MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY --- oOo --- HUỲNH ANH KIỆT CAPITAL STRUCTURE AND FIRM PERFORMANCE: CASE STUDY: LISTED COMPANIES IN HOCHIMINH STOCK EXCHANGE MASTER THESIS Ho Chi Minh City – 2010 TIEU LUAN MOI download : skknchat@gmail.com MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY --- oOo --- HUỲNH ANH KIỆT CAPITAL STRUCTURE AND FIRM PERFORMANCE: CASE STUDY: LISTED COMPANIES IN HOCHIMINH STOCK EXCHANGE MAJOR: BUSINESS ADMINISTRATION MAJOR CODE: 60.05 MASTER THESIS INSTRUCTOR : PROFESSOR NGUYỄN ĐÔNG PHONG Ho Chi Minh City – 2010 TIEU LUAN MOI download : skknchat@gmail.com ACKNOWLEDGEMENT I would like to express my deepest gratitude to my research Instructor, Professor Nguyen Dong Phong for his intensive support, valuable suggestions, guidance and encouragement during the course of my study. My sincere thanks are also due to Dr. Vo Thi Quy and Dr. Tran Ha Minh Quan for their valuable time as the members of the proposal examination committee.
Their comments and constructive suggestions were of great help in my completing this study. My sincere thanks is extended to Assistant Professor Nguyen Dinh Tho, Dr. Tran Ha Minh Quan, Dr. Truong Tan Thanh, Dr.
Pham Huu Hong Thai, Dr. Bui Thanh Trang for their valuable time as members of examination committee. Their comments and suggestions were of great value for my study. I would like to express my sincere gratitude to all of my teachers at Faculty of Business Administration and Postgraduate Faculty, University of Econimics Hochiminh City for their teaching and guidance during my MBA course.
I would like to specially express my thanks to all of my classmates, my friends from www.vn for their support and encouragement. I would also like to avail this opportunity to express my appreciation to Professor Nguyen Dong Phong, UEH Board of Directors for creating MBA program in English and Dr. Tran Ha Minh Quan for his support during the course. Finally, I heartily dedicate this study to my beloved parents and my wife, Vu Thi Huyen who have always sacrificed to encourage and support me during my study.
i TIEU LUAN MOI download : skknchat@gmail.com ABSTRACT This study investigates the relationship between firm capital structure and firm performance. The author explores both the effect of firm performance on firm captial structure as well as the effect of capital structure on firm market performance using cross-sectional data representing of 162 Vietnamese companies in Hochiminh Stock Exchange for 2008. According to the results, a firm profitability is found to have a significant and negative impact on all firm capital structure. This finding support pecking order theory of Myers and Majluf (1984).
An interesting finding is that firm size has a positive and significant impact on the leverage, which consistent with a previous study of Rajan and Zingales (1995), and indicating that a firm size is an important determinant of corporate capital structure. Firm capital structure is confirmed to have positive and significant impacts on firm market performance which is measured by Tobin’s Q. The author also finds that firm growth opportunities have a positive and significant impact on the firm value Tobin’s Q. Keywords: Capital structure, corporate performance, Vietnam, HOSE.
ii TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENTS ACKNOWLEDGEMENT. ii TABLE OF CONTENTS. iii LIST OF FIGURES. v LIST OF TABLES.
vii CHAPTER 1: INTRODUCTION .4 RESEARCH METHODOLOGY AND SCOPE .5 STRUCTURE OF THE STUDY. 5 CHAPTER 2: LITERATURE REVIEW .4 HYPOTHESIS AND EMPIRICAL MODEL. Model 1: The Leverage Model. Model 2: The Firm Value Model .15 CHAPTER 3: RESEARCH DESIGN.
Data Analysis Method .4 VARIABLES MEASUREMENT FOR MODEL 1 .5 VARIABLES MEASUREMENT FOR MODEL 2 .6 FRAMEWORK OF THE STUDY. 24 CHAPTER 4: EMPIRICAL RESULTS OF THE RESEARCH.2 CHARACTERISTICS OF RESEARCH SAMPLES. Model 1: The Leverage Model. Model 2: The Firm Value Model.
32 CHAPTER 5: CONCLUSIONS, RECOMMENDATIONS AND LIMITATIONS. 38 iii TIEU LUAN MOI download : skknchat@gmail. 51 iv TIEU LUAN MOI download : skknchat@gmail.com LIST OF FIGURES Figure 1: The Leverage Model. 14 Figure 2: The Firm Value Model.
17 Figure 3: Research Process. 19 Figure 4: Framework of the study. 23 v TIEU LUAN MOI download : skknchat@gmail.com LIST OF TABLES Table 1: Dependent variables for model 1. 20 Table 2: Independent variables for model 1.
21 Table 3: Dependent variables for model 2. 22 Table 4: Independent variables for model 2. 22 Table 5: Summary Statistics of the Explanatory Variables. 26 Table 6: Correlation Matrix of the Explanatory Variables for Model 1.
28 Table 7: Correlation Matrix of the Explanatory Variables for Model 2. 28 Table 8: Estimate Results for Model 1. 29 Table 9: Estimate Results for Model 2 Using TDTA. 32 Table 10: Estimate Results for Model 2 Using TDTE.
