INTRODUCTION 1. Relevance of the study The issue of determination of optimal capital structure at a certain point of time has been a challenge for any company. In fact, hardly anyone can solve the optimal capital structure problem. Companies often determine a certain level (or a range) of target capital structure before making the capital structure decision. In order to estimate this target capital structure, the financial managers should specify the determinants of firm’s capital structure, based on that the company’s target capital structure for each particular period is estimated. During the last decades, there have been many studies on the firm’s capital structure. Most of the studies use modern theory models to explain the capital structure choice and provide empirical evidence on the explainability of the models in practice. The object of study is the listed companies in developed countries that have much similarity in institutional condition, particularly the US, Europe, Japan etc. Previous studies not only analyze the effect of firm-specific factors, but also explore the impacts of the economic environment and industry factors on the firm’s capital structure. The negative impacts of the global financial crisis starting from 2008 have been the cause of the economic slowdown in Vietnam ever since. Up to the now, the situation hasn’t completely got over, evidenced by high inventories and difficulties in raising funds of the companies. This situation leads to the fact that firm’s production is contracted and sunk, a number of companies have to cease the operation or even collapse. This is the time that companies should have a comprehensive evaluation of their financial policy, including the financing policy. 2 For the above metioned meaning, there should be am overall assessment of the Vietnamese companies’ capital structure in order to understand the fundamental features of the firm’s financing policy. The objective is not to see whether the firm’s existing capital structure is optimal or not, but to analyze the factors affecting the Vietnamese companies’ capital structure, thereby helping the firm making capital structure policy effectively in the coming time. In spite of a number of studies on the firm’s financing policy undertaken in developing countries such as China, India, Pakistan, Thailand, the Central East European countries etc., few studies have been carried out to investigate the factors affecting the firm’s capital structure in Vietnam. The topic “A study of the factors affecting the capital structure of the companies listed on Vietnam stock market” was chosen for this PhD thesis and is expected to fill the gaps in the previous studies. 2. Research objectives and questions 2.1. Research objectives The overall objective of the thesis is to determine the factors affecting the capital structure of the companies listed on HoChiMinh Stock Exchange and Hanoi Stock Exchane. The specific objectives of the thesis include: (i) Analyse the current status, characteristics, trend of changes in Vietnamese listed companies’ capital structure, (ii) Identify the company specific factors affecting the capital structure of listed companies; (iii) Evaluate the impact of the state ownership factor on the firm’s capital structure; (iv) Assess the impact of the listing of shares on capital structure policy; (v) Demonstrate the significant differences in capital structure between manufactoring and non-manufactoring 3 industries; (vi) Analyse the impact of managerial factors of the Vietnamese companies on the capital structure; (vii) Propose the solutions for the companies and recommendations to the government and regulatory bodies to improve the capital structure of listed companies in Vietnam. 2.2. Research questions In order to achieve the seven research objectives mentioned above, the thesis focuses on answering the following five research questions: (i) What are the main features of capital structure of Vietnam listed companies?; (ii) Can the Vietnamese companies’ capital structure be explained by the capital structure theories?; (iii) How does the state ownership affect the capital structure policy?; (iv) How does the share listing affect the firm’s capital structure?; (v) Does the companies in manufactoring industries use more debt and others? (vi) How does companies adjust their capital structure policy since the global financial crisis; (vii) Beside the factors indentified by the theories, how does the managerial factors affect the firm’s capital structure? 3. Object and scope of the research 3.1. Object of the research Object of the thesis is the firm’s capital structure and factors affecting capital structure of the companies listed on the Vietnam stock market. The listed companies are chosen as object of the study because they represent the companies across different industries, sectors in the economy and have the best environment to implement the financial policy. 3.2. Scope of the research 3.2.1. From the geographical aspect 4 The thesis focuses on investigating factors affecting the capital structure of the companies listed on HoChiMinh Stock Exchange and Hanoi Stock Exchange. 3.2.2. From the timeline aspect The thesis analyses the impact of factors on the listed companies’ capital structure over the last 6 years. The secondary data was collected for the period from 2007 to 2012. Besides, the thesis also uses primary data collected from a survey of financial policy of Vietnamse companies conducted in 2013. 