UNIVERSITY OF ECONOMICS HO CHI MINH CITY INTERNATIONAL SCHOOL OF BUSINESS ----------------------------------------------------------- MASTER THESIS Understanding capital structure of companies in Viet Nam Effects of profitability, tangible assets, growth opportunities, firm size, ownership type, and non-debt tax shields Author: Vo Tien Dung Student No.: 22110010 Email address: tiendung.com Supervisor: Dr. Pham Quoc Hung Email address: phquhung76@yahoo.com November 2013 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 1 TABLE OF CONTENTS TABLE OF CONTENTS .1 Background of the research .6 Organization of the study. 9 CHAPTER 2: LITERATURE REVIEW AND HYPOTHESES .2 The trade-off theory .3 Pecking order theory .4 Market timing theory .6 Agency cost problem .7 Asymmetric information problem .2 Empirical literature review .1 Leverage (Lev) and capital structure .2 Profitability (PRO) and leverage.3 Tangibility (TANG) and leverage .4 Growth opportunities (GROW) and leverage. 20 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.5 Firm size (SZ) and leverage .6 Ownership type (OWNT) and leverage .7 Non –debt tax shields (NDTS) and leverage.
24 CHAPTER 3: RESEARCH METHODOLOGY .1 Sample size and data set .2 Calculation of the variables .4 Method of data analysis. 34 CHAPTER 4: RESULT ANALYSIS .1 Screening and cleaning the data .2 Checking assumptions of multiple regression .2 Checking normality, linearity, homoscedasticity of residuals .3 Checking multicollinearity problem.4 Testing autocorrelation problem .3 Results of multiple linear regressions .2 Evaluation of the model .3 Evaluating the independent variables. 40 CHAPTER 5: CONCLUSIONS AND IMPLICATIONS .2 Limitation of the study. 45 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.
56 Table 7: Normal P-P Plot of regression standardized residual. 57 Table 9: List of non-financial companies. 63 Table 10: Interest rate from banks in Viet Nam. 64 Table 11: Summary of some theoretical results.
65 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 4 ACKNOWLEDGEMENTS First of all, I would like to express my deep gratitude to my master thesis supervisor, Dr. Pham Quoc Hung who spends very much time teaching me many things from the beginning of the master thesis. I would like to thank you Ho Chi Minh Stock Exchange, cophieu68, and cafef whose published data on the website to support me saving the collected time. Special thanks are given to International school of business (ISB) supporting me vary information, guiders relating to the master thesis in order to help me finish the master thesis on time Finally, I am deeply grateful for support, understanding of my wife who spends a lot of time to take care of all works in my family in order to make more free time for me during nearly two-year MBUS program.
LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 5 ABSTRACT The objective of this article is to understand the effect of capital structure of 124 non-financial companies listed on the Ho Chi Minh City Stock Exchange (HOSE) in Viet Nam. The research collected panel data from the annual financial statement of 124 companies to examine the six factors such as profitability, tangibility, growth opportunities, firm size, ownership type, and non-debt tax shields effect to capital structure (leverage). Under trade off and pecking order theories, the empirical results found that there was a negative (-) relationships between profitability, ownership type and leverage. The Tangibility, size of firm, and non-debt tax shield were a positive effect to leverage.
Growth opportunities had a not statistically significant impact on the capital structure. Key words: Capital structure, leverage, trade off, pecking order, non-financial companies, Viet Nam. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 6 CHAPTER 1 INTRODUCTION 1.1 Background of the research Capital structure plays a very important role in corporate financial management. There are many research papers talking about capital structure and how to find out the particular model for the optimal capital structure for the business.
The most important task of the financial manager is to balance the debt and equity capital to ensure capital structure is better, hence strive to find out the optimal corporate capital structure (Tong and Green, 2005), lower cost of capital will lead to maximizing value of a company (Shah and Kahn, 2007). A firm faces with a financial deficit during doing business, thus the manager of the firm should find out a fund to support new investments in order to maintain the activity of a firm stably as well as making a right financial decision. One way that can be chosen is to undertake a capital structure of a firm, especially debt restructuring. In order to take a capital structuring, a manager has a high acknowledgement in financial filed and analytic capabilities hence a manager can minimize the cost of capital and maximize the value of the firm, the composition of capital structure consists of debt and equity, the resource of funds include retained earning, debt, and equity.
Orderly, retained earnings is cheapest fund due to without borrowing cost, cost of debt always lower than a cost of equity due to the shareholders requires a rate of return bigger than the interest rate. Based on LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 7 capital analysis, the managers raise the fund for investments by issuing debt or equity or retained earnings reasonable. Previously, there are two studies from Franco Modigliani and Merton H. Miller in 1958 with title “Cost of capital, corporate finance and theory of investment” states that the capital structure is not impacted on the value of the company and the revised publish in 1963 named “Corporate income taxes and the cost of capital: a correction” to reverse that corporate income tax effect on the value of the company it mean that capital structure also impacts to the value of the firm.
