Luận văn thạc sĩ UEH determinants of capital structure evidence from listed companies on hochiminh

MINISTRY OF EDUCATION AND TRAINING

UNIVERSITY OF ECONOMICS HOCHIMINH CITY

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VĂNG NGUYỄN PHƯƠNG THẢO

DETERMINANTS OF CAPITAL STRUCTURE

EVIDENCE FROM LISTED COMPANIES ON

HOCHIMINH STOCK EXCHANGE

MASTER THESIS

Ho Chi Minh City - 2011

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MINISTRY OF EDUCATION AND TRAINING

UNIVERSITY OF ECONOMICS HOCHIMINH CITY

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VĂNG NGUYỄN PHƯƠNG THẢO

DETERMINANTS OF CAPITAL STRUCTURE

EVIDENCE FROM LISTED COMPANIES ON

HOCHIMINH STOCK EXCHANGE

MAJOR: BANKING AND FINANCE

MAJOR CODE : 60.31.12

MASTER THESIS

INSTRUCTOR : ASSOC. PROF. – DR. PHẠM VĂN NĂNG

Ho Chi Minh City - 2011

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ACKNOWLEDGEMENT

I would like to express my deepest gratitude to my research Instructor,

Associate Professor – Doctor Pham Van Nang for his intensive support, valuable

suggestions, guidance and encouragement during the course of my study.

My sincere gratitude are also due to Doctor Vo Xuan Vinh for his valuable

feedback on the problems of the study.

I would like to express my thanks to all of my lecturers at Banking and

Finance Faculty, University of Economics Hochiminh City for their teaching and

guidance during my Master of Banking and Finance course.

Moreover, I would like to specially express my thanks to all of my

classmates, my friends for their support and encouragement.

My final and greatest thanks are sent to my family including my parents, my

brothers, my husband and my baby who are the greatest encouragement for me to

overcome all difficulties in my life.

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ABSTRACT

This thesis research the explanatory power of some of the literary theories

that have been propounded to explain variations in capital structures across firms.

In specific, this thesis investigates capital structure determinants of firms listed on

Hochiminh Stock Exchange based on a panel data set from 2006 to 2010

comprising 77 companies. Main characteristic of Vietnamese firms, including

firms listed on Hochiminh Stock Exchange, is short-term debt comprises a

considerable part of firms’ total debt. An analysis of determinants of leverage

based on total debt ratios may hide significant differences in the determinants of

long and short-term forms of debt. Therefore, this thesis studies determinants of

total debt ratios as well as determinants of short-term and long-term debt ratios.

The thesis consider the impact of those ratios on capital structure during period

2006-2010 to consider whether there was any different from before, in and after

the financial crisis. The thesis also tests the different choice of capital structure of

eleven groups of industries. And the last answer should be find out is the

difference of capital structure of firms with different size.

Keywords: Capital structure, Vietnam, HOSE.

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CONTENTS

Acknowledgement .........................................................................................i

Abstract ................................................................................................ ii

Contents .......................................................................................................iii

List of Tables ...............................................................................................vi

Abbreviations ....................................................................................................vii

CHAPTER 1: INTRODUCTION ............................................................................ 1

1.1. Introduction ...................................................................................................... 1

1.2. Research objectives .......................................................................................... 2

1.3. Research methodology...................................................................................... 2

1.4. The structure of the research............................................................................. 3

CHAPTER 2: LITERATURE REVIEW.................................................................. 5

2.1. Introduction ...................................................................................................... 5

2.2. Theoretical and Empirical Findings.................................................................. 5

2.3. Potential determinants of capital structure......................................................... 7

2.3.1. Profitability (PROF) ...................................................................................... 8

2.3.2. Firm size (SIZE)............................................................................................ 9

2.3.3. Assets tangibility (TANG)........................................................................... 10

2.3.4. Growth opportunities (GRO) ....................................................................... 10

2.3.5. Non-debt tax shield (NDTS)........................................................................ 11

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2.3.6. Income variability (INVAR)........................................................................ 12

2.3.7. Time dummies............................................................................................. 12

2.3.8. Industry Dummies ....................................................................................... 13

2.4. Measures of capital structure/financial leverage.............................................. 13

2.4.1. Financial leverage of firms........................................................................... 13

2.4.2. Decomposition of total debt into short-term and long-term debt ratios......... 16

2.5. Conclusion...................................................................................................... 19

CHAPTER 3: RESEARCH METHODOLOGY .................................................... 21

3.1. Introduction .................................................................................................... 21

