Luận văn thạc sĩ UEH capital structure and corporate performance, evidence in vietnam

UNIVERSITY OF ECONOMICS

HO CHI MINH CITY

VIETNAM

INSTITUTE OF SOCIAL STUDIES

THE HAGUE

THE NETHERLANDS

VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN

DEVELOPMENT ECONOMICS

CAPITAL STRUCTURE AND CORPORATE PERFORMANCE:

EVIDENCE IN VIETNAM

A thesis submitted in partial fulfillment of requirements for the degree of

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

PHẠM THỊ THÚY DIỄM

Academic Supervisor

Dr. CAO HÀO THI

HO CHI MINH CITY, NOVEMBER 2013

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CERTIFICATION

“I certify that the substance of this thesis has not already been submitted for any degree

and has not been currently submitted for any other degree.

I certify that to the best of my knowledge and help received in preparing this thesis and all

sources used have acknowledged in this thesis”.

PHAM THI THUY DIEM

Date: … November 2013

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ACKNOWLEGMENTS

Foremost, I would like to thank so much to Vietnam – The Netherlands programme for

Master of Art in Development Economics (MDE programme), I have been studying useful

knowledge. Besides, I thank so much for all lecturers because of their valuable

contributions as well as all my friends because of their helps during period of studying.

I would like to thank deeply to my academic supervisor, Doctor Cao Hao Thi for his

enthusiastic supports, advices and great encouragements during my completion of the

thesis.

Last but not least, I am deeply grateful to my family, especially my mother who supports in

my life as well as lovely thank to my husband Nguyen Phuc Loc and his family.

One time again, I am grateful to all of you. Thank you so much!

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ABSTRACT

This article aims to examine the influence of capital structure on corporate performance

and the reverse causality from corporate performance to capital structure, using data from

150 Vietnamese listed manufacturing firms from 2008 to 2012. Comparing the results of

random effects model (REM) and fixed effects model (FEM), the more appropriate model

will be discussed some empirical results. The study found that the capital structure has

significant and positive relationship with corporate performance in associated with debt to

assets (TDTA) and short-term debt to assets (STDTA). In contrast, corporate performance

is insignificantly influenced by debt to assets (TDTA). The results also state that there is no

existence of optimal capital structure decision. The reverse causality from corporate

performance to capital structure, corporate performance has a significant and positive

influence on capital structure in related with debt to assets (TDTA) and short-term debt to

assets (STDTA) but corporate performance has no meaning with long-term debt to assets

(LTDTA).

Keywords: capital structure, leverage, corporate performance

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TABLE OF CONTENTS

CERTIFICATION................................................................................................................i

ACKNOWLEGMENTS......................................................................................................ii

ABSTRACT.........................................................................................................................iii

LIST OF FIGURES...........................................................................................................vii

LIST OF TABLES............................................................................................................viii

ABBREVIATIONS.............................................................................................................ix

Chapter 1: INTROCDUCTION......................................................................................... 1

1.1. Problem statement.................................................................................................... 1

1.2. Research objective.................................................................................................... 2

1.3. Research questions................................................................................................... 2

1.4. Research scope and data........................................................................................... 3

1.5. Thesis structure ........................................................................................................ 3

Chapter 2: LITERATURE REVIEW................................................................................ 5

2.1. Conceptual issues..................................................................................................... 5

2.1.1. Capital structure................................................................................................. 5

2.1.2. Corporate performance...................................................................................... 6

2.2. Theoretical Literature............................................................................................... 7

2.2.1. Theories of capital structure and corporate performance.................................. 7

2.2.2. Theories of reverse causality from corporate performance to capital structure

12

2.3. Empirical Literature ............................................................................................... 13

2.3.1. The impacts of capital structure on corporate performance ............................ 13

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2.3.2. The reverse causality from corporate performance to capital structure .......... 18

2.4. Conceptual framework ........................................................................................... 21

Chapter 3: RESEARCH METHODOLOGY ................................................................. 25

3.1. Research process.................................................................................................... 25

3.2. Measurement of variables...................................................................................... 27

3.2.1. Capital structure variable................................................................................. 27

3.1.2. Corporate performance variable ...................................................................... 28

3.1.3. Control variables for firm characteristics........................................................ 29

3.3. Hypothesis development ........................................................................................ 34

3.4. Model specification................................................................................................ 35

3.4.1. Capital structure and corporate performance .................................................. 35

3.3.2. Reverse causality from corporate performance to capital structure................ 37

3.4. Estimation strategy................................................................................................. 38

