UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS DETERMINANTS OF CAPITAL STRUCTURE OF LISTED REAL ESTATE COMPANIES IN VIETNAM BY DO QUANG THAI MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, DECEMBER 2014 TIEU LUAN MOI download : skknchat@gmail.com UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS DETERMINANTS OF CAPITAL STRUCTURE OF LISTED REAL ESTATE COMPANIES IN VIETNAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By DO QUANG THAI Academic Supervisor: NGUYEN HOANG BAO HO CHI MINH CITY, DECEMBER 2014 TIEU LUAN MOI download : skknchat@gmail.com ABSTRACT This research focuses on the impact of determinants to capital structure with respect to 56 listed real estate companies in Vietnam from 2010 to 2013. Basing on two theories of trade-off and pecking order, capital structure, which is defined by debt ratio, is expected to provide the current prospect of Vietnamese real estate sector. The trade- off theory mentioned about the establishment of optimal capital structure for enterprises, while theory of pecking order implied the financing decisions by board of managements. For the methodology, Fixed Effect Model is used to test the results of regression model.
Non-random statistics of Fixed Effect Model would be more efficient and consistent in order to reduce the level of bias. The data set will be arranged by panel data, which combined both cross section and time series, helped to improve the significant results of regression model. Policy implications carefully mentioned about the limitation of both Pecking order and Trade-off theories in Vietnam evidence. For Pecking order, board of management prefers to use external financing budgets by issuing new bonds or stocks rather than internal financing capital.
The abuse of debt financing is also pointed out the hard pressures on banking system, securities markets, and the corporate governance structure of the listed firms. Besides that, Trade-off theory has limited its effect in Vietnam due to centrally planned economy. The government needs to change its administration in some listed real estate companies to create fair environment for the whole market. TIEU LUAN MOI download : skknchat@gmail.com TABLE OF CONTENTS CHAPTER I: PRESENTATION OF THESIS RESEARCH…………… 1 1.4 Scope of study……………………………………………………….5 Structure of thesis research…………………………………………… 6 CHAPTER II: LITERATURE REVIEW……………………………….1 Review of Empirical Studies………………………………………….2 Hypothesis of Variables…………………………………………….1 Dependent Variable: Debt Ratio………………………………… 11 2.2 Independent Variables…………………………………………… 11 CHAPTER III: RESEARCH METHODOLOGY…………………….1 Assumptions of Regression Model……………………………… 16 3.2 Limitations of Regression Model……………………………….3 Equation of Regression Model………………………………….5 Research Method………………………………………………… 19 CHAPTER IV: RESULTS AND EXPLANATIONS…………………….1 Overview of Real Estate Companies in Vietnam…………………….2 Impacts of Vietnamese Real Estate Market………………………….1 Inflow Capital to Real Estate Market…………………………….2 Land and Property Law………………………………………….3 Urbanization in Vietnam………………………………………… 24 TIEU LUAN MOI download : skknchat@gmail.4 Economic growth rate (GDP’s Growth rate)…………………….5 Results of Regression Model………………………………………….1 Multicollinearity Test by Correlation Matrix…………………….2 Using Wald-Test to Adjust Core Regression Model…………….4 Jarque-Bera Test for Normality (in Residuals)………………….1 Summary of Research Methodology………………………………….5 Further Researches…………………………………………………… 43 REFERENCES……………………………………………………………….
49 TIEU LUAN MOI download : skknchat@gmail.com LIST OF TABLES Table 2.1: Expected signs of five related determinants…………………….1: Correlation matrix of debt ratio and five related determinants….2: T-statistic of debt ratio and each of determinants……………….3: Leverage test of debt ratios……………………………………….4: Results of regression model by FEM…………………………….5: Regression model without DEBT_INTEREST…………………. 37 LIST OF FIGURES Figure 2.1: The Trade-off Model…………………………………………….2: The Pecking Order……………………………………………….1: Analytical framework of capital structure’s determinants……… 12 Figure 4.1: VN Index and Real Estate Index from the period 2010-2013….2: FDI flows to Vietnam from 2006-2013………………………….3: Number of Urban Cities in Vietnam from 1985-2012………….4: Vietnam GDP’s Growth Rate from 2004-2013………………….5: Descriptive Statistic of debt interest and debt ratio…………….6: Descriptive Statistic of depreciation ratio and debt ratio……….7: Descriptive Statistic of size and debt ratio……………………… 28 Figure 4.8: Descriptive Statistic of profitability and debt ratio…………….9: Descriptive Statistic of volatility and debt ratio………………… 30 TIEU LUAN MOI download : skknchat@gmail.com ABBREVATION EBITDA Earnings before interest, taxes, depreciation, and amortization EV Enterprise Value FDI Foreign Direct Investment FEM Fixed Effect Model GDP Gross Domestic Products HNX Hanoi Stock Exchange HSX Ho Chi Minh Stock Exchange REM Random Effect Model SMEs Small and Medium Enterprises SSC State Securities Commission of Vietnam WTO World Trade Organization TIEU LUAN MOI download : skknchat@gmail.com CHAPTER I: PRESENTATION OF THESIS RESEARCH In 2014, the Vietnamese real estate market eventually has lighted up positive signs of recovery, which followed the gains of the stock market, benefits of interest rate cuts, and expansionary changes in land and property ownership laws, stimulated the market’s liquidity. The first chapter involves in five parts to present the overview of thesis research. They consist of problem statement, research objectives, research questions, scope of study, and general structure of the study.1 PROBLEM STATEMENT The financial crisis from 2007 to 2009 in the United States were mentioned the worst crash of economic system in Wall Street since the Great Depression happened in 1930s by research of Lee, Rabanal and Sandri (January, 2010).
