BANKING ACADEMY Faculty of Finance ---------- GRADUATION THESIS TITLE: THE IMPACT OF CAPITAL STRUCTURE ON THE VALUE OF VIETNAMESE CONSTRUCTION MATERIALS FIRMS Supervisor : Dr.Tran Thi Thu Huong Student : Nguyen Thi Thuy Anh Class : K19CLC-TCA Student ID : 19A4010040 Hanoi - 2020 DECLARATION I hereby declare that this submission is my own work in design and execution. The thesis has not been applied for any degree and it is not concurrently submitted in candidate of any other similar titles elsewhere. Signature i ACKNOWLEDGEMENTS First and foremost, I offer my sincerest gratitude to all of my lecturers in Banking Academy of Vietnam who have guided and inspired me throughout the four-year process in university. I would like to express my gratitude and appreciation to my supervisor, Dr.
Tran Thi Thu Huong for her patience, knowledge and dedication. With her profound academic knowledge, she has given me many constructive comments and valuable suggestions, which I found very helpful to complete this thesis. Besides, I would like to thank Market Research and Consultant Division of FiinGroup for helping me to have a chance to interact with real work and collect information for this thesis. ii TABLE OF CONTENTS DECLARATION.
ii Table of Contents. iii LIST OF ABBREVIATION .v LIST OF TABLES. vi LIST OF FIGURES. vii LIST OF GRAPHS .THEORETICAL FRAMEWORK AND.
Theoretical framework on capital structure and impact of capital structure on firm’s value .Theories about capital structure and firm’s value .2 Previous researches on the effect of capital structure on firm ‘s value. DATA, METHODOLOGY AND MODEL .Variables and model .Non-linear regression model structure .Fixed-effects method (FEM) .Random- effects method (REM) .Generalized Least Squares method (GLS) .Test in model .26 CHAPTER III: EMPIRICAL ANALYSIS.Current situation in capital structure and firms’ value on building materials industry .Review on Vietnamese construction materials industry .Debt ratio of construction materials companies in Vietnam .The value of construction materials companies in Vietnam .Debt ratio and Tobin’s Q .Correlation coefficients and multicollinearity phenomenon .Result of non-linear regression model .37 CHAPTER IV: CONCLUSION AND RECOMMENDATION .For the firm’s management .For the firm’s investors .For the next researchers .48 iv LIST OF ABBREVIATION ABBREVIATION MEANING ROE Return on equity ROA Return on assets FEM Fixed-effects method REM Random- effects method OLS Ordinary least squares GLS Generalized Least Squares method GMM Generalized method of moments HOSE Ho Chi Minh Stock Exchange HNX Hanoi Stock Exchange v LIST OF TABLES Table Page Table 1.1: Measurement criteria of capital structure 5 Table 2.1: Number of samples listed on listed on HOSE, HNX and 14 Upcom Table 2.2: Sample’s sector 16 Table 2.3: Relationship between independent variables and firm’s 25 value in previous studies.4: FEM and REM comparison 28 Table 3.1: Interest rate 2015-2019 33 Table 3.2: Statistic description 39 Table 3.3: Correlation coefficient result 39 Table 3.4: Multicollinearity phenomenon test result 40 Table 3.5: Regression results 41 Table 3.6: Regression result by GLS 43 vi LIST OF FIGURES Figure Page Figure 1.1: Static Trade-off theory of capital structure 7 Figure 2.1: Relationship between Tobin Q and Leverage 17 Figure 2.2: Determinant of firm's value 17 18 LIST OF GRAPHS Graph Page Graph 3.1: Revenue and profit margin of construction materials 29 industry in Vietnam Graph 3.2: Debt ratio of some manufacture firms in Vietnam 30 Graph 3.3: Net profit margin of steel, cement and tiles sector 32 Graph 3.4: Tobin's Q ratio of construction companies, 2015-2019 33 Graph 3.5: Debt ratio and Tobin's Q ratio, 2015-2019 33 vii INTRODUCTION 1. The necessity of identifying the impact of capital structure on the value of Vietnamese construction materials firms In recent years, Vietnam has been assessed as a robust growth economic, an improving logistics, a regulatory environment and the fastest-growing among major markets in South East Asia. As a result, the country has been increasing investment in infrastructure to meet the rapid growth of economies.
For more details, energy infrastructure has been invested most heavily, accounting for 50% of total capital. For example, two projects for Steam-electric power station Dung Quat I & III will be started in 2021 and 2022 with total demand for investment capital reaching about VND 36. Following this are telecommunication and road, with respectively 19% and 16%. Recently, Government has approved North-South highway’s VND 102,500 billion plan with three projects are undertaking, and eight projects will be started in 2020.
In addition, FDI for real estate ranks 2nd over total investment. Demand for construction materials, therefore, will quickly grow. Construction materials industry has proven its important position in Vietnam’s economy. Currently, Vietnam’s capacity of building materials segment is not only enough to domestic demand but also surplus to export.
In 2018, building materials sector was one of ten sectors having the most rapid export value with USD 5. Especially, in 2019, Vietnam is the biggest cement exporter, accounting 13.2% of total global cement export with export value of USD1. To meet the higher market’s demand, expanding production capacity and invest in new technology is strategic plan of many companies operating in construction materials industry. So, it is undoubted that a huge capital is needed.
