourage investor participation number of studies found that a relationship (IOSCO, 2002). One common form of between cash dividend announcements and incentives is fiscal policy incentives. They share prices is not observable (Dempsey et often take the form of exemptions from al., 1993; Van Horn, 2001; Hansen et al., withholding tax on interest and dividends 1994; and Black et al., 1995). on certain kinds of investment, for example, collective investment schemes 3. Research Methodology for employees or long term debt securities This study uses a mixed methodology (Mugabi, 2001). Incentives can also take approach. Elements of a qualitative the form of investor protection schemes. research are combined with elements of a For instance, in Egypt, the creation of a quantitative research. While perceptions, Settlement Guarantee Funds (SGF) and an opinions, ideas, and facts - not numbers - investor protection fund as well as the constitute the gist of the evidence gathered introduction of specialized liability to address all the issues raised, an added

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layer of evidence in the form of opinions familiar with the LSX. The unstructured gathered from a group of respondents can interviews were conducted with: help further affirm - or disaffirm – the - Two managers of a state-owned company preponderant findings. that may soon be listed. Primary data were collected via (i) semi- - Two respondents employed with structured interviews, (ii) unstructured domestic private companies in the interviews, (iii) questionnaires, and (iv) shipping industry (their personal observations. Secondary data firms may be listed soon). were collected from documents. - Five respondents from the Lao National (i) Semi-Structured Interviews Assembly, all of them support staff with Unlike a structured interview, which has knowledge of an extremely prearranged set list of the government incentives designed to questions to which the respondent is encourage investors. encouraged to provide restricted choice - Six university students with various socio- responses, a semi-structured interview economic backgrounds from the allows for questions to build up during the University of Laos. - Two high-level civil progress of the interview. servants at the Ministry of Foreign Affairs. In this study, 4 semi-structured interviews Although the researcher had prepared a were conducted. The four respondents series of questions, almost all of the were selected based on the different questions asked flowed naturally from the perspectives they offered. They came from answers provided. The researcher took the private and public sectors and from the notes during the conversations and wrote banking/investment and unrelated summaries of them immediately after the industries. They include: interviews were completed. - One senior officer who has been working (iii) Survey Questionnaire with the LSX since its inception. The target population in this survey - One senior stockbroker from one of the questionnaire is participants at a seminar at the Headquarter of the LSX in . brokerage firms licensed to operate in Laos who was previously based in Hong Entitled “Color of Investment Gateway Kong for five years. 2014,” the seminar was held on 22 March, - One manager from one of the two 2014 and intended to provide information companies listed on the LSX. and advice to Laotians who may want to invest in the LSX. The researcher had - One manager from a state-owned contacted the LSX staff prior to the company that may eventually be listed on seminar and was given permission to the LSX. attend the seminar and distribute All the questions asked were open-ended questionnaires. Approximately 1,300 questions, broad enough to broach on a people were in attendance. wide variety of LSX related issues . One hundred questionnaires were (ii) Unstructured Interviews randomly distributed to the target Typically, unstructured interviews are population as they came in and were to be based on the natural invention of questions filled out and given back to the researcher in a natural interaction. 17 unstructured at the end of the seminar. The researcher interviews were conducted with people, essentially relied on appearances (well either ‘very’, ‘moderately’, or ‘not at all’ dressed, business like, casual, etc), gender, age (to the extent that it can be determined)

