UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS CAPITAL STRUCTURE AND CORPORATE PERFORMANCE: EVIDENCE IN VIETNAM A thesis submitted in partial fulfillment of requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By PHẠM THỊ THÚY DIỄM Academic Supervisor Dr. CAO HÀO THI HO CHI MINH CITY, NOVEMBER 2013 TIEU LUAN MOI download : skknchat@gmail.com i CERTIFICATION “I certify that the substance of this thesis has not already been submitted for any degree and has 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 acknowledged in this thesis”. PHAM THI THUY DIEM Date: … November 2013 TIEU LUAN MOI download : skknchat@gmail.com ii ACKNOWLEGMENTS Foremost, I would like to thank so much to Vietnam – The Netherlands programme for Master of Art in Development Economics (MDE programme), I have been studying useful knowledge.
Besides, I thank so much for all lecturers because of their valuable contributions as well as all my friends because of their helps during period of studying. I would like to thank deeply to my academic supervisor, Doctor Cao Hao Thi for his enthusiastic supports, advices and great encouragements during my completion of the thesis. Last but not least, I am deeply grateful to my family, especially my mother who supports in my life as well as lovely thank to my husband Nguyen Phuc Loc and his family. One time again, I am grateful to all of you.
Thank you so much! TIEU LUAN MOI download : skknchat@gmail.com iii ABSTRACT This article aims to examine the influence of capital structure on corporate performance and the reverse causality from corporate performance to capital structure, using data from 150 Vietnamese listed manufacturing firms from 2008 to 2012. Comparing the results of random effects model (REM) and fixed effects model (FEM), the more appropriate model will be discussed some empirical results. The study found that the capital structure has significant and positive relationship with corporate performance in associated with debt to assets (TDTA) and short-term debt to assets (STDTA). In contrast, corporate performance is insignificantly influenced by debt to assets (TDTA).
The results also state that there is no existence of optimal capital structure decision. The reverse causality from corporate performance to capital structure, corporate performance has a significant and positive influence on capital structure in related with debt to assets (TDTA) and short-term debt to assets (STDTA) but corporate performance has no meaning with long-term debt to assets (LTDTA). Keywords: capital structure, leverage, corporate performance TIEU LUAN MOI download : skknchat@gmail.com iv TABLE OF CONTENTS CERTIFICATION. iii LIST OF FIGURES.
vii LIST OF TABLES. ix Chapter 1: INTROCDUCTION. Research scope and data. 3 Chapter 2: LITERATURE REVIEW.
Theories of capital structure and corporate performance. Theories of reverse causality from corporate performance to capital structure 12 2. The impacts of capital structure on corporate performance. 13 TIEU LUAN MOI download : skknchat@gmail.
The reverse causality from corporate performance to capital structure. 21 Chapter 3: RESEARCH METHODOLOGY. Measurement of variables. Capital structure variable.
Corporate performance variable. Control variables for firm characteristics. Capital structure and corporate performance. Reverse causality from corporate performance to capital structure.
39 Chapter 4: EMPIRICAL ANALYSIS RESULTS. Corporate performance and capital structure. Reverse causality from corporate performance to capital structure. Limitations and suggestion of further research.
56 TIEU LUAN MOI download : skknchat@gmail.com vi REFERENCE. 65 TIEU LUAN MOI download : skknchat@gmail.com vii LIST OF FIGURES Figure 2.1: The trade-off of capital structure.2: Conceptual framework for the impacts of capital structure on corporate performance .3: Conceptual framework for the reverse causality from corporate performance to capital structure .2: Analytical framework for the reverse causality from corporate performance to capital structure. 34 TIEU LUAN MOI download : skknchat@gmail.com viii LIST OF TABLES Table 2.1: A summary of the empirical results analyzing the relationship between capital structure and corporate performance .2: A summary of the empirical results the reverse causality from corporate performance to capital structure .1: Control variables used in some previous studies.2: Analytical framework for the impact of capital structure on corporate performance .3: Variable description and expected sign for Model 1 .4: Variable description and expected sign for Model 2 .5: Variable description and expected sign for Model 3 .1: Summary statistics of the explanatory variables, 2008-2012 .2: Correlation matrix of the explanatory variables, during 2008-2012 .3: Results of Hausman test .4: Choice between fixed effects model and random effects model .5: Corporate performance and capital structure .6: Corporate performance and optimal capital structure .7: Reverse causality from corporate performance to capital structure. 53 TIEU LUAN MOI download : skknchat@gmail.com ix ABBREVIATIONS EFF: Effectiveness FEM: Fixed effects regression model Growth: Sales growth HNX: Hanoi Stock Exchange HOSE: Ho Chi Minh Stock Exchange LEV: Leverage LTDTA: Long-term debt to total assets M&M: Modigliani and Miller PROFIT: Profitability ROA: Return on total assets ROE: Return on total equity REM: Random effects regression model Size: Firm size STDTA: Short-term debt to total assets Tang: Tangibility TIEU LUAN MOI download : skknchat@gmail.com 1 Chapter 1: INTRODUCTION 1.