3.5. Data collection........................................................................................................ 39

Chapter 4: EMPIRICAL ANALYSIS RESULTS.......................................................... 41

4.1. Descriptive statistics............................................................................................... 41

4.2. Empirical results..................................................................................................... 44

4.2.1. Corporate performance and capital structure .................................................. 44

4.2.2. Reverse causality from corporate performance to capital structure................ 50

Chapter 5: CONCLUSIONS ............................................................................................ 55

5.1. Conclusions............................................................................................................ 55

5.2. Limitations and suggestion of further research...................................................... 56

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REFERENCE..................................................................................................................... 58

APPENDIX......................................................................................................................... 65

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LIST OF FIGURES

Figure 2.1: The trade-off of capital structure......................................................................... 9

Figure 2.2: Conceptual framework for the impacts of capital structure on corporate

performance ......................................................................................................................... 22

Figure 2.3: Conceptual framework for the reverse causality from corporate performance to

capital structure.................................................................................................................... 23

Figure 3.1: Research process............................................................................................... 27

Figure 3.2: Analytical framework for the reverse causality from corporate performance to

capital structure.................................................................................................................... 34

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LIST OF TABLES

Table 2.1: A summary of the empirical results analyzing the relationship between capital

structure and corporate performance ................................................................................... 14

Table 2.2: A summary of the empirical results the reverse causality from corporate

performance to capital structure .......................................................................................... 20

Table 3.1: Control variables used in some previous studies................................................ 32

Table 3.2: Analytical framework for the impact of capital structure on corporate

performance ......................................................................................................................... 33

Table 3.3: Variable description and expected sign for Model 1.......................................... 36

Table 3.4: Variable description and expected sign for Model 2.......................................... 37

Table 3.5: Variable description and expected sign for Model 3.......................................... 38

Table 4.1: Summary statistics of the explanatory variables, 2008-2012............................. 42

Table 4.2: Correlation matrix of the explanatory variables, during 2008-2012.................. 43

Table 4.3: Results of Hausman test ..................................................................................... 44

Table 4.4: Choice between fixed effects model and random effects model........................ 45

Table 4.5: Corporate performance and capital structure ..................................................... 47

Table 4.6: Corporate performance and optimal capital structure ........................................ 49

Table 4.7: Reverse causality from corporate performance to capital structure ................... 53

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ABBREVIATIONS

EFF: Effectiveness

FEM: Fixed effects regression model

Growth: Sales growth

HNX: Hanoi Stock Exchange

HOSE: Ho Chi Minh Stock Exchange

LEV: Leverage

LTDTA: Long-term debt to total assets

M&M: Modigliani and Miller

PROFIT: Profitability

ROA: Return on total assets

ROE: Return on total equity

REM: Random effects regression model

Size: Firm size

STDTA: Short-term debt to total assets

Tang: Tangibility

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Chapter 1: INTRODUCTION

1.1. Problem statement

The connection between the level of equity in financial leverage and corporate

performance has been considered as an important theme in the corporate governance

literature (Williamson, 1988; Short, 1994; Shleifer and Vishny, 1997). The argument goes

back to Modigliani and Miller classic theory in 1958, which indicated that the relationship

between capital structure and corporate’ value is independent under some unreasonable

assumptions in the real world. In contrast, based on these illusive assumptions, a number of

researchers have claimed that the corporate’ performance and behavior might be effected

by the level of debt (Kraus and Litzenberger, 1973; Jensen and Meckling, 1976); however,

their statements may be opposite.

Many empirical studies have been conducted to examine the influence of capital structure

on corporate performance. A number of previous studies have claimed that capital

structure have a statistical and significant negative effect on corporate performance

(Pushner, 1995; Majumdar and Chhibber, 1999; Zeitun and Tian, 2007; Soumadi and

Hayajneh, 2008). Nevertheless, a number of studies found that capital structure is positive

related to corporate performance (Nickell et al., 1997; Margaritis and Psillaki, 2010; Gill et

al., 2011). However, there is some evidence that capital structure and corporate

performance is independent (Krishnan and Moyer, 1997; Laurent Weill, 2007; King and

Santor, 2008).

Many researchers have suggested that the reverse causality from corporate performance to

capital structure have negative correlation (Rajan and Zingales (1995; Noulas and

Genimakis, 2011). In contrast, there is some evidence that the existence of positive

relationship about the reverse causality from corporate performance to capital structure

(Feidakis and Rovolis, 2007; Margaritis and Psillaki, 2010).

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