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and demeanor. The respondents were (v) Documents briefed about the objective of the study As Yin (2003) stated, “the most important and guaranteed anonymity. They were also use of documents is to substantiate and told about the purpose of this research. supplement confirmation as of other The questionnaire consists of 7 parts: sources.” The documents used in this - Part A focuses on the demographics of research to collect data include among the respondents others: reports from the two companies - Part B seeks to probe their understanding listed, LSX documentation and brochures, of technical terms. websites from various government agencies, local dailies, international - Part C zeroes in on the amount of money newspapers and magazines. they have invested, risk perception and risk-taking. 4. Research Findings - Part D seeks to determine their perception All the data gathered as part of the mixed of the level of protection offered in the methodology are discussed next. industry. (i) Findings from the Survey Questionnaire - Part E focuses on the tax aspect of A majority of the people surveyed were investment and on stockbroker services. It males (59%). 37% of them were between 21 uses a five-point and 29 years old, 26% fell in the 30-39 age Likert scale, (with 1 meaning “strongly category and 18% in the 40-49 age disagree”, 2 “disagree”, 3 “normal”, 4 category. Another 13% were in the 50-59 “agree”, and 5 “strongly agree”). year group and 6% of those surveyed were - Part F looks at the nature of the services over 60. Obviously, interest in the LSX is stockbrokers provide. This part uses a four- not limited to one age group. Even though point slightly more than half of the respondents This part uses a four-point Likert scale (1: were below thirty, Laotians of all age are “good”, 2 “average”, 3 “poor”, and 4 eager to learn more about the LSX as an “excellence”). investment vehicle. - Part G focuses on the obstructions to the An overwhelming majority of the people LSX development. surveyed has a bachelor degree (57%) and All parts except for Parts E and F use “tick” another 17% a Masters’ degree. Clearly, boxes. those showing an interest in the LSX are (iv) Personal Observations well educated. This is no accident. Their Many of the observations made for this education level not only predisposes them study were made by dint of circumstances; to seek knowledge and learn fast but also a discussion with a friend, a family means that their income level is such (or member, a colleague at the company will be in the case of students) that they where the researcher was previously have or will have money to invest. A employed. The researcher also walked majority of the respondents (56%) worked downtown, around the shopping mall, near for state owned companies and a sizeable the new construction sites (mostly large 28% of them were either self-employed offices). A large part of these observations (14%) or civil servants (14%). A low 11% were meant to have a sense of whether the were employed in the private sector and pool of potential investors would increase another 5% held various part time jobs in the future. classified under ‘other occupations’. The

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fact that more than half the people  Level of Investment: 36% of the surveyed work for state-owned companies respondents have invested more and another 14% for the government than LAK 10 million (US$1,250), suggests that job-security may take priority 23% LAK 7-10 million (US$875- over compensation, which, when 1,250), 15% LAK 1-3 million transposed to the investment realm suggests in turn that a majority of those (US$125-375) and 11% LAK 3-5 surveyed may not be risk takers. Of course, million (US$375-625). A majority the argument can also be made than those of those investing in stocks (61%) do facing risk (including job insecurity) on a not frequently buy shares, which daily basis may not want to take additional suggests they are cautious and have risk with stock investment and would adopted a “wait and see” attitude, rather go for a steady income stream, for example, in the form of a cash deposit needing to know first how the investment. stocks will behave over a relatively long period of time, a frequent The following summarizes the respondents’ answers to the survey. attitude among private investors.  Knowledge and Understanding of Overall, a good majority of them Capital Markets: It is important for are interested in the LSX as a vehicle for investment (hence their investors to understand how the market operates and know the attending the seminar). 11% claim to range of financial products have no interest whatsoever in available prior to even thinking of investing in the LSX in the future. investing in securities, all the more as new products continue to  Investors’ Risk Tolerance and emerge. Most respondents have Perception: 23% of the respondents heard of the capital market fall into the ‘moderate risk’ terminology before but almost half category, 20% in the ‘low to of them do not know what they moderate risk’ category and 13% mean. The only terms with which into the ‘low risk’ category. 10% are they are familiar is ‘share’ (60% of risk averse. the respondents), which outlines the

need for more LSX-related  Investor Protection: The findings education as a first step toward indicate a fair level of confidence encouraging Lao people to invest with 52% fairly confident, 13% very in stocks. Their sources of confident. 26%, however, have no knowledge vary. Internet represents confidence in the process. A their most important source (55%), considerable proportion of followed by newspapers (52%) and investors see the financial products schools (48%). Few obtained unsuitable to their needs either out knowledge from fund managers of a lack of information or simply (2%) or investment advisers (5%) or as a result of a failure by the brokers/dealers (14%). industry to respond to the needs of potential Lao investors and come