Problem statement The connection between the level of equity in financial leverage and corporate performance has been considered as an important theme in the corporate governance literature (Williamson, 1988; Short, 1994; Shleifer and Vishny, 1997). The argument goes back to Modigliani and Miller classic theory in 1958, which indicated that the relationship between capital structure and corporate’ value is independent under some unreasonable assumptions in the real world. In contrast, based on these illusive assumptions, a number of researchers have claimed that the corporate’ performance and behavior might be effected by the level of debt (Kraus and Litzenberger, 1973; Jensen and Meckling, 1976); however, their statements may be opposite. Many empirical studies have been conducted to examine the influence of capital structure on corporate performance.
A number of previous studies have claimed that capital structure have a statistical and significant negative effect on corporate performance (Pushner, 1995; Majumdar and Chhibber, 1999; Zeitun and Tian, 2007; Soumadi and Hayajneh, 2008). Nevertheless, a number of studies found that capital structure is positive related to corporate performance (Nickell et al., 1997; Margaritis and Psillaki, 2010; Gill et al. However, there is some evidence that capital structure and corporate performance is independent (Krishnan and Moyer, 1997; Laurent Weill, 2007; King and Santor, 2008). Many researchers have suggested that the reverse causality from corporate performance to capital structure have negative correlation (Rajan and Zingales (1995; Noulas and Genimakis, 2011).
In contrast, there is some evidence that the existence of positive relationship about the reverse causality from corporate performance to capital structure (Feidakis and Rovolis, 2007; Margaritis and Psillaki, 2010). TIEU LUAN MOI download : skknchat@gmail.com 2 In Vietnam, several studies have presented the link between firm’s capital structure and its performance. Son and Hoang (2008) states that there is a significant and positive impact of firm leverage on firm corporate performance but this study only used market performance measure. In causality link, Anh (2010) the corporate performance has negative relationship with capital structure.
However, there is lack of empirical evidence to examine the influence of capital structure on corporate performance as well as the reverse causality from corporate performance to capital structure. Based on important points mentioned earlier, “Capital Structure and Corporate Performance: Evidence in Vietnam” has been considered as a research of interest which is believed to bring significant theoretical and practical benefits. Research objective The study aims to analyze the relationship between firm’s capital structure and its performance. Particularly, this study investigates: - The influence of firm’s capital structure on its performance.
- Finding out the optimal capital structure - The reverse causality from corporate performance to capital structure - Finding out the firm characteristics factors which also influence on corporate performance as well as capital structure. Research questions This research questions in this study mainly focused on investigating the relationship between firm’s capital structure and its performance. For this reason, the study aimed to answer these following questions: - Does capital structure have significant in related with corporate performance? TIEU LUAN MOI download : skknchat@gmail.com 3 - If there is some evidence that capital structure is significant in related with corporate performance, how the optimal capital structure is maximum the corporate performance? - How do the impact of firm characteristics factors on corporate performance? - How does the reverse causality from corporate performance to capital structure? - How do the impact of firm characteristics factors on capital structure? 1. Research scope and data The study focused on investigating the relationship of firm’s capital structure and its performance in 150 Vietnam manufacturing firms from 2008 to 2012.
These firms are collected randomly in Hanoi Stock Exchange (HNX) and Ho Chi Minh Stock Exchange (HOSE). Selected sample are required to publicly disclosure their audited financial statements at least from 2008 to 2012 and downloaded directly from their websites. As a result, the type of used data is a balanced panel including necessary variables. To find out the relationship of capital structure and corporate performance, this study based on M&M theory, trade off theory for the effect of firm’s capital structure on its performance; agency cost theory for finding out the existence of capital structure; efficiency-risk hypothesis and franchise-value hypothesis for testing reverse causality from corporate performance to capital structure.
This study employed panel least square method to run the models including random effects model (REM) and fixed effects model (FEM). Thesis structure The structure of the study consist five chapters and the herein chapter is the introduction section. The next chapter is to review the literature of the relationship between firm’s capital structure and its performance both theory and empirical evidences. Third chapter illustrates the research methodology including measurement of variables, hypothesis development, model specification, estimate strategy and description of data is used in this research.
The next is the chapter about empirical analysis TIEU LUAN MOI download : skknchat@gmail.com 4 results which are focused and discussed the findings. The final one provides the conclusions, limitations as well as research future directions. TIEU LUAN MOI download : skknchat@gmail.com 5 Chapter 2: LITERATURE REVIEW The major objective of chapter two is review relevant theoretical literature as well as empirical literature associating with the relationship between firm’s capital structure and its performance. This study aims to analyze this relationship though two channels including the influence of capital structure on corporate performance and the reverse causality from performance to firm’s capital structure.
First of all, conceptual issues of capital structure and corporate performance are also illustrated to provide a view of this study. The final part is conceptual framework which supports for next chapters. Capital structure The concept of capital structure or leverage is a combination debt with equity capital which the firm uses to finance its operations (Jensen and Meckling, 1976; Myers, 1977). Capital structure is also mentioned as financial structure.
Total capital of the firm is divided by two major components including debt and equity. Debt is associated with debt holders who is individuals, banks or debt instruments of financial intermediaries such as bonds, bill, etc…Equity is referred as firm ownerships through stock. A other aspect of capital structure is optimal capital structure. Jensen and Meckling (1976) suggested that the optimal leverage which could be obtained though trading off benefits of debt against agency costs of debt.
In brief, agency theory indicates that enterprises in mature industries in which have few growth opportunities such as airlines and steel industries leading to highly leverage. In contrast, enterprises have large cash inflows which experience slow as well as negative growth such as mining industry have more debt in its capital structure.