Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance FINANCE DISSERTATION ON DETERMINANTS OF CAPITAL STRUCTURE OF LISTED FIRMS IN THE CONSTRUCTION SECTOR IN VIETNAM TRUONG HUU DUC ID No: 21071811 Intake 5 SUPERVISOR: DR. PHAM MANH HUNG Banking Academy of Vietnam September 2022 17014126219671000000 EXECUTIVE SUMMARY Vietnam's building industry is the largest producer of materials. And to this day, the construction industry continues to play a pivotal role by ensuring and bolstering the production and service capacities of all economic sectors. This dissertation used the fixed effect model and random effect model with 10-year data (from 2012 to 2021) for 35 construction companies listed on the Ho Chi Minh Stock Exchange to evaluate what a suitable capital structure would be.
This dissertation makes recommendations to strengthen the capital structures of Vietnamese construction companies based on the findings of the research. i ACKNOWLEDGEMENTS Prior to anything else, I would want to express my thanks to my supervisor, Dr. Pham Manh Hung, for his unwavering support of my master's studies and research, as well as for his patience, encouragement, excitement, and vast knowledge. His assistance was invaluable during the research and writing of this dissertation.
For my master's studies, I could not have asked for a greater supervisor and mentor. In addition to my supervisor, I would like to extend my deepest and most sincere gratitude to all the teachers and friends who have provided me with highly useful information. Without their instructions and assistance, it would not have been possible to complete this dissertation successfully. Lastly, I'd like to thank my family and loved ones, who have always encouraged and motivated me to complete this dissertation.
Truong Huu Duc ii STATUTORY DECLARATION I affirm that this is the result of my own study. These are analyses, evaluations, and outcomes based on the fundamentals of the discipline, the information sources, and the data acquired from the primary sources of business reports. Please be certain that the topic's content has been acknowledged and the citation information has been supplied. I accept full responsibility for this Council and School commitment.
Hanoi, September, 2022 Truong Huu Duc iii TABLE OF CONTENTS CHAPTER 1: INTRODUCTION. Research method, objectives and questions. 4 CHAPTER 2: LITERATURE REVIEW. The theory of capital structure from the traditional point of view.
Modern theory of capital structure (M&M theory). Trade-off theory. Pecking order theory. 14 CHAPTER 3: DATA AND METHODOLOGY.
Measurement of variables. 16 CHAPTER 4: ESTIMATION RESULTS AND MAJOR FINDINGS. Diagnostic tests and define regression models. VIF test for multicollinearity.
Breusch and Pagan Lagrange multiplier test. Modified Wald test for groupwise heteroskedasticity. Wooldridge test for autocorrelation. TLEV model robust.
29 CHAPTER 5: POLICY RECOMMENDATION. Utilize economies of scale when employing loans. Balance between current assets and short-term liabilities. Improve business efficiency.
Invest more in existing assets. Enhance the function of financial managers in organizations. 41 LIST OF TABLES Table 1: Symbols and definitions of variables ………………………………………… 22 Table 2: Descriptive statistics…………………………………………………………. 24 Table 3: Correlation matrix…………………………………………………………….
25 Table 4: VIF test for multicollinearity…………………………………………………. 26 Table 5: Breusch and Pagan Lagrange multiplier test .……………………………… 27 Table 6: Hausman test…………………………………………………………………. 28 Table 7: Modified Wald test…………………………………………………………… 28 Table 8: Wooldridge test………………………………………………………………. 29 Table 9: TLEV model results………………………………………………………….
29 Table 10: Final estimation result………………………………………………………. Motivation In the present market economy, capital is recognized and conceptualized as the sum of all starting values applied to subsequent business activities. This notion relates not only to capital as an essential input for manufacturing businesses but also to the continual engagement of capital in the enterprise's production and commercial operations throughout its existence. Therefore, capital is the most important component in all manufacturing and economic activity.
Capital enables firms to develop production and operations, acquire equipment, and fulfill other future goals. Therefore, firms must have good capital management and utilization in order to protect and expand capital, thus insuring their growth and vitality. Depending on the unique circumstances of each business, the capital structure will change as a result of the influence of the macroeconomy, the growth of each industry, and the culture or religion. Therefore, contemporary financial research focuses on the influence of factors impacting the capital structure or the ability of financial organizations to deploy financial leverage.
Based on how these factors interact with the capital structure, organizations can decide whether to use a loan or equity to simplify the production business. They can also suggest ways to make sure that financial leverage works well and that the value of an enterprise's assets is maximized. Over the years, some developed nations have conducted research on the theory of new modern capital structures, while developing nations have either paid little attention to it or have focused on it only on a general level for businesses without conducting extensive research for specific industries, such as the construction industry. A developed nation is 1 one that meets its infrastructural needs.
To do this, there is little doubt that the construction sector is essential. This discipline contributes to the establishment of the required infrastructure for each unit, organization, and society as a whole. Then, other sectors of the new economy have several favorable circumstances for growth. It is possible to say that the building sector has always played a crucial role.
It determines the size and technological sophistication of the economy. In addition, it serves as the most effective economic regulating instrument. The construction sector is the major producer of materials in Vietnam. And to this day, the building industry continues to demonstrate its vital role by assuring and assisting in strengthening the production and service capacities of all economic sectors.