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up with different finacial products, and timing of purchases and sales which of course first presupposes a and also whether they can be solid understanding of what they trusted to work zealously for their need. 52% of the respondents are clients, regardless of the amount fairly confident in the complaints invested. A majority of the handling mechanism, 6% very respondents (48%) believe that the confident and 10 % neutral, leaving amount of information provided is 16% of them with no confidence in poor and leave much room for the way complaints are handled. improvement with another 42% reporting that the advising  Stock Market Tax Incentives: A provided by stockbrokers is just average. Only 5% regard their majority of the respondents agreed (53%) and strongly agreed (23%) with services good and another 5% as the fact that lower tax rate on excellent. Clearly most of security investment would be an respondents are dissatisfied with incentive. 15% were neutral, with the kind of information brokerage another 5% disagreeing and 4% firms provide. One of the strongly disagreeing. 26% of the misunderstandings (and respondents strongly agreed and expectations) is that stockbrokers another 33% agreed that the should know which shares are removal of the capital gain tax likely to grow and should be held would operate as an incentive for liable whenever their predictions people to invest in the LSX. An turn out to be wrong. While they additional 28% had no opinion, are expected to know the market well and anticipate fluctuations, no thereby indicating that in their eyes one should be expected to know it is neither an incentive nor a with certainty how the market will deterrent. A low 9% disagreed and act. Stockbrokers may be expected (2%) strongly disagreed with the to work miracles and provide notion that it would act as an winners even though much of the inventive. An overwhelming fate of a stock is beyond their majority (86%) see tax relief granted control. As a whole, the perception on the expenses incurred as an of stockbrokers is not very incentive, 13% are neutral and just positive, which may be an issue in only 1% disagreed. Clearly any form terms of promoting the LSX. of tax saving resonates well with the public.  Major Impediments to the  Stockbroker Services - Whenever Efficiency and Development of the Securities Exchange - 45% of the investors want to commit funds to the LSX, one of their primary respondents see the lack of concerns is the ability of a information transparency as the stockbroker to provide valuable main obstacle to any future information and insightful development of the LSX. Another guidance in the choice of stocks 27% consider that securities

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regulations pose a challenge as tolerance. They believe this will they fail to create a climate of trust. improve as interest in the LSX 11% regard the lack of real tax grows. More Lao people are now incentives as a serious impediment. interested to learn about financial 9% of the respondents view markets (which does not mean stockbroker services (the lack of though they will invest in stocks). quality) as a barrier to growth. Potential investors may, however, Another 8% click the ‘other grow to accept that returns are commensurate with the level of segmentation’ case, indicating that risks taken. a miscellaneous list of small

problems, which on aggregate may  LSX Regulations and Potential become big obstacles, hampers the Investors: According to the LSX efficiency of the LSX. officer, there has been an extensive (ii) Findings from the Interviews and development of the regulatory Documentation Support framework governing the LSX as The following is a summary of the content part of an effort to instill of the interviews by themes. confidence among potential  Laotians’ Risk Perception and Risk investors. But according to a few Tolerance: Lao people’s perception interviewees well-versed in LSX of the LSX and their level of matters, the real challenge is to tolerance of the risks associated effectively implement and enforce with it are based on their the rules and regulations that have knowledge/perception of the LSX been adopted. Unless they are itself and the process involved. It properly enforced, they are useless. largely depends on what Laotians The interviewees are especially know about capital markets in fearful of insider trading which general and the LSX in particular. results in asymmetrical information According to the senior LSX and is perceived as grossly unfair officer, Laotians are quite fearful and market distorting. They believe of investment risks, especially risks a comprehensive set of regulations associated with the LSX which is covering issues such as dividend very new, all the more given the receipts, remittance, and voting Lao culture and its emphasis on a rights should be adopted. This laid back attitude. Lao people could discourage the participation generally do not like to have to of foreign investors, seen by many deal with many challenges. As of those interviewed as important emphasized by most of those to promote the growth of the LSX interviewed, integrating risks as and a token of trust. The LSX part of the investment equation officer’s view is that the LSX may require time. It is also their regulatory body is determine to view that investors currently ensure a fair process and project a participating in the market still positive image. This echoes the have a moderate-to-low-high risk beliefs of some of the investors

