UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS DETERMINANTS OF CAPITAL STRUCTURE FOR LISTED CONSTRUCTION COMPANIES IN VIET NAM BY NGUYỄN THỊ MỸ KHÁNH MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, November 2013 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS DETERMINANTS OF CAPITAL STRUCTURE FOR LISTED CONSTRUCTION COMPANIES IN VIET NAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYỄN THỊ MỸ KHÁNH Academic Supervisors: Assc. NGUYEN TRONG HOAI HO CHI MINH CITY, November 2013 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CERTIFICATION “I certify that the substance of this thesis has not already been submitted for any degree and have not been currently submitted for any other degree. I certify that to the best of my knowledge and help received in preparing this thesis and all sources used have been acknowledged in this thesis.” NGUYỄN THỊ MỸ KHÁNH LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ACKNOWLEDGMENTS The process of writing a thesis is a collaborative experience involving the support and helps from many people. I want to express my gratitude to those who give me the tremendous support to complete this thesis.
I am deeply indebted to my parents and my husband for their invaluable support and constant encouragement. From my early childhood, my parents always teach me valuable lessons on the importance of learning. The boundless love of my parents have accompanied with me as I continue my long journey on the pathway of intellectual acquisition. I wish to express my heartfelt gratitude to Associate Professor Doctor Nguyen Trong Hoai, Lecturer at Department of Economic Development, University of Economics (HCMC), my supervisor, for his valuable suggestions during the time I write this thesis.
His wide knowledge, excellent advice and logical way of thinking have provided me a good basis in present this thesis. In addition, my special thanks should send to Dr Trương Đang Thuy for their help and sharing of their resources to complete this thesis successfully and in time. Finally, I take a pride in myself for working very hard to finish this thesis. I realize that after each success stories, there is a process of lots of hard works, difficulties, obstacles and overcoming.
Even in the hardest time when I write this thesis, I always believe that great efforts will eventually to be paid off. Thank for the great time to learn and to grow up. Nguyễn Thị Mỹ Khánh November 2013 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com TABLE OF CONTENTS LIST OF TABLES .1 Trade-off theory .2 Pecking order theory .3 Determinants of leverage: .1 Leverage and Tangibility: .2 Leverage and Profitability .3 Leverage and Size .4 Leverage and Growth .5 Leverage and Liquidity .4 Empirical studies review on determinant of leverage: .1 Empirical evidences finding from the world: .2 Empirical evidences from Vietnam : .1 Overview the construction industry in Vietnam: .2 Data and description variable .25 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.3 Method of estimation .1 Fixed effect (FE) estimator : .2 Random effect estimator (RE): .3 Hausman specification test : .2 Fixed effects model (FEM) .3 Public and Private Firm Comparison .2 Determinants of Financial Leverage. CONCLUSION AND RECOMMENDATION .1 Recommendations for construction firms: .49 REFERENCE APPENDIX LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABBREVIATIONS SMEs: small and medium size enterprises WTO: World Trade Organization GDP: Gross Domestic Product FE: Fixed effects RE: Random effects TEs: Transition economies LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF TABLES Table 2.1 Summary of leverage determinant .1 Variable, Description and expected sign .1 Descriptive Statistics of Leverage, short-term leverage, long-term leverage and Explanatory Variables with construction firms .3: Result of Fixed effects regression in construction sector .4 Summary of leverage determinants .5 Descriptive Statistics of Public and Private Firms .6 Regression Result of Public and Private Firms.42 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABSTRACT This study explores the determinant of capital structure of Vietnam listed construction companies using panel data for the period of 2007-2012.
Tangibility, profitability, size, growth and liquidity use as independent variables. Total leverage, short-term leverage and long-term leverage were dependent variable. The research finds that all the selected independent variables were significantly associated to at least one of the leverage ratios except profitability. Profitability seems to have no significant effect to the capital structure of Vietnamese construction listed firms.
A positive significant related to leverage and tangibility and growth variables; a negative relationship between leverage and liquidity also supported the implication of pecking order theory while a positive significant of size variable confirmed to prediction of trade off theory. The study also finds that there are different in determinants of capital structure between public and private firms in construction industry about the profitability and growth variables. Size, profitability and liquidity effect to leverage of public firms while size, growth and liquidity have a relation to leverage of private firms. Public firms tend to use more debt than private firms.
Keywords: capital structure, leverage, construction companies 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER I INTRODUCTION 1.1 Problem Statement Capital structure is not a new area to study. From the first research of capital structure was presented by Modigliani & Miller (1958), after that a lot of researches try to identify determinants of capital structure. But the results are still an argument problem in financial and inconsistent among researchers at different countries and different industries. Myers (1984) also showed that “the average debt ratio will vary from industry to industry because assert risk, asset type and requirement for external fund also vary by industry”.