Those great theories above encouraged many researchers around the world to study models of capital structure, the result states that there is different outcome regarding to capital structure comparing between research from developing countries (Graham and Harvey, 2001), (Tong and Green, 2005), (Shah and Khan, 2007) and developed countries (Mazur, 2007), (Rajan and Zingales, 1995) in term of the score factors effect to capital structure of the firm. Previous studies examined the interaction between leverage on behalf of capital structure and exogenous such firm growth opportunities, firm size, firm profitability, ownership type, intangible assets, non-debt tax shied, firm performance, dividend policy, uniqueness, tax, volatility, asset structure, etc. This research will focus on six independent variables such as growth opportunities, firm size, profitability, tangibility (collateral), ownership type, and non-debt tax shields effect to dependent variable defined leverage.2 Research problem LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 8 There are many empirical researches regarding to the impact of factors on capital structure in many different approaches of researchers in term of techniques, models, variable selections, countries. Different approaches leading to many outcomes relating to positive or negative impact of factors on capital structure.
For instance, there is a negative effect of profitability (Kester, 1986), (Shyam-Sunder and Myers, 1999) and firm size (Kester, 1986), (Titman and Wessels, 1988) to leverage upon pecking order theory whereas trade-off theory is a positive impact (Bowen, Daley and Huber, 1982), table 11 shows some of theoretical results related to capital structure. This study identifies the capital structure of listed companies in Viet Nam and responds to the gap that there are many issues related to the selection of capital structure in every country in the world. Furthermore, the manager of a firm can consider the cost and benefit of capital structure based on the theories in order to finance their financial deficit or new investments 1.3 Research question The research is going to answer the following major research question: Which factors have significant effects on capital structure of companies in Viet Nam? 1.4 Research objectives Capital structure decision is mainly influenced by the trade-off theory and the pecking order theory, based on the research question, the objectives of this research are to examine the effects of six independent variables such as profitability, asset tangibility, growth opportunities, size of firm, ownership type, LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 9 and non –debt tax shields to debt ratio (leverage ratio) as implied by the trade-off theory and pecking order theory, then the research finds out the relationship between above six dependent variables and leverage. The objectives of the research are to investigate how do firms in Viet Nam finance for investments by internal or external resources? 1.5 Expected contribution The purpose of this research will not produce a theory that applying to all populations, the objectives of research is trying to examine the six mentioned independent variables effect to debt ratio of listed companies in Viet Nam.
The research finds out what factors influence the choice of capital structure? How firms finance capital for investments, by internal or external resources, since this study will conducts firms to make the choice of capital structure 1.6 Organization of the study CHAPTER 1: Introduction CHAPTER 2: Literature review and hypotheses CHAPTER 4: Result analysis CHAPTER 3: Research methodology CHAPTER 5: Conclusions Appendices and recommendations LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 10 The organization of the research is illustrated in the above figure. In more detail, chapter 1 provides an introduction about the thesis, including the background, research problem, research question, research objectives, expected contribution, and organization of the study. Chapter 2 reviews about the theoretical framework consisting of capital structure, the trade -off theory, the pecking order theory, market timing theory together with signalling problem, agency cost problem, and the asymmetric information problem. This chapter provides an overview regarding to capital structure from previous studies in many countries, and identifies dependent and independent variables and link these to relevant research question, expectation, and hypotheses of the research.
The work in chapter 3 is to introduce research methodology. Chapter 4 integrates both presentations of data and analysis of results. Chapter 5 is to summarize the main points of the research objectives and draws the conclusions, recommendation, and suggestion for future research. Finally, the appendices show information gathered during the research.
LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 11 CHAPTER 2 LITERATURE REVIEW AND HYPOTHESES This chapter will focus on some theories relating to capital structure, Literature review is review of definitions and past research done by previous researchers. Literature review includes an overview of the trade off theory, pecking order theory, market timing theory, signalling problem, agency cost problem, asymmetric information together with the argument the impact of independent variables on capital structure of the firm The independent variables include profitability, firm size, tangibility, type of ownership, non-debt tax shields, the dependent variable is leverage that is a proxy for capital structure. This chapter will explain and find the theoretical framework supporting the research.1 Capital structure Capital structure of firms is a combination of debt, equity and other sources of finance that firms use to fund for its operation. The pioneer study of capital structure is coming from Franco Modigliani and Merton H.
Miller published in 1958 (called M and M theory), the theory states that the value of a firm is independent of capital structure, whatever the firms finance the investments by issuing debt or equity under a few assumptions in the context of a market without taxes, without transaction cost, the capital market is perfect and LUAN VAN CHAT LUONG download : add luanvanchat@agmail. Otherwise, the result of M and M theory in 1958 shows that an unlevered company has the same value as a levered one. There are many highly critiques of research on being irrelevant due to the theory built on unrealistic assumptions leading to the revision of M and M in 1963 to correct the correct the previous theory by adding the effect of taxes to revise the irrelevance capital structure theory.