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interviewed. In his opinion, the set raise capital, on the other, they see of minimum standards which it as an imposition of additional companies must meet in order to be burdens and pressure, especially as listed on the LSX helps to project they need to keep achieving an image of fairness and efficient optimum performances in order to management as well as proper keep attracting public interest. As governance. However, according to pointed out by another interviewee, the managers, those stringent many firms believe that the measures make the process advantages of listing on the LSX burdensome and lengthy and may are largely erased by the risks they thus operate as a disincentive. All see associated with them (proper the interviewees concurred that the accounting and external auditing most important issue is the need to are not usually practiced in many maintain the confidence of the enterprises, a practice that LSX public by ensuring accurate and listing would end). Changing the fair information disclosure and an mindset of company owners, environment supporting market however, is still the biggest hurdle openness. to be overcome. As mentioned by several interviewees, many  Need for More Companies to company owners don’t understand Become Listed on the LSX: The why they have to reveal their fact that there are only two financial statements to the public. companies listed on LSX is seen by many interviewees as a drawback  Stockbrokers’ Perception: Most of as investors have a very limited those interviewed believed that the amount of shares to chose from. In low number of stockbrokers is one their eyes, the LSX needs to have of the factors keeping some people more companies listed, so that if from investing in the LSX. The lack some companies listed are not of competition also impairs doing well other can be picked up investor confidence. Another to compensate for it. As one of problem is that the two brokerage them pointed out, it all comes firms are located in Vientiane, down to risk perception and risk which makes it difficult for dilution; the more stock options potential investors located they are, the more investors can anywhere to actually meet with the diversify their portfolio. brokers.

 Tax Incentives Promote  Difficulty Convincing Companies Transparency, Good governance to Become Listed on the LSX: and Increase Public Welfare: The From the discussion with the two government would ultimately managers, it appears that while on benefit from lowering the corporate the one hand companies see the tax rate for publicly listed benefits of being listed, most companies as these companies notably in terms of their ability to would be required to operate

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transparently and therefore give the not have a Put-Through trading government the full amount of system, which might make it a less taxes owed. Many companies attractive option for large investors. provide inaccurate information on their earnings to avoid paying taxes  Importance of Sound Economic in full. Improved transparency Fundamentals: As made clear in would boost corporate growth as it several interviews, macroeconomic would increase the confidence of stability is one of the key factors investors which would translate shaping the confidence of foreign into more capital raised for investors in the LSX. Since the companies to fund their growth, adoption of the NEM, the Lao eventually leading to more economy has enjoyed a rather employment and income favorable macroeconomic opportunities for Lao people. environment and grown remarkably despite short-term  Dividend Payments and Intention impacts from external to Invest: Some of the interviewees vulnerabilities. Moreover, inflation admitted that dividend payment has been kept under control at a can be one of the factors single digit for many consecutive stimulating the LSX, especially for years. Investors consider the ability Lao investors. As they explained, if of the government to maintain the Lao people can see the obvious economy’s strong fundamentals benefits of stock ownership (bi- and supervise and manage annual dividend payments), they domestic financial markets as are more likely to invest in the important factors for deciding stock market rather than deposit whether to invest in Lao securities. money in the bank. As pointed out by the LSX officer, dividend (iii) Findings from Personal Observations payment tends to be paramount in The following is a summary of the field the decision to invest in the LSX. observations made by the researcher in relation to the research questions. Lao people regard investment in  Preference for Gold and Real land and gold as better alternatives. Estate: Family members and friends One potential investment deterrent pointed by some of the of the researcher do not talk about the stock market but about real interviewees is that while the time- estate and gold. They clearly regard matching trading system currently applied in the LSX indirectly gold as a good and relatively safe encourages speculation and price investment vehicle and are always manipulation by experienced checking whether this is a good traders (the long lag between offer time to buy or sell. As with real estate, they look at it as something time and buying/selling time tangible and easy to deal with provides rich information on price which does not require special and quantity to be traded). Unlike knowledge or a broker to buy or other countries, the LSX also does sell. Buying stocks is hardly ever

