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Dissertation

Capital structure and firm performance

- Empirical evidence from Vietnam SMEs –

Table of Content

List of Figures 4

List of Tables 5

Table of Content .................................................................................................................................. 1

Chapter 1. Introduction .................................................................................................................. 6

1.1 Rationale for chosen topic ......................................... Error! Bookmark not defined.

1.2 Research objectives and questions ............................................................................... 8

1.3 Research object and scope ........................................................................................... 9

1.4 Research approach ....................................................................................................... 9

1.5 Research significance................................................................................................. 10

1.6 Research materials ..................................................................................................... 10

1.7 Research structure ...................................................................................................... 10

Chapter 2. Literature Review....................................................................................................... 12

2.1 Overview on corporate capital structure .................................................................... 12

2.1.1 Concept of corporate finance ....................................................................................... 12

2.1.2 Structure of corporate finance ...................................................................................... 12

2.2 Empirical research on factors affecting corporate capital structure ........................... 12

2.2.1 Firm size....................................................................................................................... 12

2.2.2 Business performance .................................................................................................. 13

2.2.3 Business risk ................................................................................................................ 13

2.2.4 Asset allocation ............................................................................................................ 13

2.3 Relationship between capital structure and firm performance .................................. 13

2.4 Empirical model and criteria ...................................................................................... 13

2.5 Summary .................................................................................................................... 13

Chapter 3. Methodology .............................................................................................................. 14

3.1 Research design ......................................................................................................... 14

3.2 Data interpreting ........................................................................................................ 15

3.2.1 Sampling ...................................................................................................................... 15

3.2.2 Data analysis ................................................................................................................ 15

3.3 Research model .......................................................................................................... 15

3.3.1 Model 1: Leverage model ............................................................................................ 15

3.3.2 Model 2: Firm value model.......................................................................................... 16

3.3.3 Summary ...................................................................................................................... 17

Chapter 4. Result and Discussion ................................................................................................ 18

4.1 Hanoi Stock Exchange ............................................................................................... 18

4.1.1 Hanoi Stock Exchange ................................................................................................. 18

4.1.2 Duties and authorities of Hanoi Stock Exchange ........................................................ 18

4.1.3 Issuance and listed securities ....................................................................................... 18

4.1.4 Current practice:........................................................................................................... 18

4.2 Capital structure characteristics of companies listed ................................................. 18

4.2.1 General situation of business performance of companies listed .................................. 18

4.2.2 Actual financial structure of listed companies ............................................................. 18

4.3 Empirical results ........................................................................................................ 18

4.3.1 Sample characteristic ................................................................................................... 18

4.3.2 Sample description ...................................................................................................... 18

4.3.3 Regression analysis ...................................................................................................... 18

4.4 Summary .................................................................................................................... 18

Chapter 5. Conclusion and Recommendation ............................................................................. 20

5.1 Conclusion ................................................................................................................. 20

5.2 Recommendations ...................................................................................................... 20

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5.3 Limitations ................................................................................................................. 20

Chapter 6. Learning Statement .................................................................................................... 21

6.1 What I have studied ................................................................................................... 21

6.2 Improvement of limitation and future study .............................................................. 21

6.3 Contribution to personal development and career ..................................................... 21

References Error! Bookmark not defined.

List of Figures

Figure 3-1 Research paradigms ........................................................................................... 14

Figure 3-2 Research process ............................................................................................... 14

Figure 3-3 Model 1: Leverage Model ................................................................................. 16

Figure 3-4 Model 2: Firm Value Model .............................................................................. 17

Figure 4-1 Revenue of listing companies............................ Error! Bookmark not defined.

Figure 4-2 Profit after tax .................................................... Error! Bookmark not defined.

Figure 4-3 Sector average revenue ...................................... Error! Bookmark not defined.

Figure 4-4 Sector average profit ......................................... Error! Bookmark not defined.

Figure 4-5 Industry average profit on sales......................... Error! Bookmark not defined.

