Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance FINANCE DISSERTATION ON IMPACT OF CAPITAL STRUCTURE ON PERFORMANCE OF VIETNAMESE FIRMS ON HANOI STOCK EXCHANGE DURING PERIOD 2015-2019 VU QUYNH ANH ID No: 19046141 Intake 3 Supervisor: Dr. Tran Ngoc Mai September 2020 EXECUTIVE SUMMARY Whether there is an existence of an optimal financial structure for each business or not and if so, how its effect on the company's performance is always a topic that attracts a lot of attention and controversies from scholars for decades. In fact, a successful manager is someone who can determine the optimal capital structure by minimizing the company's financial costs and thereby maximizing company profits. It can be seen that capital structure affects company performance.
This paper aims to examine the impact of capital structure on the performance of firms listed on the Hanoi stock market in the period 2015 to 22019. Based on the theoretical basis of capital structure and factors affecting the business performance of the business from a number of previous related studies, both in Vietnam and abroad, the author conducts the model construction and proposes research hypotheses. The data used in this study is collected from the public financial statements of 100 companies listed on the Hanoi Stock Exchange for the period 2015-2019. Data after collection were processed on Eviews software for results.
The results are then analyzed and discussed. Part of the author's research results are consistent with the previous research results; part of the results is not. Based on the research results, the author has proposed a few recommendations to improve the performance of enterprises. i TABLE OF CONTENTS EXECUTIVE SUMMARY.
i LIST OF TABLES. iv CHAPTER I: INTRODUCTION. 1 CHAPTER II: LITERATURE REVIEW. The capital structure of enterprise.
Definition of capital structure. The performance of the firm. The theory of business efficiency. Firm’s performance measurement.
16 CHAPTER III: DATA AND METHODOLOGY. Structure characteristics of listed companies on Hanoi Stock Exchange 19 3.1 Hanoi Stock Exchange. Capital structure characteristics of companies listed on the HSE. Situation of financial structure of listed companies.
Source of research data. Description of variables. Descriptive statistical analysis. 28 CHAPTER IV: EMPIRICAL ANALYSIS.
Matrix analysis of correlation coefficients:. Analysis of regression results. Business size and performance efficiency. Financial leverage and performance efficiency.
Tangible assets and performance efficiency. Liquidity and performance efficiency. Tax and performance efficiency. Implications for Vietnamese firms.
45 iii LIST OF TABLES Table 1: Revenue and Profit by industries in HSE (2014) .20 Table 2: Revenue and profit before tax according to types of firms based on authorized capital scale (HSE, 2014) .21 Table 3: Independent variables .25 Table 4: Descriptive statistics results .29 Table 5: Result matrix correlation coefficients between variables .31 Table 6: VIF test results .32 Table 7: OLS FEM REM test results .33 Table 8: Result table.35 Table 9: Result table of REM test .45 Table 10: Result table of The Hausman test .46 iv CHAPTER I: INTRODUCTION The relationship between capital structure theory and the performance of businesses has been one of the subjects that have attracted the interest from scholars in the area of corporate finance for decades. In the world, there are many studies analyzing the effect of capital structure on business overall performance of companies (Shah, 2014; Abeywardhana, 2016; Mouna, et al. In terms of negative impact, Khan's study (2012) showed that financial leverage as measured by short-term debt to total assets and total debt to total assets has a significant negative relationship with the performance of the business measured equal to the income index on total assets, gross profit margin and market business efficiency index (Khan, 2012). The relationship between financial leverage and firm's performance as measured by return on equity is negative but negligible.
The results of this study are similar to the findings of Umar et al. Therefore, the high level of debt in the capital structure will reduce the business performance of the business and recommend that managers should not combine too much debt in the capital structure of the business but should rely more on internal funds and funds from shareholders of business (Khan, 2012). In terms of positive impact, capital structure also positively affects business performance of enterprises. Specifically, studies of Khatab et al.
(2011), Ebrati et al. (2013), Nirajini and Priya (2013) have shown a positive relationship between capital structure and business performance of enterprises (Khatab et al., 2011; Ebrati et al. Research by Stohs and Mauer (1996) suggested that larger firms are less risky when using long-term debt. In Vietnam, there are several studies conducted on the same topic and also found out both negative and positive impact of capital structure on effectiveness of business.
The research of Son and Hoang (2008) proposed the clear evidence of the effect of capital structure on business performance of enterprises. Research results showed that business performance of enterprises is affected by capital structure. Business performance has a positive correlation with capital structure, business efficiency has close and quadratic relationship with the capital structure of the enterprise when the debt ratio is below 100%, negatively correlated with the 1 capital structure (Son & Hoang, 2008). The approach of the method of analyzing the path of Doan Ngoc Phi Anh (2010) has shown that business performance and financial structure have a positive impact on the return on equity and two factors.
