MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY ------------ NGUYỄN THỊ HỒNG LOAN IMPACT OF CAPITAL STRUCTURE ON FIRM’S PERFORMANCE EVIDENCE FROM VIETNAMESE LISTED COMPANIES Subject: Master of Business Administration Code: 60.02 MASTER THESIS OF BUSINESS ADMINISTRATION SUPERVISOR: PGS. PHẠM THỊ THU TRÀ TPHCM - 2012 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Abstract: Although over the last decades many studies have been conducted to examine the impact of Capital Structure on Firm’s Performance, but the report results are mixed and the question of capital structure’s impact on performance still holds well and empirical study continues, especially in an emergency market like Vietnam where the financial imbalance occurs in almost business. To answer this question, this study examines the impact of capital structure on corporate performance in Ho Chi Minh stock exchange, in which we control the effect of firm’s size, firm’s age, industrial sectors and ownership in the period 2007-2011. At first the research results show that Vietnamese firms are using an unbalance financial leverage with a big amount of debt while state controlled use more debt than non state controlled firm and heavy industry uses more debt than light industry and the difference is significant.
These results are consistent with theories. An unbalanced panel of 97 companies are studied in this paper and report that a firm’s capital structure was found to have a significant and negative impact on the firm’s performance measures in the accounting measures and negative but insignificant in the market measure – Tobin’s Q. Therefore, it is recommended that Vietnamese firms can reduce their debt ratio in order to increase profitability. Control variables: Firm’s age, size, industrial, ownership show mixed results of relationship with firm’s performance, it may significant or not but with the same trend as the theories.
Key works: Capital structure, Debt Ratio, Firm’s performance, ROE, ROA, Tobin’s Q, Gross Profit Margin, Firm’s Age, Firm’s Size, Owner-ship, Different Industries. 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Statement of original authorship I declare that this research project is my own work. It is submitted in partial fulfillment of the requirements for the degree of Master of Business at Institute School of Business, University of Economics. It has not been submitted before for any degree or examination in any other University.
I further declare that I have obtained the necessary authorization and consent to carry out this research. 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Acknowledgments First and most importantly, I would like to thank my family especially my beloved husband for their love, support and patience from the beginning of the course to the end. I could not have made it without them. Secondly I would like to express my all respects and appreciation to Ms.
Pham Thi Thu Tra my supervisor for her invaluable support, advice and instructions. Having her as a supervisor greatly assisted in getting to this research done. I would also like to thank Mr. Nguyen Dinh Tho, who exerts every effort in guiding me as well as ISB students to implement research.
I would like to thank all my colleagues in VCSC, for supporting me in getting data for the research. I also thank to my ISB classmate, for their kindly support and assistance during this last year. Last but not least, I would thank management, the faculty and all the staff at ISB for what they have done to support me as well as my classmate during the course. Ho Chi Minh City, January 1st, 2013 Nguyen Thi Hong Loan 3 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Table of Contents Abstract:.
1 Statement of original authorship. 3 List of tables. 6 List of Figures:.4 Outline of the report .1 Vietnam Economic overview:.2 Theory about Capital structure and Firm’s Performance .1 Modigliani and Miller’s theory: .2 Trade-off theory .3 Pecking order theory .4 The information asymmetry and signaling theory: .3 The impact of firm’s characteristics: .4 Different industrial sectors .2 Variable of research:. 22 4 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.4 Model of study:.
26 4 Results and Discussions .3 Limitations and recommendations. 40 Appendix A: Final sample selection. 40 Appendix B: DR - GPM regression analysis result. 45 Appendix C: DR - ROE regression analysis result.
47 Appendix D: DR - ROA regression analysis result. 49 Appendix E: DR - Tobin’s Q regression analysis result. 51 5 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com List of tables Table 1: Summary statistics of the explanatory Variables, 2007-2011. 27 Table 2: Correlation Matrix of the Explanatory Variables, during 2007-2011.
30 Table 3: Correlation Matrix of the Explanatory Variables of Heavy industry during 2007- 2011. 30 Table 4: Correlation Matrix of the Explanatory Variables of Light industry during 2007- 2011. 30 Table 5: Correlation Matrix of the Explanatory Variables of state- controlled Company during 2007-2011. 31 Table 6: Correlation Matrix of the Explanatory Variables of non state-controlled Company during 2007-2011.
31 Table 7: Impact of Capital structure on manufacturing firm’s performance. 32 List of Figures: Figure 1: Total debt to asset in different industrial factor. 12 Figure 2: The explanatory variable of time, 2007-2009. 29 6 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Abbreviations GPM: Gross Profit Margin ROE: Return on Equity ROA: Return on Assets EPS: Earning per Share DR: Debt ratio HSX: Hochiminh Stock Exchange HNX: Hanoi stock Exchange RE: Random-effects model FE: Fixed-effects model SMEs: Small and medium-size enterprises 7 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.1 Research Background: Capital structure decisions play a pivotal role in maximizing the performance of firm and its valve.