Capital of a firm is sponsored by two sources, including debt and equity. Many practical researches stated that capital structure will affect on the effective of firm and the benefit of shareholders. However, in construction materials industry, do the capital structure relating to expectation on firm’s value? Is this relation positive of negative? 1 In Vietnam, there are few researches on the relation between capital structure and firm’s value. However, there has not yet a study focusing on construction materials industry although this industry have such an important position in total economy.
Therefore, this thesis will identify “The impact of capital structure on the value of Vietnamese construction materials firms”. Research questions and aims Base on theories as well as previous researches on the relationship between capital structure and firm's value, the thesis will elaborate and analyze the impact of capital structure on the value of Vietnamese building materials firms. From study's result, this thesis will propose several policies and solutions to build a reasonable capital structure to raise firm's value. In detail, this thesis has three questions as below: (1) What are theory of capital structure and what are impacts of capital structure on construction materials firm’s value? (2) What is the impact of capital structure on Viet Nam construction materials firm’s value through regression model? (3) What are recommendation to firm’s managers and investors? 3.
Subject and scope of research Subject of research This thesis will study the impact of capital structure on value of firm. Scope of research - Space scope: 30 construction materials companies listed in HOSE, HNX and Upcom in the period of 5 years from 2015 to 2019. - Time scope: The period of 5 years from 2015 to 2019 4. Research method This thesis uses comparative and synthetic analysis methods and empirical research method to demonstrate the relationship between capital structure and firm’s value in Vietnamese construction materials industry.
Meaning of research Research provides a scientific basis based on empirical research for building materials firms to build a reasonable capital structure to increase business’s value. Besides, investors intending to invest in building materials segment can use the results to manage their investment portfolio to maximize profit. Research structure The thesis will be divided into 2 parts as follow: Part I is the Introduction about the thesis. Part II includes four chapters as below: CHAPTER I: THEORETICAL FRAMEWORK AND LITERATURE REVIEW: Chapter I gives basic knowledge of firm’s value, capital structure, relevant theories and previous research CHAPTER II: DATA, METHODOLOGY AND MODEL: Chapter II explains the reasons for data selection and application model.
CHAPTER III: EMPIRICAL ANALYSIS: Chapter III provides an overview about capital structure, firm’s value, and the empirical analysis about relationship between capital structure and firm’s value in Vietnamese construction materials industry. CHAPTER IV: CONCLUSION AND RECOMMENDATION: Chapter IV will make some recommendations for firms to make reasonable decisions about capital structure and for investors. THEORETICAL FRAMEWORK AND LITERATURE REVIEW 1. Theoretical framework on capital structure and impact of capital structure on firm’s value 1.
Firm’s value Firm’s value is the money expression of all expected benefits that a business can bring to its investor during the operation at a point of time. There are different approaches to determine firm’s value. From the perspective of balance sheet, firm’s value is value of total assets. Besides, firm’s value is estimated by adding total asset value with value of competitive advantage.
Another view about firm’s value is that firm’s value is present value of future cash flows such as free cash flows to equity or free cash flows to firm. Firm’s value is also represented by Tobin’s Q. Tobin’s Q was proposed by James Tobin in 1969. The Q ratio is calculated as the market value of a company divided by the replacement value of the firm's assets.
This expresses the relationship between market valuation and intrinsic value of a company. In other words, it is means of estimating whether a given business or market is overvalued or undervalued. A low Q (between 0 and 1) implies that the stock is undervalued. Conversely, a high Q (greater than 1) implies that a firm's stock is overvalued.2 Capital structure Capital structure is the way that a company finances its operations.
The three most basic sources of fund are debt, equity (or the issue of stock), and, for a small business, personal savings. Capital structure usually refers to how much of each type of financing a company holds as a percentage of all its financing. The components of capital structure include debt and equity. Debt could be long- term with maturities of more than one year.
They are paid principal when due and made timely interest on the unpaid balance. Debt also could be short- term with maturities of less than one year. 4 Equity is the residual interest in the net assets of an entity that remains after deducting its liabilities from its assets. It represents the amount of money that would be returned to a company’s shareholders after all of the company's debt was paid off if all of the assets were liquidated.
The three main financial differences between debt and equity: - Debt is not an ownership interest in the firm. Creditors generally do not have voting right. - The cost of debt is considered as a cost of doing business and fully deductible while dividends paid to shareholders are not tax deductible - Unpaid debt is a liability of the firm. If it is not paid, the creditor can legally claim the assets of the firm.
The possibility does not arise when equity is issued. Capital structure estimation Table 1.1: Measurement criteria of capital structure Measurement Formula Meaning criteria Debt ratio ( DA) The extent to which debt is used to finance assets of the Total debt / total capital business, meaning percentage of debt in total capital of the business Short-term ratio The extent to which short- (SDA) term debt is used to finance Short-term debt / total assets of the business, capital meaning percentage of short- term debt in total capital of the business Long-term debt The extent to which long- ratio (LDA) term debt is used to finance Long-term debt / total assets of the business, capital meaning percentage of long- term debt in total capital of the business Source: Le Lam Khanh (2013); Vo Minh Long (2017); Shinta &Nila (2014), Ammara & Bilal (2016); Jahirul (2014); Do Van Thang (2010 5 1.Theories about capital structure and firm’s value 1.1 Modigliani and Miller theory ( MM theory) The theory of modern capital structure begins with the theory of Modigliani and Millier (1958). There are 2 approaches to MM theory, including the context of no tax and tax.