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List of Tables

Table 2-1 Corporate financial structure .............................................................................. 12

Table 2-2 Relationship between asset structure and capital resource structure .................. 12

Table 2-3 Impacts of firm size on financial structure ......................................................... 12

Table 3-1 Symbols for dependent variables in model 1 ...................................................... 15

Table 3-2 Symbols of independent variables model 1 ......................................................... 15

Table 3-3 Symbols of dependent variables in model 2 ....................................................... 16

Table 3-4 Symbols of independent variables in model 2 .................................................... 16

Table 4-1 Revenue and profit by sector .............................. Error! Bookmark not defined.

Table 4-2 Average revenue – profit by firm size ................ Error! Bookmark not defined.

Table 4-3 Descriptive Statistics in SPSS Vs 16.0 ............... Error! Bookmark not defined.

Table 4-4 Correlation matrix of variables in model 1 ......... Error! Bookmark not defined.

Table 4-5 Correlation matrix of variables in model 2 ........... Error! Bookmark not defined.

Table 4-6 with TDTA as dependent variable ...................... Error! Bookmark not defined.

Table 4-7 with TDTE as dependent variable ...................... Error! Bookmark not defined.

Table 4-8 with STDTA as dependent variable .................... Error! Bookmark not defined.

Table 4-9 with LTDTA as dependent variable ................... Error! Bookmark not defined.

Table 4-10 With TDTA as the independent variable .......... Error! Bookmark not defined.

Table 4-11 With TDTE as the independent variable .......... Error! Bookmark not defined.

Table 4-12 With STDTA as the independent variable ........ Error! Bookmark not defined.

Table 4-13 With LTDTA as the independent variable........ Error! Bookmark not defined.

Chapter 1. Introduction

1.1 Research Background

Most of the enterprises often finance their business through two sources, which are debt

and equity (Gasparro and Pagano, 2010; Covas and Haan, 2011). Which source should be the

prior one? Or financing at the same time two sources with the suitable ratio? In other words, is

there any optimal financial structure for each enterprise or not and if yes, how it affects the

firm value has always been the controversial topic in finance community for many decades.

Modigliani and Miller (1958) review with the result is that under perfect capital market

conditions, no taxes, no transaction cost, no asymmetric information, expectations in

homogeneous market, the firm value is independent of the capital structure. The work has

made contribution to the process of forming modern capital structure theory. Since then this

topic has drawn much interest of many economists and firm managers worldwide. With the

calculation of the corporate income tax, Modigliani and Miller (1963) have changed the

initial conclusions and come to recognize the tax shield because tax that needs paying can be

reduced, therefore the best capital structure of a firm should be 100% of debt but this does

not seem to make sense in practice.

Jensen and Meckling (1976) have introduced the concept of representative cost and have

researched in details about the nature of the representative which is generated from the

existence of debt and maximum equity. The study has presented the theory balancing these

above factors to achieve the best capital structure, together with the calculation that involves

at the same time corporate income tax, bankruptcy cost and representation cost. Based on the

extension of results of Castanias (1983); Barclay and Smith (2005); Hackbarth and Mauer

(2011) include both tax and bankruptcy cost to gain the best capital structure. Hamada et al.

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(1984); Grabowski (2009); Kolari and Velez-Pareja (2010) argue that: the existence of

corporate income tax shield without debt is the enough deduction to upset the

incompatibility theorem of financial leverage. Recently, Levin (2009); Rodrigues and

Stegemoller (2011); Sinn and Wollmershäuser (2012) report that companies tend to aim at

the target rate when they raise or withdraw capital or redeem the existing capital, It is also

realized that companies should use an appropriate debt structure to financial assets and

relative amount of equity to take advantage of financial growth opportunities.

One controversial matter that has been going on is that: companies that gain much profit

tend to be less dependent on debt in its capital structure than companies that gain less profit

in literature (Psillaki and Daskalakis, 2009; Czarnitzki and Kraft, 2009; Baker and Martin,

2011; Zhu, 2012).. Another controversial problem is that: companies that have high growth

rate have high debt-to-equity index. Bankruptcy cost (which is determined by the company

size) is also the important effect on the capital structure, in literture (Hwang et al., 2009; Lee

et al., 2011; Aysun and Honig, 2011). If those three factors are considered the crucial to the

capital structure, the three factors can be used to determine the efficiency of the company’s

performance later on. In fact, successful managers are people who can determine the optimal

capital structure by minimizing the financial cost therefore maximizing company’s profit. It

can be seen that capital structure affects the company’s performance thus affecting the

financial capacity and insolvency evidently. According to Aysun and Honig (2011) in the

angle of banking, debt-to-equity ratio of the company is the targets supporting the risk

management strategy of banks and is the base for them to determine insolvency as well as the

finance value of the company when facing bankruptcy.