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considered as an option. These observations are supported by  A Rising Land-Owning Group of observations made at the main Investors: As the observer noted, shopping mall downtown Vientiane many Laotian people that have where the number of shops selling recently come into money (mostly gold had increased substantially through selling downtown land) are (some even have branches in other eager to show their newly-acquired parts of town). A few years ago, wealth. With legacy land fetching there were only a handful of them. unprecedented high prices in the This change suggests that Laotian Lao capital, opportunities for the people are buying more gold than LSX grow. For the moment, ever. Laotian people will not buy however, much of the newly- gold when the price drops or sell acquired wealth goes into building when it increases; they tend to buy big houses and buying luxury cars gold when they have money. In and other items typically associated many cases, they will not sell it with nouveau-riche status. except if they have an emergency

case or need money urgently.  More Capital Flowing in Laos:

Another important development in  Conspicuous/ Luxurious terms of potential LSX trade Consumption on the Rise: There is increase is the growing inflow of a growing sense of opulence in FDI. Every time the researcher goes Vientiane. It is not just about seeing back home, she notices more more gold stores but also about the construction activity around the mall’s offerings in general. There capital as large commercial real are now a whole array of venues estate projects are under offering luxurious products such as construction. They stand as clear expensive watches from abroad, indications of the increasing handbags, including some famous infusion of foreign capital as more brand names, as well as expensive companies are conducting business designer clothing boutiques and in Laos and find themselves in stores offering high-priced need of office space. Some (or all) electronics equipment. Such an of those companies may one day be assortment of stores would have listed on the LSX. Apart from been inconceivable even five years raising the profile of the LSX, they ago. What this suggests is that if will also create high-paying there is now more money to be managerial-level jobs and bring spent on luxurious items, those more expatriates to the country, same well-off consumers could be some of whom may decide to LSX investors since they clearly invest in the LSX. have discretionary income. These changes signal the emergence of a  Lack of Investment Culture: potential pool of LSX investors. Laotians do not have an investment

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culture the way Thai people do. As Investment Banking-Program I observed by the researcher, at her (LA-PIB I), the course was offered university in Thailand, it is not for the first time on April 26, 2014 infrequent for students to talk about as part of the university curriculum. the stock market and exchange The course focuses on material views on the best bargains and directly relevant to the LSX and trade tips, something that in the includes topics such as the researcher’s own experiences rarely mechanisms and structure of occur on Lao campuses or in any financial markets and financial other public places for that matter. product evaluation. Lectures are TV programs in Thailand also given by highly-educated frequently refer to the Stock professionals and professors from Exchange of Thailand (SET). In Thai Universities. While primarily fact, several times a day, news intended to train future LSX and people report directly from the investment bank employees, it is SET, something which again does also meant to disseminate LSX not happen on most channels in knowledge among the student Laos. population and may eventually change the Lao community  Governmental Efforts to approach to LSX investment. Disseminate LSX-Related Knowledge: The low LSX media 5. Conclusion and Recommendations coverage is partly offset by the The five research questions will now be government’s attempt to eventually addressed based on all the data reported make the LSX a household name, above and some conclusions drawn. arguably a tall order at this point. RQ 1: Is there an investor culture within One clear example is the seminar the Lao community? which the researcher attended. Laotians do not have an investment culture Whether such efforts will translate yet the way, for example, Thai people do. into a shift in investment from gold The LSX has failed to enter the collective and real estate to stock, or at least mind. Whenever the researcher spends turn the LSX into another viable time in Laos, she hardly ever hears people investment option remains unclear. talk about the stock market. It is only when It is the researcher’s view that it she broaches the topic that people may will take a lot more LSX-related volunteer comments. The LSX media coverage is also low This is in stark events for a real shift in the . perception of the LSX as a sought- contrast to the researcher’s experience in Thailand where students talk about the after form of investment to occur. stock market and exchange views on the  Industry-University Cooperation: best bargains and where TV programs The main state university and the frequently refer to the SET. There is also a APM Securities Company Ltd. channel for money markets. have developed a LSX-related Many Lao people do not know anything course. Entitled LAO Professional about the LSX, some do not even know it exists and among those who know of its