4. Structure of the thesis In addition to the introduction, conclusion, table of content, list of acronyms, list of tables, list of figures, list of references and appendix, the thesis is structured into 4 chapters as follows: Chapter 1: Theoretical framework and literature review of factors affecting company’s capital structure Chapter 2: Research methodology Chapter 3: Overview of listed companies and status of capital structure of listed companies in Vietnam Chapter 4: Analysis of factors affecting capital structure of listed companies in Vietnam Chapter 5: Solutions and recommendations to improve capital structure of listed companies in Vietnam 5. New contribution of the thesis The thesis has new contribution to the literature of the factors affecting the capital structure of listed companies from both theoretical and practical perspectives, specifically: From the theoretical perspective: Previous studies mostly focus on the financing policy of companies in developed countries. Recently, researchers tend to 5 expand the topic to the companies in developing countries, ussually in big economies such as China, India, Thailand or transitional countries in Central East Europe. In general, the research results are inconsitent. Due to the limitation in data collection, there still few studies on firm’s capital structure policy are undertaken in Vietnam, Most of these studies uses the financial data of listed companies over a short time period. This thesis expect to provide an addtional empirical evidence on the capital structure policy of Vietnamese companies, using both financial and non-financial data collected from the listed company database and primary source of data collected through company survey. In addition, the research model also supplements dummy variables that allow to evaluate the capital structure of companies with different ownership structures, stock trading exchanges, business sectors, evaluate changes in the companies’ capital structure before and after the financial crisis. The thesis also analyses the impact of the managerial factors, including management strategy, psychology, human resources and relationship network, which few earlier studies in developing countries account for. From the practical perspective: This thesis provides an overall assessment on the financing policy of the listed companies in Vietnam, thereby allowing the policy maker to indentify the type of companies that need to be supported by the government, seeking for the solutions to help companies undertaking their financing policy more effectively. 6 CHAPTER 1 THEORETICAL FRAMEWORK AND LITERATURE REVIEW OF FACTORS AFFECTING COMPANY’S CAPITAL STRUCTURE 1.1. Basic concept of capital structure 1.1.1. Company’s source of capital 1.1.1.1. Borrowings 1.1.1.2. Owner’s equities 1.1.2. Company’s capital structure 1.1.2.1. Definition Stephen A. Ross, Randolph W. Westerfield and Bradford D. Jordan (2003) in “Fundamental of Corporate Finance” states that the firm’s capital structure or financial leverage is the specific mixture of debt and equity that the firm uses to finance its business operation. 1.1.2.2. Capital structure measurement a. Company’s capital structure measures b. The book value based and market based capital structure 1.1.2.3. Optimal capital structure The optimal capital structure is the mix of debt and equity that minimize the firm’s cost of capital, thereby maximizing its value. The company’s capital structure, however, is affected by a number of factors which are not easy to indentify. Therefore, determination of optimal capital structure at a specific point of time is still a challenge for companies as well as researchers. In fact it is difficult to estimate a specific optimal capital structure and companies ussually estimate a range of optimal capital structure called target capital structure, based on that they make the capital 7 struture policy. At a certain point of time, a company has its own target capital structure level and the target level may change from time to time. 1.1.2.4. Factors affecting the company’s capital structure a. Company specific factors b. Industry factors c. Economic environment factors 1.2. Capital structure theories 1.2.1. Modigliani and Miller’s Capital Theory (M&M) 1.2.2. Trade-off Theory 1.2.3. Agency Costs Theory 1.2.4. Signalling Theory 1.2.5. Pecking Order Theory 1.2.5. Market-timing Theory 1.3. Literature review of factors affecting capital structure 1.3.1. Review of empirical studies around the world 1.3.2. Review of empirical studies in Vietnam CHAPTER 2 RESEARCH METHODOLOGY 2.1. Research design 8 Diagram 2.1: Analytical framework Source: Author 2.2. Empirical testing of impact of firm-specific factors on capital structure 2.2.1. Hypothesis development (1) Factors relating to M&M Theory (1963) and Trade-off Theory (2) Factors relating to Agency Cost (3) Influences of other factors 2.2.2. Data and sample To test for the impact of the aboved mentioned factors on the the capital structure of listed companies, the thesis uses balanced panel data of companies listed on HoChiMinh Stock Exchange and Hanoi Stock Exchange during the period from 2007 to 2012. These companies are at different asset size, operating in different businesses, and therefore are able to represent the whole companies Secondary analysis of firm-level data In-depth interview Company survey Verification of existing findings Development of survey instrument Factors affecting capital structure as predicted by financial theories Empirical testing of the impact of managerial factors on capital structure 9 in the economy. The total research sample is 193 non-financial companies (including 90 listed on the Hanoi Stock Exchange and 103 listed on the HoChiMinh Stock Exchange) from 2007 to 2012. 