This trauma highly contributed to the failure of key businesses, reduced the living standards, and also resulted in a slowdown of whole national production activities. It initially started with the U.S mortgage market and spread out its impact over the world as “domino effect”. Vietnamese economy now is integrated its domestic market towards worldwide. Therefore, the industrial real estate market in Vietnam could not avoid to be influenced in this twisting curse.
According to the study of Jehan and Luong (2008), they provided the problems of Vietnam real estate market in front of global financial crisis. Their priority is given by lack of capital resources which came from credit agencies or financial institutions. The function of many credit markets seriously stopped to function at all and impacted on other industries. Most of local credit institutions admitted that the process took extreme constrains to provide lending credits to Small and Medium Enterprises (SMEs).
The problem is described as a downside bottleneck effect in the credit system because the tight monetary policies of governments. Basing on research paper of Pham et al. (August, 2013), 1 TIEU LUAN MOI download : skknchat@gmail.com they clarified transparently the important contribution of SMEs to Vietnamese economy. They also pointed out the policy implications to reduce the stress of bottle neck effect which may help government to restore economic growth.
In fact, the industrial real estate in Vietnam has experienced with the hardest landing since the last booming period of the housing marketing in 2001. Do, Zhang and Zheng (2014) demonstrated his argument of frozen liquidity in Vietnam real estate market. Due to low turnover, low disbursement, and sharp fall of housing prices, there is calculated approximate $3.1 billion USD of inventories for listed real estate companies in 2012. Their statistics announced that 10,077 of local real estate enterprises had to close their business due to low trading liquidity in 2013.
Ho Chi Minh and Hanoi are two largest areas which flooded in huge volume of inventories. In details, Hanoi had inventories of over 6,580 apartments and Ho Chi Minh had inventories of 7,830 apartments, which were worth of 12,900 billion VND and 17,480 billion VND respectively. When the total demand unexpectedly dropped to a lower level, the companies did not know how to settle down their current debts. Most of Vietnamese enterprises still are vulnerable due to not only volatility of financial market but also different economic scenarios.
One more reason is that most of Vietnamese enterprises are developing and limited experiences, so they may receive the prospect of default when the crisis suddenly come into them (Jehan and Luong, 2008). The main specification of the real estate market is to require a huge amount of capital to accomplish the housing projects. To evaluate the effectiveness of capital structure in real estate sector, time lags in different economic scenarios are the most struggling obstacles which somehow lead to wrong final financial decisions. The market may be immediately impacted by changes of the equity market, but it takes time to reflect on business activities.
Companies will fall deeper to the bottom if they do not resolve immediately the current issues by adjusting their capital structure to lower level. 2 TIEU LUAN MOI download : skknchat@gmail.com Vicol (2010) successfully demonstrated in his thesis research that real estate companies in the crisis scenarios would face a lot of issues relating to their own business activities such as financial cash flow, general operations, inventories, and depreciation methodology affecting their adjustments of capital structure. The author realizes that there is an abnormal phenomenon in Vietnamese enterprises related to real estate sector. The high debt ratio in their financial statement alerted the risk-on to business activities when the market crashed.
Although facing with high interest expenses and low level of market demand, most of real estate enterprises are willing to borrow more short-term debts in order to maintain their current business activities. This strange phenomenon will be explained by hypotheses and assumptions in this study are basing on two primary theories of corporate capital structure decisions which are ranked as theories of trade-off and pecking order. However, not only all of the problems came from the internal business operations, but also these potential externalities may impact on the consequences, such as monetary policies and management levels. By applying theories of the trade-off and pecking order, we expect to find down the determinants which will make any significant effect on capital structure in real estate corporations towards a specific optimal financial decision in the future.2 RESEARCH OBJECTIVES First of all, this research paper tries to verify clearly the concepts and priorities of defining corporate capital structure.
By Trade-off and Pecking Order theories, the author wants to test the impact of both theories on each of determinants. Secondly, the author would like to start with analyzing the debt ratio during the crisis. Kantor and Holdsworth (2010) showed that the leverage of firm gradually 3 TIEU LUAN MOI download : skknchat@gmail.com increased in the crisis and also continued to rise sharply in post-crisis due to time lags. These time lags were referred to the delay of the project construction.
The inefficient account receivables also determined the lack of capital or risky capital structure which owners had to borrow more debts in order to settle down these problems in the crisis stage. The research by Kang, Maysami, Mensah, and Pham (2013) demonstrated that the negative operating business of real estate companies performed gloomy visions in the crisis. High interest expenses just wiped out their earnings, and cash flow gradually shifted from positive sign to negative sign over this period. Furthermore, Kim and Stone (1999) figured out that high levered corporations might face an unexpected cut-off of lending credits from financial institutions which was imitated obviously in their thesis.
Its effect of financial distress may drive the company go bankrupt. The urgent response from board of directors is to divest in non-core projects and reduce goods or materials in inventory at a discount price to survive in the market. Finally, in the modern age, there is a new trend for firms in the crisis may use spin—off strategy which may help parent company to achieve an efficient capital structure or lower debt ratio by excluding several debt amounts. Basically, the spin-off strategy does not change the levered ratios in consolidated financial statement.
But this strategy somehow will help business to get better financial ratios of parent company. The parent company has high opportunities to be raised its credit by rating agencies. There are also alternative solutions of internal financing (Nguyen, 2010) such as pre-sale system to the buyers or diversified business sector in order to stay in the market. In general, the author specifies their mechanisms by typical examples in the data set.