Capital structure and corporate financial performance: Evidence from Southeast Asian construction firms

Dissertation submitted in partial fulfillment of the

Requirement for the MSc in Finance

FINANCE DISSERTATION ON

Capital structure and corporate financial performance:

Evidence from Southeast Asian construction firms

DAO LE QUAN

ID No: 21071796

Intake 5

Supervisor: Dr Chu Khanh Lan

September 2022

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Table of Contents

Chapter 1: Introduction 2

1.1. Research background 3

1.1.1 Background knowledge 3

1.1.2. Significance of research 5

1.2. Research objective 6

1.3. Research subjects 6

1.4. Research scope 6

1.5. Research questions 7

1.6. Research structure 7

1.7. Contribution of the research 9

1.8. New findings of research 9

Chapter 2: Literature review 10

2.1. Capital structure theories 10

2.1.1. The trade-off theory 12

2.1.2. Pecking order theory 13

2.1.3. The agency theory 14

2.1.4. The market timing theory 16

2.2. Corporate financial performance 18

2.3. Factors affecting Corporate financial performance 20

2.4. Leverage 21

2.5. Leverage and Corporate financial performance 22

2.6. Previous studies in South East - Asia 23

2.7. Proposed model 25

Chapter 3: Methodology 26

3.1. Research design 26

3.2. Research methodology 27

3.3. Research process 28

3.4. Data collection method 29

3.5. Variables 30

Chapter 4: Analysis and results 31

4.1. Impact on ROA 31

4.2. Impact on ROE 32

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4.3. Research some specific countries 33

4.3.1. Thailand 33

4.3.2. Singapore 35

4.3.3. Malaysia 36

4.3.4. Viet Nam 38

Chapter 5: Conclusions and recommendations 40

5.1. Discussion 40

5.2. Conclusions 42

5.3. Recommendations 43

REFERENCES 45

Appendix 1: Descriptive statistic 51

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Chapter 1: Introduction

1.1. Research background

1.1.1 Background knowledge

This study was built and developed with the main objective to evaluate the relationship

between capital structure and corporate financial performance of enterprises operating in

Southeast Asia. For the operation of many businesses, the use of financial leverage is an

indispensable issue to ensure the operation process. In recent years, Southeast Asian countries

have increased their economic integration; increased multilateral and bilateral cooperation

processes in the region (Kwok & Koh, 2017). To achieve growth, businesses need many

resources, including financial resources when mobilizing more from loans or increasing calls

for investment capital from shareholders and investors. However, increasing the use of

financial leverage or calling for more investment capital can bring many risks to the business.

Therefore, this study evaluates the influence of capital structure on corporate financial

performance of enterprises in Southeast Asia. Capital structure is the ratio between debt and

equity in the capital source of the business to finance production and business activities

(Anuar & Chin, 2016). A company's capital structure is the combination of debt and equity

used to finance its operations. In this sense, capital structure is the ratio between debt and

equity; capital to finance business activities.; if the enterprise is considered as an asset for

investment, the value of the enterprise is the benefit to investors at the present time as well as

in the future. Currently, there are many methods with different viewpoints to determine the

value of enterprises such as: from the absolute valuation point of view, there is the discounted

cash flow method or the asset method.

Capital structure is an important issue for any business, no matter how large or small. A

company's capital finance structures the growth and formation of capital that a company can

use to purchase assets and do business. According to the equity relationship criterion, the

capital structure component of a company usually consists of equity and debt capital. Equity

is the amount of capital owned by the business owner; can be one or more people. This is a

very important source of capital for an enterprise, not only limited to the legal issue of

establishing a business, but also demonstrating the financial autonomy of a company

(Ajanthan, 2013). Equity usually consists of own capital and retained earnings. For many

businesses, the owner's equity is often not an abundant resource. Therefore, many businesses

often borrow money to operate, leading to an increase in liabilities. On the other hand, raising

more capital to raise equity from investors for many businesses is not always easy (Weill,

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2008). The capital structure of an enterprise includes the structure of internal and external

funding sources that the enterprise uses in the course of its operations.

In general, the resource-based view of financial capital assumes that if a business is

constrained by financial resources; then the balance of use of these resources has a great

influence on output efficiency as well as financial efficiency to ensure business continuity.

Operating businesses are often limited in their ability to raise capital or use scale. When a

company increases its financial leverage; the company needs to develop a full scenario to pay

its payables on time and if these obligations are not met, creditors can ask the company to go

bankrupt. Therefore, a factor considered that affects the development ability of the enterprise

is the level of financial leverage; as well as the choice of debt structure or equity structure in

the business capital structure. When considering the cost of financial distress from using debt,

the trade-off theory also suggests that many potentially financially distressed firms will use

less debt in their capital structure. to avoid the risks and benefits of using debt makes sense

only when the company has to meet its tax obligations. In the case of companies, the tax

benefits of increased business efficiency are not the main consideration. The positive impact

of capital structure on a business is the financial flexibility to realize business opportunities as

well as the certainty that there is less risk in the business owner's business. as suggested by

this theory.

Many researchers construct optimal capital structures and prove the existence of this model

through actual control processes. The optimal capital structure is considered the efficient

capital structure; minimize the cost of operating capital and mobilize the resources of the

enterprise, while maximizing the value of effective use. Therefore, optimal capital structure

decisions have a strong impact on the success of a business (Zafar, Zeeshan and Ahmed,

2016). However, the huge challenge of building an optimal capital structure is not an easy

task; when the capital structure of the business often changes over time due to changes in cash

flow or business strategy. Exactly how companies choose the amount of debt and equity in

their capital structure is a mystery. Is the business mainly influenced by the traditional capital

structure in their industry or are there other reasons behind their actions? The answers to these

questions are important, because the actions managers take will affect the company's

performance, as well as how investors perceive the company.

Many research models on capital structure have been carried out to find out how to support

enterprises to operate effectively. In particular, Vietnam's economy has many small and

medium enterprises; even for many large enterprises, the main concern of business leaders is