2.2.3. Research model Regression model: Based on the research questions, the thesis use a multiple linear regression model described as follows: y it = α i + β j X jit + γ 1 GOV + δ 1 FLOOR + λ 1 MANU + ∆ 1 YEARDUM + ɛ it Model variables Dependent variable is financial leverage measured by three debt ratios: total debt ratio, long-term debt ratio and short-term debt ratio. Explanatory variables include effective tax rate, non-debt tax shield, bankrupcy risk, business scale, profitability, asset tangibility, business growth, liquidity, state ownership dummy, stock exchange dummy, industry dummy and year of observation dummy. Estimation method Pooled Ordinary Least Square- Pooled OLS Fixed Effects Model-FEM Random Effects Model-REM 2.2.4. Descriptive statistics and correlation matrix 2.3. Empirical testing of the impact of the managerial factors on capital structure 2.3.1. Research hypothesis (1) Factors relating to management strategy (2) Factors relating to psychology (3) Factors relating to human resources (4) Factors relating to relationship network 2.3.2. Data and sample 10 Data are collected through online survey questionare. Of the 500 email sent, 112 are responded, however 52 of the responded results are excluded as the respondents are in unlisted companies, the remaining 60 responses are valid. 2.3.3. Research model and variables The analytical method used is the ordinary least square (OLS) for cross sectional data, the estimation function is as follows: y i = α i + β j X i + ɛ it The explained variables are also measured by: total debt, long-term debt ration and short-term debt ratio; explanatory variables include the management variables and controlling variables. 2.3.4. Descriptive statistics CHAPTER 3 OVERVIEW OF LISTED COMPANIES AND STATUS OF CAPITAL STRUCTURE OF LISTED COMPANIES IN VIETNAM 3.1. Overview of listed companies in Vietnam 3.1.1. Company reform and stock market development in Vietnam 3.1.1.1. Company reform in Vietnam The process of state-owned company reform has experienced the phases of history and achieved a lot of positive outcomes of which the most noted one is the synchoronous formation of regulation system creating legal framework for renovating, rearranging and restructuring of state-owned companies as well as renovating of the government’s controlling mechanism at state- owned companies. 3.1.1.2. Stock market development in Vietnam 11 a. Equity market After 13 years of establishment and development, Vietnam’s stock market has achieved significant growth rate. The stock market growth has created a channel for medium and long-term fund mobilization in addition to the traditional form such as bank credit and commercial credit. b. Bond market The Vietnam’s bond market is still immature and small in size, with total market capitalization account for 15% GDP. The liquidity is low and the secondary market is inactive. 3.1.2. Features of listing companies Listing the shares on stock exchanges allows the companies to be able to raise long-term fund at lower cost, however the listed companies must satisfy the information disclosure obligation to ensure that the investors are provided with sufficient, precise and updated information relating to the business operation of the companies as well as the changes that may affect the share price. Besides, the corporate governance requirements and standards for listed companies are more stringent than that for non-listed companies, the issue of internal control and external supervision of listed companies is also highly regulated. 3.1.3. Overview of listed companies in Vietnam a. The number and scale of listed companies At the end of 2013, the number of listed companies in Vietnam’s stock market is 678, operating in different areas of business, with total market capitalization of 946 trillions dong, equivalent to 31% of GDP. b. Ownership structure 12 Local institutional and individual investors are the major shareholders of the listed companies, holding approximately 78.19% of total number of shares outstanding. The government’s ownership is quite significant (14.05%); foreign investors hold nearly 7.78% of the total number of listed companies’ shares. c. Operating results The operating results in recent years indicate a positive signal of the economic recovery leading to the improved business performance of the listed companies. 3.2. The capital structure of Vietnamese listed companies 3.2.1. The status of fundraising structure of listed companies Statistics show that, compared to listed companies around the world, Vietnamese listed companies use relatively high debt ratio with total liabilities account for 55% of the firm’s total assets, of which debt account from 34-36%. It should be noted that most of the debt used by non-financial companies are short-term debt. Statistics on capital structure by sectors show different fundraising structure across different areas of business. Companies in the fields of industrials, basic material, comsumer goods, real estate have highest debt ratio, whereas health care, comsummer service companies have the lowest level of financial leverage. For all the industries, short-term debt dorminates in total debt. 3.2.2. Evaluation of fundraising structure of listed companies 3.2.2.1. Advantages First, listed companies are able to diversify their sources of fundraising and have more flexibility in raising funds. Second, listed companies can raise funds at lower cost than that of the non-listed companies. 