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existence, few are willing to take risks. Investors see the LSX turning into a good Demographics offer little hope in terms of investment proposal in the long term. As changing the present lack of investor the country prospers, they feel the value of culture. While the younger generations their stocks will increase while in the may know of the LSX existence, this does meantime they will be collecting not mean they regard it as an investment dividends. The preference of investors for opportunity or something they should look dividends over potentially very lucrative into. Regardless of age, the desire to invest short-term capital gains bespeak of the in stocks is low. Perhaps things may deeply-entrenched reluctance to take undue change the day some ‘happy stories’ make risk and the attachment to more the headlines. predictable form of investment income. The lack of an investment culture is also RQ3: Do investors have confidence in the linked to the perception of risk in the LSX and/or in stockbrokers? country. Most people are risk adverse. This Investors have confidence in the economy is a comportment that does not easily go and the direction it is going. On the basis along with an investor culture, which is of the country optimistic economic premised on some level of acceptance of outlook, investors see a good future in the risk. Another important point is that LSX which does not, however, necessarily despite effort by the government through translate into confidence in the LSX as an tax incentives to encourage investment in institution yet as it is still largely viewed the LSX, those fiscal benefits have failed as being in its infancy. While investors to generate an investor culture. have confidence in the money-making RQ 2: What is the average Lao investor’s potential of the LSX, they are far less attitude toward the LSX? confident in its ability to discipline itself Individual LSX investors form a small and navigate through the risk of insider group given their avowed preference for trading or any other form of market other types of investment. For those distortions that would result in interested in the LSX, as was the case with asymmetrical information. Even though the some of the interviewees, caution prevails. LSX does its best to reassure investors of Lao investors considered that the LSX is a the fairness and transparency of the new sector in Lao that requires to proof process, doubts remain in investor’s mind. itself first. While investors may understand The data collected also indicate that the that it is not risk free, they are also limited number of companies listed affect cautious in their approach to investment. investors’ decision and thus their They also see the laws and regulations as confidence in the process. In their mind, not stable yet and believe that the more companies listed means that more legislation may favor them more in the companies trust the system. As to future as the Lao government continues to brokerage firms, one of the main concerns improve the regulatory framework in a is their low number, as it precludes. way that benefits investors. Much of their Interviewees believe brokers may lack the attitude is also dictated by the economic incentives (i.e., a more competitive environment. Laos’ solid financial environment) to perform at their best and fundamentals provide a good investment provide reliable services. Finally, since the climate. In their view, the strong two companies are located in Vientiane, performance of the Lao economy will the level of confidence is lower in outer translate in equally strong performances on parts of the country as there can be no the LSX as more companies will be listed.