33 Table 11: Estimate Results for Model 2 Using LTDTA. 34 Table 12: Estimate Results for Model 2 Using STDTA. 35 vi TIEU LUAN MOI download : skknchat@gmail.com ABBREVIATIONS HOSE Hochiminh Stock Exchange GROWTH Growth opportunities LTDTA Long-term debt to total assets PE Price-to-Earnings Ratio PROF Profitability ROA Return on assets ROE Return on equity ROI Return on investment SIZE Firm Size STDTA Short-term debt to total assets TA Asset tangibility TDTE Total debt to total equity TDTA Total debt to total assets TOBIN Tobin’s Q vii TIEU LUAN MOI download : skknchat@gmail.com Capital Structure and Firm Performance CHAPTER 1: INTRODUCTION 1.1 BACKGROUND The theory of the capital structure is an important reference theory in firm's financing policy. The capital structure refers to firm includes mixture of debt and equity financing.
The topic of optimal capital structure has been the subject of many studies. The modern theory of the capital structure originate from the contribution of Modigliani and Miller in 1958, under the perfect capital market assumption 1 that if there is no bankrupt cost and capital markets are frictionless, if without taxes, the firm value is independent with the structure of the capital. In 1963, under considering the corporate taxes, Modigliani and Miller modified the conclusion to recognize tax shield. Because debt can reduce the tax to pay, so the best capital structure of enterprises should be 100% of the debt.
But this seems to be unreasonable in the real world. Jensen and Meckling (1976) introduce the concept of agency costs and investigate the nature of the agency costs generated by the existence of debt and outside equity. When considering corporation tax, bankrupt costs and agency costs at the same time, trade-off theory can be introduced to derive the existence of the optimum capital structure. Leland (1994) extends the results of Merton (1974) and Black and Cox (1976) to include taxes, bankruptcy costs to derive the optimal capital structure.
Deangelo and Masulis (1980) argue that the existence of non-debt corporate tax shields such as depreciation deductions is sufficient to overturn the leverages irrelevancy theorem. Hovakimian, Opler, and Titman (2001) test the hypothesis that firms tend to a target ratio when they either raise new capital or retire or repurchase existing capital. They found firms should use relatively more debt to finance assets in place and relatively more equity to finance growth opportunities. It has also been argued that profitable firms are less likely to depend on debt in their capital structure than less profitable ones.
It has been argued that firms with a high growth rate have a high debt to equity ratio. Bankruptcy costs (proxied by firm size) are also found to be an important effect on capital structure (Kraus and 1 Perfect capital markets means that the following assumptions hold: (a) there are no taxes, (b) there are no transaction costs, (c) there is symmetrical information, (d) there are homogenous expectations, and (e) investors can borrow at the same rate as corporations. Page 1 TIEU LUAN MOI download : skknchat@gmail.com Capital Structure and Firm Performance Litzenberger, 1973; Harris and Raviv, 1991). If these three factors are considered as determinants of capital structure, then these factors could be used to determine the firm performance.
In practice, firm managers who are able to identify the optimal capital structure are rewarded by minimizing a firm’s cost of finance thereby maximizing the firm revenue. If a firm capital structure influences a firm performance, then it is reasonable to expect that the firm capital structure would affect the firm health and its likelihood of default. From a creditor’s point view, it is possible that the debt to equity ratio aids in understanding banks’ risk management strategies and how banks determine the likelihood of default associated with financially distressed firms. In short, the issue regarding the capital structure and firm performance are important for both academics and practitioners.
There is lack of empirical evidence about the effect of firm performance on capital structure in Vietnam. Then, the first objective of this study is to examine the effect which firm performance has on capital structure of listed companies in Hochiminh Stock Exchange. Trần Hùng Sơn and Trần Viết Hoàng (2008) find a positive and significant impact of firm leverage on firm accounting performance, but have not used market performance measures. Thus, the second objective of this study is to examine the effect which firm capital structure has on corporate market performance.
This study contributes to literature in two directions: (1) by using ordinary least square regression model to investigate the relationship between capital structure and firm performance to fill the gap in corporate finance literature in Vietnam; (2) by employing different measures of capital structure such as short-term debt to total assets, long-term debt to total assets, total debt to total assets, and total debt to total equity to investigate the effect of the debt structure on corporate market performance in Vietnam. This study contributes to practical implications by investigating the effect of capital structure on corporate performance using market measures to provides evidence about whether the stock market is efficient or not. It also provides managers a structure approached to plan their firm capital structure strategies and improve the firm value. Page 2 TIEU LUAN MOI download : skknchat@gmail.com Capital Structure and Firm Performance 1.2 RESEARCH PROBLEMS Problem definition is essential before conducting a study, especially quantitative research.
82) recommends that formal quantitative research should not begin until the problem has been clearly defined. In Vietnam, lack of empirical evidence, that investigate the relationship between firm capital structure and firm performance, is an issue for both academics and practitioners. There is lack of empirical evidence that investigate the relationship between firm capital structure and firm performance in Vietnam. In 2008, Trần Hùng Sơn and Trần Viết Hoàng tested the relationship between capital structure and firm performance by using data sample of 50 non-financial companies in Hochiminh Stock Exchange for the period September 2008.
The results show that there is a positive correlation between a firm capital structure and performance, which is measured by average of return on assets and return on equity. The corporate performance has a strong quadratic or cubic correlation with the capital structure when they use the debt ratio under 100%. The performance has a positive correlation with the capital structure when the debt ratio is in the range from 0. However, they have not used market performance measures and have not explored the optimal capital structure to maximize the performance of the firm.
They have not tested the correlation between the distribution of debt ratio and corporate performance to each type of companies, as well as each industry. Their research recommended that further research should be implemented. Margaritis and Psillaki (2007) use a sample of 12,240 firms from the 2004 New Zealand Annual Enterprise Survey to investigate the effect of leverage on firm performance as well as the reverse causality relationship. They use quantitative regression analysis to show that the effect of efficiency on leverage is positive at low to mid-leverage levels and negative at high leverage ratios.