Not only is guaranteeing the ratio, balance, and rationality of production capacity for economic development in industries, regions, and economic zones a vital duty for the construction industry, but so is ensuring the proportion, equilibrium, and rationality of production capacity in these areas. Nevertheless, the building sector also generates circumstances that increase the quality and efficiency of social activities, citizen living, and national security while also making major contributions to economic earnings. According to the socioeconomic development strategy report for the period 2012–2020, construction is an economic sector with a vital strategic position and role in the process of national construction and development, accounting for 5% of GDP annually. However, in addition to the achievements of Vietnam's building sector, its enterprises have faced several obstacles.
In recent years, the construction industry has been negatively impacted by the COVID-19 epidemic, variations in interest rates and inflation, and government management policies. To optimize profits and minimize financial risks, it is essential to analyze the factors affecting the capital structure of construction companies. Therefore, this research into the factors influencing the capital structure of construction companies listed on Vietnam's stock exchange aims to produce scholarly contributions that will assist firms in making capital management decisions. Due to these factors, the author chose to examine "Determinants of Capital Structure of Listed firms in the Construction Sector in Vietnam" in order to determine what a good capital structure for listed businesses in the construction industry would be.
Research method, objectives and questions Using OLS regression, pooling data, fixed effects, and random effects methodology, a vast amount of literature has explored the nature of capital structure, capital structure differences, optimal capital structure, and the causes of capital structure at the business, industry, and country level. Some of these contemporary scholars have proposed cross- sectional studies including massive collections of publicly accessible data. The purpose of the study is to examine the elements that have a substantial impact on the capital structure and to develop some conclusions based on your results. This provides a clear direction and findings regarding the financial structure of Vietnamese construction firms.
In addition, this study might provide a summary of the numerous arguments for and against capital structure, as well as the factors that influence capital structure. Next, an inquiry into the nature of the relationship between the firm's capital structure and the financial metrics that indicate the company's characteristics that influence that structure. Using the quality economy model, we will evaluate and analyze the impact of numerous variables on the capital structure of construction enterprises listed on the Vietnamese stock exchange. To achieve all of these objectives, this study intends to provide answers to the research questions.
First, it must be determined whether firm-specific characteristics influence the capital structure of publicly traded Vietnamese construction firms. The second issue is whether the impact weights of the factors that influence the capital structure of Vietnam- listed enterprises are significantly different from one another. New contribution In contrast to previously published research, only independent variables that are measured by the criteria on the financial statements or are quantifiable variables that can be calculated and examined are often employed. The research incorporated both kinds of factors.
This may result in more recent study findings, which may serve as the foundation for providing proposals to enhance capital structure in a timely way that are consistent with reality. Dissertation structure Chapter 1: Introduction: Introducing the motivation of the dissertation, the research objectives and research questions, and the research methodology. Chapter 2: Literature review: Mentioning the theoretical framework of capital structure, and reviewing the results of previous research papers about the factors that affect the capital structure of firms. Chapter 3: Methodology: Mentioning the sources of data and the research method of the dissertation.
Chapter 4: Estimation results and major findings: Presenting the estimation results, performing tests to have the most accurate results and interpreting these results. Chapter 5: Policy recommendation: Policy recommendations to improve the capital structure of Vietnamese construction firms. CHAPTER 2: LITERATURE REVIEW This chapter presents the conceptual framework and empirical evidence of the investigation. The prominent capital structure theories, such as the conventional theory of capital structure, the modern theory of capital structure (M&M theory), the trade-off theory, and the pecking order theory, constitute the conceptual framework.
In the second section of the chapter, empirical information about the determinants of capital structure is presented. Different academics provide both support and criticism for the theories covered in this chapter. As a result, it is believed that the discussion of the theories and the evaluation of their strengths and flaws would throw light on the theoretical context of the study and assist the researcher in directing future research. Theoretical Framework This section provides a concise survey of the theoretical literature on the various capital structure theories.
However, this is merely a synopsis of the most significant arguments offered over the past fifty years; it is by no means a comprehensive review. The theory of capital structure from the traditional point of view David Durand's (1952) research is the first to examine the capital structures of businesses, based on the assumptions that the business operates in an environment with corporate income tax, the financial market is imperfect, and the business has potential utilizing debt conceals the danger of financial distress. When a company begins to borrow, debt is frequently less expensive than equity. Nonetheless, when enterprises increase the ratio of loan capital to equity, the level of risk also increases, compelling owners to increase profitability and reducing the enterprise's value.
There exists, according to this theory, an optimal capital structure that maximizes the firm's value and helps to minimize its average cost of capital (WACC). Modern theory of capital structure (M&M theory) Modern capital structure theory is based on the theory of Modigliani and Miller (1958), vol. 1, which examines the relationship between financial leverage and the value of a company in both taxed and untaxed environments. In a tax-free setting, business value increases.
Debt-free individuals and businesses are identical. In a taxed environment, the value of an asset declines. The company has more debt than it is worth, but it does not use financial leverage because it enjoys a tax shield.