Capital structure involves the decision about the combination of the various source of funds, a firm uses to finance its operations and capital investments. These sources include the use of long term debt finance, short term debt finance called debt financing, preferred stock and common stock also called equity financing. Modigliani and Miller (1958) were the first authors who developed capital structure theory which suggest that in the perfect capital market financing strategies do not affect the value of the firm, but later they argue that firm value can be increased by changing the capital structure because of tax advantage of debts (Modigliani and Miller, 1963). In recent decades the capital structure has become one of the most interesting issues in the corporate finance literature.
Since then, many researcher followed Modigliani and Miller’s path to develop new theory on debt policy of firms. However, these attentions led to develop two main capital structure theories: the static trade-off theory and the pecking-order theory. According to the static trade-off theory, an optimal capital structure exists for firm that can be reached by conducting a balance between benefits (interest tax shields) and the cost of financial distress (bankruptcy and agency costs) of debts (Myers and Majluf, 1984) Rajan and Zingales, 1995; Wald, 1999; Shyam-Sunder and Myers, 1999; Booth et al., 2001; Fama and French, 2002; Huang and Song, 2006; Tang and Jang, 2007; Karadeniz et al. Using this optimal capital structure, the value of the firm could be increased due to its lowest cost of capital (Tang and Jang, 2007; Karadeniz et al.
Myers and Majluf (1984) developed the pecking order theory as an alternative to the static trade-off theory. Pecking order theory, in contrast to static trade-off theory, assumes that there is no an optimal capital structure for a firm. According to this theory, 8 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com since there is an asymmetric information between managers and investors, therefore to minimize this asymmetric information firms prefer to finance using retained earnings, debt and equity respectively (Myers, 1984; Myers and Majluf, 1984; Rajan and Zingales, 1995; Wald, 1999; Booth et al., 2001; Fama and French, 2002; Huang and Song, 2006; Tang and Jang, 2007; Karadeniz et al. Although over the last decades many studies have been conducted to examine the superiority of pecking order theory compare to static trade-off theory, but the reported results are controversial.
Fama and French (2002) revealed that none of these theories would be rejected. The theories show that the use of financial leverage to grow faster, bringing in higher profits for shareholders is required. However, in Vietnam, the financial imbalance occurs in a lot of business in the past years, when the economy fell into difficulties. As Son (2012) said, the debt-to-equity ratio of local firms is as much as 120%, versus the regional average of 45%.
This is an alarming figure; a ratio of over 60% already poses risk of bankruptcy if the market developments are unfavorable. The question is whether the increase of debt influences the financial performance of the business? As my knowledge, only several such studies have dealt in Vietnam. Of these, San (2002) focused on a single industry sector (tourism) in a single locality (ThuaThien Hue Province), whilst Nguyen and Ramachandran (2006) focused on small and medium-size enterprises (SMEs) only. By contrast, Vu (2003) analyzed companies listed the main stock exchange.
Although they are far less numerous than unlisted companies (most of the latter are SMEs), listed companies account for a larger share of economic activity. Therefore, it is important to explore the relationship between capital structure and firm performance in Vietnamese market. 9 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.2 Research objective This study aims at examining the relation between Capital Structure which is indicated by Total debt ratio and the manufacturing Firm’s Performance; including Gross profit margin (GPM), Return on Assets (ROA), Return on Equity (ROE) and Tobin’s Q over the period 2007-2011 in Hochiminh Stock Exchange (HSX). Moreover, I will examine some other factors which have influences on this relationship such as: Firm’s age, Size, Ownership and Different industries.
So the main objective of this research report is: - To examine the nature of relationship between capital structure and firm performance of listed companies in Vietnam. - To evaluate different impacts of capital structure on firm performance with the different firm’s characteristic.3 Research questions: This study seeks to provide answers to these questions: 1. What is the impact of capital structure on firm performance? 2. Is there any different impact of capital structure to firm performance in the firm with different characteristic? 1.4 Outline of the report This research will be comprises of 5 parts: - Introduction: introduce research background, research problem, research objective and research question.
- Literature reviews: introduce the Vietnam economic overview and review theories as well as empirical evident which concern with research to develop the research hypothesis. - Research methodology: introduces research variables and provides general idea of research process include: method to collect and analyses data, introduces and reports the research process together with the analyzed results of pilot survey. 10 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com - Result and discussion, this part reports the analysis results of panel data as well as discusses the result finding and connection with theory. - Conclusion, to conclude the research finding, includes implication and gives research limitation as well as provides some further recommendation.1 Vietnam Economic overview: After implementing the “Doi Moi” (Reform Policy) in 1986, Vietnam implemented many reform policies such as equitizatizing the state controlled companies, reforming the banking system, liberalizing the interest rate, establishing stock markets and opening the economy to foreign investors.
Many laws also have been newly created or revised in order to support companies in such new environment. Although the financial environment of the listed companies in Vietnam has improved because of the economic reform, many problems remain need to be solved. First, in many equitized state controlled companies, the government remains as a controlling shareholder and still has a strong impact on the firm’s activities. These companies may have more advantages than other companies (International Finance Corporation, 2010).