13 3.2.2.2 Drawbacks and reasons Firstly, compared to other companies around the world, Vietnamese listed companies currently have high debt ratio; Secondly,most of company’s borrowings are bank loans, which are short-term and unstable, affecting the company’s long-term investment plan. Thirdly,fundraising activities are basically irrational, not completely based on the company’s fund uses demand. The above mentioned drawbacks are caused by the following reasons: First, our economy heavily relies on the banking system which is estimated to account for 80% of total assets of the whole financial system, the remainder are shared by the securities market, insurance companies etc. Second, the bond market is still immature and unattractive to the investors, therefore, doesn’t play the significant role in medium and long-term fundraising for the the listed companies through debt instrument issuance. Third, though stock market has experienced impressive development, the market is still highly volatile and of low liquidity, especially after the big drop since the global financial crisis. Fourth, due to the rapid increase in the number of listed companies and the rapid growth of the stock market attracted attention, the market contains certain problems when it faces difficulties such as the listed company’s corporate governance, information disclosure and risk management. CHAPTER 4 ANALYSIS OF FACTORS AFFECTING CAPITAL STRUCTURE OF LISTED COMPANIES IN VIETNAM 4.1. Testing of factors affecting capital structure 4.1.1. Testing of impact of company specific factors on capital structure 14 4.1.1.1. Choosing the estimated models: OLS, FEM and REM The Breusch and Pagan Lagrangian multiplier (LM test) shows that the Pooled OLS model is unsuitable. The Hausman test indicates that, for all the regression models of the three dependent variables, the Fixed Effect Model (FEM) is more efficient than the Random Effect Model (REM). 4.1.1.2. Tests for model specification Multicollinearity check Results of this test show that VIF associated with all the variables are less than 5. Therefore, there is little evidence of multicollinearity between variables. Serial correlation check Using the Lagram- Multiplier test to check the serial correlation for panel data, the results indicate the existence of serial correlation in all the three models. Cross-sectional dependence check The Pasaran CD test is employed to check whether the residuals are correlated in the FEM. The testing results do recognize the cross-sectional dependence problem in all the three models. Hetroskedasticity check The Modifed Wald test is implemented to check the hetroskedasticity problem on the FEM and it is evidenced that there exists the hetroskedasticity problem in all the three models. 4.1.1.3. Regression results This section presents the robust standard error estimates (by fixing the model mispecification problems) for the fixed effect models with depedent variables of total leverage (LEV), long-term leverage (LLEV) and short-term leverage (SLEV) using STATA 11 software. 15 4.1.1.4. Robustness check of the results Regression without the non-debt tax shield variable (ndts) Regression without the bankrupcy risk variable (zscore) Regression with interactive variables Basically, the estimation results support the findings from the initial model although the magnitude of the coefficients is slightly different. 4.1.2. Testing of impact of managerial factors on capital structure This section presents the estimation results of the OLS regression model with dependent varibales of total leverage (LEV), long-term leverage (LLEV) and short-term leverage (SLEV). 4.2. Anslysis of the factors affecting capital structure Table 4.12: Summary of analysis results Factors Sign of impact Notes Sign of impact agrees with proposed hypothesis Size (+) Profitability (-) Bankrupcy risk (-) For long-term debt only The value of collateral (+) For short-term debt only Liquidity (-) For short-term debt only The manager’s profit maximization objective (+) For short-term debt only The manager’s risk prospensity (+) Management experience (+) Network tie with banks (+) For long-term debt only Network tie with other companies (+) For short-term debt only Sign of impact disagrees with proposed hypothesis Business growth (+) Stock exchange (-) For short-term debt only Source: Stata Regression output First, empirical results of analysis on factors affecting the capital structure is quite consistent with that of other research undertaken in other countries around the world, however, the 16 explanatory power of the modern finance theory for capital structure policy of Vietnamese listed companies is limited due to the fact that the capital structure of companies in Vietnam is remarkably different from those in developed countries in that the short-term financing is dorminated and the the long-term debt is substantially low. - The trade-off theory is unable to explain the capital structure policy of listed companies in Vietnam. - The pecking-order theory partly explains the listed company’s capital structure, unlike the traditional pecking-order theory, the priority order when the listed companies raise funds is retained earnings- equities-debt. - The listed companiess capital structure is affected by the assymetric information between the companies and the lenders (commercial banks). Second, the state-owned companies are loosing their advantages over companies owned by other economic sectors in accessing bank loans. Third, there is little evidence that more stringent listing standards help to improve the long-term fundraising of the companies listed on the stock exchange. Fourth, the capital structure policy is also affected by the managerial factors such as the company’s profit maximization objective, manager’s risk prospensity, manager’s experience and the network tie between the company and the bank and other companies. 4.3. Policy and managerial implication Policy implication: - The government and regulatory bodies must be aware of the importance of supporting the listed companies to improve their ability to access to formal sources of capital. 