In summary, capital structure and the effective company’s efficiency are critical issues

in theory and in practice. However there has not been much empirical evidence on the

relationship between capital structure and the company’s performances in both developing

and developed countries, particularly in Vietnam and also some limitations. Within the scope

of knowledge, the research title “Capital structure and firm performance: Empirical evidence

from Vietnam SMEs” is conducted surveying the impact of factors: profit, scope, growth and

tangible asset on the capital structure as well as impact of capital structure on the

performance of companies listed on Hanoi and Hochiminh stock market on their markets to

study and write the dissertation.

1.2 Research objectives and questions

Objectives of the research are:

Determining the effects of factors: profitability, size, growth opportunities,

tangible assets for capital structure of companies listed on the Hanoi Stock

Exchange.

Determining the effects of the capital structure on the company’s market value

combined with other variables such as the company size and growth opportunities

on the Hanoi securities trading floor (specifically effects of capital structure on the

company’s market value are these factors: the company size and growth

opportunities on Hanoi Stock Exchange)

In order to achieve the research objectives, research questions are developed as

following:

What is capital structure characteristics of companies listed in Hanoi Stock

Exchange?

Is there any relationship between capital structure and firm performance of

companies listed in Hanoi Stock Exchange?

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1.3 Research object and scope

This study is to have access to scientific researches on the capital structure of foreign and

domestic scientists as well as to have access to the basic theory on capital structure.

Object of the research: All of the non-financial companies on the Hanoi Securities trading

floor in early 2012

Research scope:

In terms of content, a number of issues on the capital structure and performance of

companies listed on Hanoi stock market are studied in the research; recommendations

are made to improve the operational efficiency of enterprises.

Statistics that are used in this research are extracted from the audited 2009 financial

reports of companies listed in Hanoi stock exchange until March 2010 and the

market value of these companies’ shares in 2009 – 2010.

1.4 Research approach

The research uses the main following methods:

Quantitative research that is based on the multiple linear regression model

estimates the relationship between profitability, size, growth level, value of

tangible asset and the capital structure; as well as the relationship between

financial leverage and the company’s market price.

Tools that are used to analyze data to conduct research are descriptive statistics,

multiple linear regression models with SPSS program

1.5 Research significance

Research results on corporate financial structure worldwide as well as the domestic

ones are systematized to make base for the research of this topic.

Trends of capital structure of companies in Hanoi stock market are identified and

discovered.

Determine effects of these factors: profitability, size, growth opportunities, value

of tangible assets on capital structure of companies listed on Hanoi stock

exchange and effects of capital structure on the market value of companies on

Hanoi stock exchange.

Some solutions are proposed to help those companies have orientation in

determining their financial structure.

1.6 Research materials

To conduct this research, materials used by author are economic, commercial dictionaries, a

number of monographs, textbooks on finance, articles, domestic and international scientific

articles, some master’s dissertations on the same major, companies’ data, information on websites

related to capital structure and enterprises’ performance and websites of stock companies in

Vietnam in current period.

1.7 Research structure

Apart from introduction, conclusion, references, appendix, the dissertation comprises of:

Chapter 1: General introduction about the dissertation

Chapter 2: Present theoretic framework of on the capital structure and corporate

performance of enterprises

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Chapter 3: Research methodology used to achieve the study purposes of this

dissertation

Chapter 4: Discussion on the results observed from analysis of determining

factors that affect the capital structure and performance relationship of the capital

structure and firm performance of companies listed on Vietnamese Stock

Exchange

Chapter 5: Summary the achievements concluded from this study as well as

propose recommendations

Chapter 2. Literature Review

2.1 Overview on corporate capital structure

2.1.1 Concept of corporate finance

2.1.2 Structure of corporate finance

Table 2-1 Corporate financial structure

Short term debt

Liabilities Long and medium term debt

Equity Equity

Table 2-2 Relationship between asset structure and capital resource structure

Current assets Short term debt

Fixed assets Medium and long term debt

Equity

2.2 Empirical research on factors affecting corporate capital structure

2.2.1 Firm size

Table 2-3 Impacts of firm size on financial structure

Impact Adverse impact Not affected

Kurshev and Strebulaev (2007)

