Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance FINANCE AND INVESTMENT DISSERTATION ON Impacts of capital structure on the performance of listed companies in Vietnam VU ANH TU ID No: 23081350 Intake: 7 Supervisor: Dr. Do Thu Hang September/2024 DISSERTATION CONFIRMATION PAGE Student’s name: Vu Anh Tu Student number: 23081350 Supervisor’s name: Do Thu Hang I, Do Thu Hang, hereby confirm that I have supervised the research and preparation of the student’s dissertation. I have reviewed the content, structure, and methodology used in the Dissertation and found it to be of satisfactory quality I am confident that the Dissertation meets the requirements set forth by the University of the West of England and is ready for examination. Signature of Student and date Signature of Supervisor and date Date: 08th September 2024 Date: 08th September 2024 ACKNOWLEDGEMENT First and foremost, I would like to express my greatest appreciation to my supervisor Dr.
Do Thu Hang for giving me immense knowledge, motivation to assist me completing my dissertation. This dissertation could not be done without her guidance. In addition, I would love to give special thanks to all lecturers in International School of Banking Academy (ISBA) for all supportive and essential guidance. Further more, I also want to give many thanks to ISBA for giving me all of the best conditions during my study at University and University of The West of England for creating this wonderful program and supporting from England.
I greatly appreciate all of my friends in UWE 7A class for collaborating, supporting, sharing with me all happiness, difficulties during my time at Banking Academy. Last but not least, thanks to my family for all the best given to me and assisted me to achieve this valuable Master’s degree. ABSTRACT The study titled “Impacts of Capital Structure on the Performance of Listed Companies in Vietnam” explores how capital structure, comprising debt and equity, influences firm performance. Focusing on Vietnamese companies listed on the Ho Chi Minh and Hanoi stock exchanges from 2012 to 2021, the research examines the relationships between capital structure factors—such as debt ratio, short-term loans, and long-term loans—and performance indicators like Return on Assets (ROA), Return on Equity (ROE), and Tobin’s Q.
Key macroeconomic variables, including GDP growth, inflation, and interest rates, are also integrated into the analysis. Using pooled Ordinary Least Squares (OLS), Fixed Effects, and Random Effects models, the findings suggest that higher debt ratios generally improve firm performance, while excessive short-term loans negatively impact profitability. Firm size positively correlates with performance, indicating that larger companies tend to perform better. The study highlights the crucial role of an optimized capital structure in enhancing firm performance, especially in Vietnam’s evolving economic environment.
Furthermore, the results offer practical implications for managers seeking to improve profitability through capital structure optimization. TABLE OF CONTENTS CHAPTER 1: INTRODUCTION. Background and Rationale. 3 CHAPTER 2: LITERATURE REVIEW AND RESEARCH MODEL.
Theories on Capital Structure and Firm Performance. Theories on Impact/Effect of Capital Structure on Firms’ Performance. Agency Cost Theory. Durand’s Classical Theory.
The Theory of Modigliani and Miller. Trade-off Theory. Pecking Order Theory. Research on the Impact of Capital Structure on Firm Performance.
Hypotheses and Research Model. Firm-specific Factors. Macro-variable Factors. 20 CHAPTER 3: RESEARCH METHODOLOGY.
Regression Analysis and Hypothesis Testing. 29 CHAPTER 4: FINDINGS AND DISCUSSION. Fixed Effects Model. Random Effects Model.
Model Selection: Pooled OLS, Fixed Effects, or Random Effects. Hausman Test Results. Random Effects Model Result. 52 CHAPTER 5: CONCLUSION AND IMPLICATIONS.
Implications for Management. Capital Structure Optimization. Short- and Long-term Loan Management. Firm Size Improves Performance .5 Corporate Governance and Risk Management.
59 LIST OF TABLES Table 2.1: Defining variables in the model .1: Summary Statistics of Key Variables .2: Mean Values of Variables by Year .4: Variance Inflation Factor (VIF) Values .1: Pooled OLS Regression Results for ROA .2: Pooled OLS Regression Results for ROE .3: Pooled OLS Regression Results for Tobin’s Q.4: Fixed Effects Model Results for ROA .5: Fixed Effects Model Results for ROE .6: Fixed Effects Model Results for Tobin’s Q.7: Random Effects Model Results for ROA .8: Random Effects Model Results for ROE .9: Random Effects Model Results for Tobin’s Q .11: Summarizing the Coefficients from the Random Effects Model .12: Summary of Hypotheses Testing Results. 49 ABBREVIATIONS Abbreviation Definition GDP Gross Domestic Product INF Inflation IR Interest Rate L-Loan Long-term loan ratio Lia Liabilities-to-assets ratio ROA Return on Assets ROE Return on Equity S-Loan Short-term loan ratio Size Firm size (Natural logarithm of total assets) Tobin’s Q Market value of a firm’s assets divided by their replacement cost 1 CHAPTER 1: INTRODUCTION 1. Background and Rationale Because of the complexities that surround a company’s capital structure, it is a subject that is highly contested and somewhat complicated all over the world. This is especially true when considering the possible impact that it could have on the enterprise’s profitability and general performance.
Capital structure, which is also known as finance leverage or financial structure, is a word that incorporates a variety of elements and is frequently referred to as capital structure or financial leverage (Watson & Head, 2007). In other words, it indicates the ratio of debt to equity that was utilized in order to fund the formation of assets by a company. The amount of debt that is utilized has a considerable influence on the conduct of managers and the decisions that are made regarding finances. With the help of financial ratios, such as the debt-to-equity ratio (also known as the long-term loan-to-equity ratio or the long-term loan-to-total capital employed ratio), one may evaluate the capital structure that exists within an organization.