This explained 90% of the rate of return on equity and can draw conclusions, businesses listed on Vietnam's stock market have used good leverage tools to improve financial efficiency (Anh, 2010). However, research by Huynh Anh Kiet (2010) revealed that corporate profits are significantly affected by variables of capital structure of total debt to total assets, total debt to equity, long-term debt. term on total assets, short-term debt on total assets (Kiet, 2010). Nguyen Tan Vinh (2011) studied the relationship of companies listed on the Hanoi Stock Exchange and found a positive relationship (Vinh, 2011).
Le and Phung (2013) used data of enterprises listed on Vietnam's stock market in the period of 2007– 2011 to study the relationship between capital structure and firm performance and it showed that the use of debt has a positive relationship with the performance of the business (Le & Phung, 2013). The theoretical and empirical researches in the world all show that there are many different factors affecting the capital structure of enterprises. Different observations and data over different time periods produce very different conclusions. Therefore, when it comes to factors that have a real impact on the capital structure of the business, it is necessary to consider and analyze based on the specific characteristics of the research object.
At the same time, to determine the target capital structure of the business, it is necessary to base on the estimated results of the model of factors affecting the capital structure of the business. In Vietnam, many studies on capital structure have been carried out. However, empirical evidence on the relationship between capital structure and firm performance in Vietnam is limited and has some limitations. On the other hand, previous research on capital structure of enterprises was only done for a short time of about 2 to 3 years.
Hence, it is not long enough to see a trend in the long term. Therefore, this dissertation, on the basis of inheriting the advantages of previous studies such as inheriting the theoretical basis of the factors affecting the capital structure of the enterprise, inherits the theoretical basis of the influence of capital structure on the business performance of the enterprises. With topic "The impact of capital structure on performance of Vietnamese firms in the period of 2015 - 2019", the dissertation will add the following research gaps: i) Synthesizing and 2 giving a theoretical point of view on the capital structure of the business; ii) Analyzing the impact of capital structure on business performance of listed companies on Hanoi stock market through the implementation of quantitative research with the latest data from 2015 to 2019. 3 CHAPTER II: LITERATURE REVIEW 2.
The capital structure of enterprise Capital structure is a topic of great interest to researchers. The first concept of capital structure was the postulate of Modigliani and Miller published by using these two authors in 1958. After that, the theory of capital structure was further researched and developed by researchers. The static trade off theory, dynamic trade off theory, theory of Modigliani and Miller, pecking order theory and market timing theory are most significant theories on capital structure in the records of empirical research and studies about this issue.
This part focuses on providing definitions of capital structure as well as literature review on theories of capital structure. Definition of capital structure Capital structure, also known as financial leverage, is the percentage of total debt to total assets of a firm at a given time (Saad, 2010). The capital structure involves the use of borrowings. The downside of debt is that the more debt the enterprises borrow, the cost of financial exhaustion will occur, and at some points the present value of the cost of financial exhaustion will suppress the present value of the tax shield from debt (Modigliani & Miller, 1963).
The cost of debt has a significant impact on business operations, even leading to the closure of the business. Financing from equity does not create the cost of capital for businesses, but shareholders can interfere with the operations of the business. High expectation on the business performance of investors also creates considerable pressure on the management team. Another condition of the optimal capital structure is to consider the business situation of the business which is the earning before tax and interest (EBIT) must overcome the bladder point so that the business can take advantage of its debt balance (Addae, et al.
One of the difficult issues of corporate finance managers is how to build the capital structure of the business, how much equity, how much bank loans to maximize business value or optimal capital structure construction (Saad, 2010). This is an interesting issue both in theoretical research and in practical application. With the optimal capital structure, it is possible to increase the enterprise value by using appropriate financial leverage ratio. Under this approach, businesses can lower the cost of capital through increasing debt use because debt costs are lower because there are tax savings.
However, as the debt ratio increases, so does the risk, so investors 4 (directly and indirectly) require an increase in profits, at some point the benefits of tax savings enough to offset the increase in the average cost of capital, making the benefits of debt use no longer available (Ajanthan, 2013). Thus, if the capital structure of the business is financed by 100% equity, on the one hand, it shows that the enterprise is active in capital (not dependent on external capital) and has no financial risks, but on the other hand, businesses also incur a high average cost of capital as the cost of equity is often higher than the cost of debt. In contrast, when an enterprise uses debt to finance its capital structure, it can reduce the average cost of capital of the business, but it can increase the risk in debt repayment, especially in in case the enterprise uses a debt ratio that is too high to exceed a certain limit, in addition to making the payment risk increase, the average cost of capital is increased. This makes the business always have to set up an optimal capital structure to minimize financial risks and reduce the average cost of capital (Zeitun & Tian, 2007).
Theory of Miller and Modigliani (M&M theory) Miller and Modigliani (1958) argued that in a perfect market, capital structure does not affect firm value (Modigliani & Miller, 1958). Therefore, there is no most effective capital structure for a unique business.