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physical contact with customers unless fundraising. They need to comprehend the investors travel to Vientiane. mechanism of the stock market. Many RQ4: What should the Lao government do company owners, however, do not like the to increase the number of investors and fact that they have to disclose their make investing in the LSX attractive to the financial statements to the public. While Lao community at large? they may understand that in exchange for According to the interviewees, especially capital, those who invest their money (and those well versed in LSX matters, the Lao partly own the company as shareholders) government is doing what it can to have have the right to know how it is used That more companies listed, which would . translate into more capital raised, more does not mean, however, managers are investors and enhanced confidence in the willing to comply with the financial process. So, one way to attract more disclosure requirements. It is clear though investors is to increase the number of that in the absence of such requirements, companies listed. More diversity in terms few investors would be willing to risk their money as they would have no way of of company offerings, more choices in terms of shares available would make the assessing a company’s financial health. LSX more attractive. So far, the Insisting on the trade off and the huge gains in terms of capital raised and government has been mostly focusing on expansion potential may be one avenue to incentives to boost the number of companies listed such as a reduction in the bring more companies to the LSX. profit tax rate of 5% for four years. Changing the minds of company’s owners Another area is FDI as more foreigners is not easy; hence the need for the LSX to investing in the country may in turn organize more conferences and seminars. translate into more investors listed. An IPO-friendly fiscal policy would also Another initiative pointed out by be a good incentive. Finally, to increase interviewees is better communication with investors’ trust, the government is also regard to the LSX and its role. If people proposing having companies audited by can better understand how it benefits the self-private accounting firms as opposed to country, bringing in capital and how state-owned companies’ internal auditors. regulations are meant to protect investors, Conclusion over time they may be more willing to As a small nation in economic transition it invest. This could be done through the is important for Laos to have a stock media and university educational market. The possibility to raise capital and programs. receive dividends can substantially raise More fiscal measures to make investment the level of investment of companies and more attractive in the form of low capital the income of many Laotians. This, gain taxes would also contribute to however, presupposes in the first place a drawing investors to the LSX. positive and accurate perception of the RQ5: Is there need to educate companies LSX and its role in the economy, which is with regard to their attitude about being far from being the case. Too few people listing on the LSX? know about the LSX and among those who The LSX needs more companies listed. know about it, still too few are willing to Obviously, this is easier said than done. invest, as they still prefer other modes of One way to encourage companies to be investment (gold and real estate in listed is to educate them on the significant particular). The biggest hopes reside in role the capital market can play in their young people, who are more open to new

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ideas and new forms of investment, 3. More incentives: The government should especially since they now are told and also keep working on incentives to have taught about it at university. As this study more companies listed. The more shows, this does not mean, however, that companies listed the better their they are willing to invest in stocks; at least governance is likely to be. Lao companies not yet. But they represent the biggest have to be re-oriented about the modern potential, all the more as with the solid trends and tenets of doing business. Lao employment prospects for those with good companies must use the LSX to their qualifications their income level is likely advantage to raise the needed capital to to increase. Although it will take time for expand beyond the borders of Laos. the LSX to raise the number of companies 4 More foreign friendly investors More listed, establishing a capital market at an . - : early stage of the country’s development foreign investors should be allowed to will eventually translate into a wider and trade on the LSX. This requires a change in more positive perception of the LSX. The the legislation as well as in the perception fact that Laotians do not understand much of foreign investors (this is does not mean, about how the stock market operates and however, that safeguards against potential do not know how to trade is a temporary abuses should be eliminated). The obstacle to the LSX growth. As the Lao development of securities rules and government is expanding funds to boost regulations on the management and education and raise the country GDP, protection of foreign investors should be knowledge, perception and acceptance of given high priorities. Criteria on the listing the LSX will keep growing. of companies and the percentage of foreign participation should also be re- 6. Recommendations examined. Based on all the above, the following 5. Embrace more state-of-the-art recommendations can be made: technology: The LSX must take technology 1. More seminars and conferences: It is to the next level and allow online trading clear from the data collected that (1) the which would empower the average person low number of companies listed tends to with internet access and enough money to act as a deterrent to investors and impair open an account and invest in the market their confidence in the LSX and (2) that without dealing with a personal broker. there are misperceptions about the LSX Online trading makes the market more regarding the level of risk involved and the accessible. gains to be made. Potential investors 6. Keep sound economic fundamentals: A should be encouraged through conferences momentum of strong growth and economic and seminars. There have been some, but stability should be maintained to create a most of them have been in Vientiane. The supportive environment for further development of the LSX. LSX needs to go on the road and go to the provinces to let Lao people know about the LSX and its benefits both to investors and References companies. Andrew, B., Gul, F., Guthrie, J., & Teoh, 2. More stock brokers: More credible H. (2005). A Note on Corporate Social financial intermediaries (stock brokers) and Disclosure Practices in Developing a greater number of them are needed. Countries. The Case of Malaysia and Banks could also be allowed to sell stocks and advise their clients.

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