Luận văn thạc sĩ UEH does firm characteristic matter in capital structure decision an empirical

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

DO FIRM CHARACTERISTICS MATTER IN CAPITAL STRUCTURE DECISION?

AN EMPIRICAL STUDY OF LISTED FOOD PROCESSING COMPANIES IN

VIETNAM

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

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

DINH THI THU

Academic Supervisors:

Dr. NGUYEN TRONG HOAI

Mr. NGUYEN XUAN THANH

HO CHI MINH CITY, October 2014

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ABSTRACT

The aim of this paper is to explore the firm-specific factors that affect the capital structure

of food processing companies listed in Vietnamese stock exchange. The paper firstly

reviews theories of capital structure: trade-off theory, pecking-order theory and other

related empirical studies. Seven factors are thereinafter concluded and discussed in the

studied model in respect of correlations and the determinants of capital structure by using

panel data procedures for a sample of 41 food processing companies listed on the

Vietnamese Stock Exchange during the period of 2007-2012. Pecking order theory

dominates in explaining financial decision of these firms. There are differences between

the determinants of long-term fund-raising and short-term fund-raising. Profitability, size,

tangibility, earnings volatility and liquidity are found statically significant to short-term

leverage whereas tangibility and earnings volatility is the most important factors impacting

the long-term leverage. Empirical findings suggest some policy recommendations for

sustainable development of the private sector in Vietnam.

Keywords: Capital structure; leverage; food processing; Vietnam listed companies; panel

data

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ACKNOWLEDGEMENT

Studying is a long and interesting journey. It would be more interesting if you have a chance

to get to know the talented people and learn from them. This paper could not have been

completed without support from my supervisors, friends and family.

I would like to convey profound appreciation to Dr. Nguyen Trong Hoai, Mr. Nguyen Xuan

Thanh and Mr. Truong Dang Thuy for their guidance in conducting this thesis. My special

thanks go to Mr. Nguyen Xuan Thanh for his valuable guidance, critical comments and warm

support which made this work possible at the crucial stages.

To my family and friends, my sincere gratitude for their unconditional love, support, and

encouragement.

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TABLE OF CONTENTS

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

1.1 Research background ........................................................................................................... 1

1.2 Problem statement................................................................................................................ 4

1.3 Research objectives.............................................................................................................. 6

1.4 Thesis structure .................................................................................................................... 7

CHAPTER 2. LITERATURE REVIEW....................................................................................... 8

2.1 Capital structure definition................................................................................................... 8

2.2 Capital structure theory........................................................................................................ 8

2.2.1 The trade-off theory..................................................................................................... 10

2.2.2 Pecking Order theory................................................................................................... 14

2.3 Comparative look on capital structure theories ................................................................. 15

2.4 Empirical evidence on determinants of capital structure ................................................... 17

2.4.1 Empirical evidence around the world.......................................................................... 17

2.4.2 Empirical studies in Vietnam ...................................................................................... 22

CHAPTER 3. OVERVIEW OF FOOD PROCESSING SECTOR IN VIETNAM .................... 27

CHAPTER 4. CAPITAL STRUCTURE DETERMINANTS – HYPOTHESES....................... 32

4.1 Profitability ........................................................................................................................ 32

4.2 Tangibility.......................................................................................................................... 33

4.3 Firm Size ............................................................................................................................ 34

4.4 Non-debt tax shields........................................................................................................... 34

4.5 Growth opportunities ......................................................................................................... 35

4.6. Earnings volatility............................................................................................................. 36

4.7. Liquidity............................................................................................................................ 36

CHAPTER 5. Methodology AND DATA................................................................................... 39

5.1. Data ................................................................................................................................... 39

5.2. Methods of estimation....................................................................................................... 39

CHAPTER 6. EMPIRICAL RESULTS ...................................................................................... 42

6.1. Descriptive statistics ......................................................................................................... 42

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6.2. Analysis of the correlation among variables..................................................................... 43

6.3. Empirical results ............................................................................................................... 46

CHAPTER 7. CONCLUSION .................................................................................................... 53

7.1. Findings............................................................................................................................. 53

7.2. Policy implications............................................................................................................ 54

7.3 Limitations......................................................................................................................... 57

REFERENCES ............................................................................................................................ 59

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LIST OF FIRGURES

Figure 1. Conceptual framework for firm-level determinants of capital structure…………..37

LIST OF TABLES

Table 1. Market capitalization of Vietnam’s stock exchange (2004 – 2012)………..…….…. 3

Table 2. A summary of selected studies on determinants of capital structure in Vietnam…..26

Table 3. Output and export contribution of food processing sector……………………...…..27

Table 4. Number of enterprises manufacturing food and beverages by size of employees

and capital resources .………………….…..……………………...…………………………29

Table 5. Some financial indicators of Vietnamese enterprises……………………..………..30

Table 6. Summary of determinants of capital structure: theory and measurement..…….…...38

Table 7. Summary statistics of sample variables………….………………………………....43

Table 8. Correlation coefficients among variables and VIF coefficients…...…………...…...45

Table 9. Results of Hausman tests for Model 1, 2 and 3……………………………..……....47

Table 10. Estimation results of firm-level factors impacting on total leverage, short-term

leverage and long-term leverage using FEM……………………...…………………………48

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CHAPTER 1. INTRODUCTION

1.1 Research background

Vietnam is a developing country in Southeast Asian region with total area of 331,210

square kilometers and population of over 91 million. Recovering from the war damage

and the rigidities of a centrally-planned economy, the country has become among the

fastest growing economies over the past decades thanks to the Doi Moi reforms in

1986. During this period, the private sector has emerged as one of the most important

driving forces in Vietnam’s economic development. The Enterprise Law in 2000 is

conceived as a remarkable milestone for development of the private business in

Vietnam. This law mainstreams the registration and operation of private companies,

implements a regime of property rights and guarantees equal treatment among

economic sectors. As a result, the period of 2000-2005 witnessed a boom in private

sector development. It is estimated that 160,672 private enterprises were registered

with a total combined capital of US$20 billion during the period of 2000-2005, which

is 3.2 times more than the total number of private enterprises registered during 1991-

1999. The private sector has played an increasingly important role in job creation,

poverty reduction and economic growth. Vietnamese private enterprises annually

contribute about 42% to overall GDP and provide 56.3% of the country's regular job

supply. Nevertheless, these private firms have been facing many challenges in their

existence and competition. One of the biggest challenges is financial capacity. The

majority of Vietnamese firms are small-sized in terms of labor and capital. More than

90 percent of the local businesses are small and medium enterprises. These firms have

been facing tough competition from foreign companies in technology and financial

capacity. Vietnam joined the WTO in 2007 following a long negotiation process of

more than ten years and became the member of Trans-Pacific Partnership trade

agreement in 2010. These turning points have brought both opportunities and

challenges to Vietnamese firms. They have chances to compete in the international

market and expand their markets via goods export. On the other hand, they also face

tough competition from foreign companies when these firms have a free access to the

Vietnamese market. To compete with foreign firms, the local ones need to keep high

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