3.2. Data specifications.......................................................................................... 21

3.2.1 Research sample description ......................................................................... 21

3.2.2. Explanatory variables .................................................................................. 22

3.2.3 Dependent variables...................................................................................... 22

3.3. Empirical model specifications....................................................................... 22

3.3.1 Model 1 ........................................................................................................ 23

3.3.2 Model 2 ........................................................................................................ 24

3.3.3 Model 3 ........................................................................................................ 24

CHAPTER 4: DATA ANALYSIS AND FINDINGS ............................................ 26

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4.1 Introduction ..................................................................................................... 26

4.2 Descriptive statistics........................................................................................ 26

4.3 Correlation matrix of explanatory variables..................................................... 29

4.4 Results of Model 1........................................................................................... 30

4.5 Results of Model 2........................................................................................... 33

4.6 Results of Model 3........................................................................................... 35

4.7 Robustness tests............................................................................................... 38

CHAPTER 5: CONCLUSION .............................................................................. 42

5.1 Introduction ..................................................................................................... 42

5.2 Conclusion....................................................................................................... 42

5.3 Limitations...................................................................................................... 44

5.4 Recommendations ........................................................................................... 45

References ..................................................................................................47

Appendix A – Regression results of 3 models.............................................. 52

Appendix B – Research data set (2006 – 2010)............................................ 76

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LIST OF TABLES

Table 2.1. Short-term vs. long-term debt.............................................................17

Table 2.2. Short-term debt ratios and firm sizes ....................................................19

Table 2.3. Long-term debt ratios and firm sizes ..................................................19

Table 3.1. Potential determinants of capital structure, corresponding measures,

and expected effect on financial leverage ...........................................23

Table 4.1. Summary of the industry structure ..................................................... 27

Table 4.2. Descriptive statistics of the variables used in the study for the non￾financial firms listed on HOSE for the period 2006 to 2010 ............... 28

Table 4.3. Comparative means for different size of firms ................................... 28

Table 4.4. Correlation coefficients among the explanatory variables .................. 29

Table 4.5. The reported results of Model 1 .....................................................31

Table 4.6. The reported results of Model 2 ........................................................ 34

Table 4.7. The reported results of Model 3 ........................................................ 36

Table 4.8. Results of Model 1 : Fixed Effects versus Random Effects ................ 39

Table 4.9. Results of Model 3 : Fixed Effects versus Random Effects ................ 41

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ABBREVIATIONS

HOSE Hochiminh Stock Exchange

PROF Profitability

SIZE Firm size

TANG Asset tangibility

GRO Growth opportunities

NDTS Non-debt tax shield

INVAR Income variability

TDTA Total debt to total assets

SDTA Short-term debt to total assets

LDTA Long-term debt to total assets

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Determinants of Capital Structure

1

CHAPTER 1: INTRODUCTION

1.1. Introduction

One of the tough challenges that firms face is the choice of capital structure.

Capital structure decision is important because it affects the financial performance

of the firm. The capital structure of a firm is defined by Abor J. (2005, p.438-45) as

specific mix of debt and equity that a firm uses to finance its operations.

The modern theory of capital structure was firstly established by Modigliani and

Miller (1958). Thirty-seven years later, Rajan and Zingales (1995, p. 1421) stated:

“Theory has clearly made some progress on the subject. We now understand the

most important departures from the Modigliani and Miller assumptions that make

capital structure relevant to a firm’s value. However, very little is known about the

empirical relevance of the different theories”. Similarly, Harris and Raviv (1991, p.

299) in their survey of capital structure theories claimed: “The models surveyed

have identified a large number of potential determinants of capital structure. The

empirical work so far has not, however, sorted out which of these are important in

various contexts.” Thus, several conditional theories of capital structure exist (none

is universal), but very little is known about their empirical relevance. Moreover, the

existing empirical evidence is based mainly on data from developed countries (G7

countries). Findings based on data from developing countries have not appeared

until recently – for example Booth et al. (2001) or Huang and Song (2002). So far,

no study has been published based on data from Vietnam (especially the

Hochiminh Stock Exchange (HOSE)), at least to the extent of this author’s

knowledge. The main goal of this thesis is to fill this gap, exploring the case of the

listed firms in HOSE.

The remainder of this chapter provides general introduction about the

research objectives, research methodology and the structure of the research.

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