The authors also claim that the capital structure ratio might include short- term and long-term loans, which is important for companies with protracted overdrafts. The importance of capital structure lies in its fundamental role in determining a firm’s financial stability and long-term growth potential. Company capital structure is the debt-equity combination used to fund operations and investments. Well-optimized capital structures allow enterprises to balance the tax benefits of leveraging debt with the hazards of excessive borrowing and financial hardship (Berger & Bonaccorsi Di Patti, 2006).
In emerging economies like Vietnam, where capital is scarce, the correct capital structure is essential for liquidity, cost reduction, and profitability (Aggarwal & Padhan, 2017; Nenu et al. Capital structure research is crucial because it helps organizations understand how financing choices affect performance (Weill, 2008; Ayuba et al. Capital structure research helps companies find the best debt- equity balance to enhance shareholder value and financial flexibility (Hirdinis, 2019). By examining capital structure components and company outcomes including profitability, market valuation, and risk exposure, companies can make informed financing decisions to sustain growth and competitiveness (Chowdhury & Chowdhury, 2010; Natsir & Yusbardini, 2020).
Capital structure research is vital for more than just 2 businesses. It advises investors, banks, and policymakers. These findings can help policymakers design sustainable and balanced business financing policies (Khan et al. This research can help investors assess capital structure-based risk-return profiles (Ramli et al.
Understanding capital structure dynamics helps banks create business-friendly loans and investments. Capital structure research boosts business performance and sustainability. Capital structure analysis helps Vietnamese companies weather market turbulence and economic changes and build resilience. Vietnamese companies need this research for capital structure optimization.
This research helps companies balance debt and equity funding by analyzing capital structure and firm performance. Understanding the right finance mix is essential for maximizing profits and limiting debt risks in emerging financial markets like Vietnam (Nguyen & Ramachandran, 2006). The study also shows how inflation, GDP, and interest rates affect firm performance. These findings help debt-dependent Vietnamese companies comprehend how external economic conditions affect their finances.
This knowledge helps companies anticipate economic and market changes. Vietnamese SMEs are more competitive thanks to this research. Controlling short- and long-term loans and optimizing business size boost performance, helping companies prosper domestically and internationally (Thanh, 2016). This research can help Vietnamese businesses grow sustainably.
Capital structure methods benefit capital- intensive industries like manufacturing and real estate, which require rigorous financial planning (Pham & Nguyen, 2013). This research helps Vietnamese enterprises improve their financial strategies, navigate economic instability, and perform better in a competitive business climate. In 2016, Thanh found a substantial association between capital structure and firm performance. However, actual findings might vary substantially, indicating that this link depends on the economic context, financial indicator recording methods, and research methodology.
Socio-political structures and a financial-banking system shape the Vietnamese stock market, so studying the impact of capital structure on firm performance will enrich capital structure theory. Vietnamese studies on this topic are important because they offer context-specific insights that global studies may miss. Firms have unique problems and opportunities in Vietnam’s transition from a centrally planned to a market-oriented economy. Understanding how capital structure 3 influences this setting helps find Vietnamese market strategies.
Nguyen and Ramachandran (2006) and Pham and Nguyen (2013) show how Vietnamese companies optimize capital structures despite economic growth, regulatory changes, and market dynamics. These localized investigations ensure financial solutions are theoretically sound and feasible in Vietnam. Combining global and Vietnamese studies explains how capital structure affects firm performance. Vietnam adapts and tests global theories and models to increase their applicability and robustness.
In contrast, Vietnamese studies may expand global debate with varied viewpoints. Research Objectives The thesis addressed these research goals.: - To make an in-depth literature review on capital structure - To analyze the impact of capital structure factors on the performance of listed companies in Vietnam - To make implications for management to enhance the performance of listed companies in Vietnam 1. Research Questions Accordingly, the thesis is to answer the following research questions: - What are theories and concepts on capital structure applied in the study? - How do capital structure factors affect the performance of listed companies in Vietnam? - Which implications for management should be made to enhance the performance of listed companies in Vietnam? 1. Research Structure In order to provide insights into the identification of an optimal capital structure that positively effects company performance, the purpose of this study is to investigate the 4 impact of capital structure on firm performance among firms that are listed on the Vietnamese stock market during the period of 2012–2021.
The paper is structured in the following manner: Chapter 1: Introduction Chapter 2: Literature review and research model Chapter 3: Research methodology Chapter 4: Findings and discussion Chapter 5: Conclusion and implications 5 CHAPTER 2: LITERATURE REVIEW AND RESEARCH MODEL 2. Theories on Capital Structure and Firm Performance 2. Capital Structure Capital structure is defined by Khan and Jain (1997) and Demirguc-Kunt et al. (2019) as the combination of debt and equity that is deployed by firms in order to support their operations over the long term.
The amount of capital that an organization has is measured by subtracting its short-term liabilities from its total assets. Capital is considered to be a source of long-term financing. Watson and Head (2007) state that the capital structure of a company is a representation of the proportion of liabilities of the company in comparison to the equity component that the company has adopted. The capital structure of the firm can be evaluated using a number of different financial indicators, including the debt-to-equity ratio, the long-term loan-to-equity ratio, the long-term loan ratio to total capital employed, and the current and long-term loan ratio/equity ratios.
In its most fundamental form, the capital structure is a reflection of the distribution of the total performance of the company between the owners (shareholders) and the creditors. Additionally, book or market value of assets, liabilities, and equity might be used as the basis for the evaluation of the capital structure while conducting the analysis. The difference between long-term loan, short- term loan, and loan debt is a significant factor in establishing the total debt of the business.