Chai (2010)

González. and González (2012)

Jiraporn and Liu (2007)

San and Heng (2011)

Nguyen et al. (2012)

Garvey and Hanka (2002)

Frank and Goyal (2003)

Lemmon and Zender (2010)

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2.2.2 Business performance

2.2.3 Business risk

2.2.4 Asset allocation

2.3 Relationship between capital structure and firm performance

2.4 Empirical model and criteria

2.5 Summary

This chapter has provided literature review on corporate capital structure through the

concepts and structures of corporation finance. In order to select the variables for the study

(indicated in further chapter), the prior researches in regards of factors affecting corporate

capital structure has been examined. Moreover, the relationship between capital structure and

firm performance investigated previously is presented in order to develop the research

hypothesis (mentioned in next chapter).

Chapter 3. Methodology

As mentioned above, the study is in interests in considering the relationship between firm

profit, firm size, development opportunities, and fixed assets to capital structure as well as

understands impact of capital structure on market activities of companies on the Hanoi stock

exchange until March 2012. The research paradigm is presented as following:

Figure 3-1 Research paradigms

3.1 Research design

Figure 3-2 Research process

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3.2 Data interpreting

3.2.1 Sampling

3.2.2 Data analysis

3.3 Research model

3.3.1 Model 1: Leverage model

Table 3-1 Symbols for dependent variables in model 1

Firm’s capital structure (dependent variable) Symbol

Total Debt to Total Assets TDTA

Total Debt to Total Equity TDTE

Long-term Debt to Total Assets LTDTA

Short-term Debt to Total Assets STDTA

Table 3-2 Symbols of independent variables model 1

Independent variable Symbol

Firm performance determined by profit PROF

Growth opportunities GROWTH

Firm size SIZEL

Fixed assets TANG

Figure 3-3 Model 1: Leverage Model

3.3.2 Model 2: Firm value model

Table 3-3 Symbols of dependent variables in model 2

Firm performance(dependent variable) Symbol

Price to earnings ratio PE

Table 3-4 Symbols of independent variables in model 2

Independent variables Symbol

Total Debt to Total Assets TDTA

Total Debt to Total Equity TDTE

Long-term Debt to Total Assets LTDTA

Short-term Debt to Total Assets STDTA

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Growth Opportunities GROWTH

Firm Size SIZEL

Fixed assets TANG

Figure 3-4 Model 2: Firm Value Model

3.3.3 Summary

Chapter 4. Result and Discussion

4.1 Hanoi Stock Exchange

4.1.1 Hanoi Stock Exchange

4.1.2 Duties and authorities of Hanoi Stock Exchange

4.1.3 Issuance and listed securities

4.1.4 Current practice:

4.2 Capital structure characteristics of companies listed

4.2.1 General situation of business performance of companies listed

4.2.2 Actual financial structure of listed companies

4.3 Empirical results

4.3.1 Sample characteristic

4.3.2 Sample description

4.3.3 Regression analysis

4.4 Summary

Through studying actual practice of financial structure of listed companies, it can be seen

that companies have financial structure with relatively low debt ratio; their financial

autonomy capability is quite high. In loan structure, short term loan is the main to supplement

for current assets demand. However, to assess factors affecting capital structure above and

the capital structure’s effect on corporate value, each specific factor as well as capital

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structure need to be analyzed. In summary, for companies on HNX, capital structure is not

the crucial to their market operations. There is no significant impact of market performance

measure of P/E pointing out the inefficiency of Vietnam asset market.

Chapter 5. Conclusion and Recommendation

5.1 Conclusion

5.2 Recommendations

5.3 Limitations

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Chapter 6. Learning Statement

6.1 What I have studied

6.2 Improvement of limitation and future study

6.3 Contribution to personal development and career

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