In Vietnam, there are only a limited number of studies on determinant of capital structure among Vietnam firms. Some of these studies just focused on listed firms (Dzung Nguyen et al 2011) or small and medium size enterprises (SME) (Nguyen, Tran Dinh Khoi 2006) and the empirical results also have conflicts with the results from many other researches in the world. Corporate financing means that all the money economy expressed through mobilizing and using capital in order to maximize the value of company. In there, capital structure is the ratio between debt and equity to finance for the enterprise.
Specifying the capital structure is an important issue not only for the manager but also for the financial officer to build up the logical funding policy to ensure the illiquid and to salvage the effect of debt margin to upgrade the value of the company. In the process of activity the enterprises have to face the important decisions such as investment, finance, dividing dividend, etc. Each decision effects to the value and the capital structure of the enterprise. Decisions involving capital structure are vital for every business organization.
Management has to carefully ensure that their capital structure decisions maximize their firm value. However, in order to achieve optimal capital structure, the manager has to consider how factors affect to capital structure of firms. There are many empirical studies about the determinant of capital structure, each research disperse in different 3 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com fields of economy. But the research of determinant of capital structure of construction sector is almost limited.
In other word, construction sector is special business area, the capital resources are appropriated for a long time and firms depend too much on debt. In the past years, especially the period from 2008 to 2012, Vietnam in general and construction sector in particular is almost affected by the economy crisis. This was a bad period for many enterprises in Vietnam. The operating of construction sector is very difficult due to the frozenness of real estate market.
Some had even been forecasted to go out of business or completely bankrupt. At the end of the year 2012, 2,110 construction firms must stop operating. The enterprises is lack of capital resources to operate because it is difficult for them to borrow money from bank due to tightening monetary policy through controlling credit strictly and limiting in supply money for the economic to control inflation. The interest from the bank is very high.
Shorting of capital to invest new project, no mobilizing external resources are a big problem for the financial manager of construction firms. So restructuring of capital structure becomes the most important problem for the construction sector firms. Firms need to have suitable leverage to improve financial ability, avoid risk of financial. This research will find the determinants of capital structure in construction firms and consider if trade off theory and pecking order theory have explained capital structure of construction firms.
Research Objectives The objective of this research is to study the factors that affect to the capital structure of Vietnam’s construction sector companies in the stage of 2007 - 2012. This study also examine whether the financing behavior in construction firms can be explain by the main capital structure theories such as trade-off theory and pecking order theory. In other hand, the research also considers the difference in determinant of capital structure between public and private firms in construction industry. 4 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.
Research Questions This study aims to answer many questions about the capital structure of construction sector companies in Vietnam such as: Question1: What are determinants of capital structure of Vietnam construction sector companies? Question2: Does trade-off theory and pecking order theory explain the determinant of capital structure of Vietnam construction firms? Question 3: Is there any difference in determinant of capital structure between public and private firms in construction industry in Vietnam? 1.4 Research Methodology This study uses annual panel data of 49 construction listed companies in Ho Chi Minh and Hanoi stock exchange for the period 2007 to 2012. To find the impact of independent variables such as tangibility, profitability, firm size, growth and liquidity on leverage of firms, we used panel regression methods: Fixed effects or Random effects which is decided by Hausman specification test. Research contribution The contribution of this research is to identify the factors effecting to capital structure of the construction sector companies. This research is also to provide an empirical evidence to test the financial theories involving trade-off theory, pecking order theory to the construction sector companies.
This study is to distinguish the difference in determinant of capital structure of public and private corporations in construction industry. 5 LUAN VAN CHAT LUONG download : add luanvanchat@agmail. Research Structure The structure of this study is divided into five chapters. The first chapter is to introduce the research with research objective, research methodology, research contribution, research structure and main questions of the study.
The second chapter is literature reviews. In this chapter, some key concepts, major theories, determinants of leverage and some empirical studies related to capital structure of a firm will be presented. The third chapter presents research methodology from theory framework to data collection method. The next chapter shows how to analyze data and result of econometric regressions.
The final chapter is conclusions of this empirical study, suggest recommendations and limitations of the research. 6 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER II LITERATURE REVIEW This chapter presents about key concepts of capital structure as well as leverage, short-term leverage and long-term leverage. Next, it reviews some popular capital structure theories such as trade off theory, pecking order theory and considers the prediction of two theories about some variables effecting leverage. Finally, some empirical studies in the world and Vietnam related to these factors will be presented.1 Key concepts: Capital structure is the way that a company finances its assets through combination of debt, common equity and preferred equity.