17 - The government should speed up the process of rearranging, reorganizing, renovating, developing and increasing the operation efficiency of the privatized companies to improve their fund mobilization. - This study also implies the necessity of strengthening listed companies’ information disclosure regulation. - The stock exchanges should be restructured in the coming time to support the listed companies’ fundraising. Managerial implication: - First, managers must be aware of the fact that, in order to minimize the cost of capital, companies should improve corporate transparency and build reliability of the public by satisfying information disclosure requirement. - Companies should evaluate the impact of the risk aversion on firm’s business growth and development. Based on the nature of the area of business to decide whether they should maintain their risk attitude and how the risk aversion may affect the company’s survival. This is especially important to the companies operating in the fast growing and intensively competitive industries. - Companies should be aware of the benefit and importance of building a wide and strong network tie with lenders, business partners when they make capital structure dicision. CHAPTER 5 SOLUTION AND RECOMMENDATION TO IMPROVE CAPITAL STRUCTURE OF LISTED COMPANIES IN VIETNAM 5.1. Advantages and distadvantages to capital structure decision making 18 5.1.1. Advantages (1) The macroeconomic condition has been stable since 2012, evidenced by the stability of price index, interest rate indicators. (2) The banking system becoming more and more stable with higher liquidity and lower risk. (3) The stock market restructuring process has achieved certain outcomes. 5.1.2. Disadvantages First, the government still holds a significant influence in a number of listed companies. Second, the state-owned commercial banks account for more than 50% of the credit market share, bank loans largely flow to the big companies that have good relatioship with banks, the credit product is not diversified. Third, individual investors are the major participant, whereas institutional investors play a limited role on the securities market. Fourth, the insufficient and limited legal framework causes difficulties and problems to fundraising activities. Fifth, the lack of normativenes in financial management in Vietnamese listed companies may affect their capital structure decision making. 5.2. Solutions to improve capital structure of listed companies 5.2.1. Applying capital structure decision making model 19 Diagram 5.1. Capital structure decision making model Source: Author The thesis develops a model that can be used as a guideline for making capital structure decision of listed companies in Vietnam. This model is built based on the results of multi-dimentional analysis of the factors affacting the capital structure of listed companies in previous chapters. 5.2.2. Establishing a division responsible for capital management 5.2.3. Diversifying the sources of fundraising and building strong credit network tie 5.2.4. Improving accounting system and information disclosure process First, the listed companies should organize its accounting division suitable to its management structure. In addition, companies Factors affecting the willingness to use debt Factors affecting the demand to use debt Factors affecting the ability to raise debt Capital structure decisions Profitability Psychology: risk prospensity, control aversion Human resources: management experience Asymmetric information: size, asset tangibility, growth… Management strategy: growth/ profit maximization Network tie 20 should apply information technology in management, using accounting softwares to update daily data to ensure quick and timerly data accessibility. Second, beside the financial statement format as required in Vietnamese Accounting Standard, the listed companies should more clearly explained the “sensitive” indicators on the notes of the financial statement. Third, the listed companies should norminate information disclosure personel or secretary devision responsible for the following up of the company’s information disclosure rather than assign the chief accountants, chief finance officer or member of board of management to be in charge of this job. 5.2.5. Improving the quality of corporate governance - Increase the awareness of the importance of a sound corporate governance principles. - Establish the company’s own corporate governance and management standard. - Strengthen the role of controlling board and internal auditing division. - Strengthen the cooperation among the boad of management, the controlling board, the chief finance officer and the accounting division in making financial decision in general, capital structure decision in specific. 5.3. Recommendation to the government and regulatory authorities 5.3.1. Improving the legal framework that regulates fundraising activities of the listed companies - Draft on amended Corporate Law should supplement the following issues : (1) Amend the regulation on joint stock company’s [...]... using accounting based value of the Tax shield and bankrupcy cost are not the determinants of the capital components rather than a market based value Besides, there company’s capital structure Factors relating to the asymmetric could be other factors that affect the capital structure of the information between the company and lenders (banks) have a great companies but are still not accounted for in the. .. information before dissemination to improve their capital structure On the listed companies part, they should establish a good foundation for financial management to - Consider to increase sanction framework to prevent the support the capital structure decision making Companies should taking advantage of information disclosure violation for personal build their own capital structure decision making... institutional and industy the company’s managerial factors Although the analysis results are, influence Also, other research methods could be applied that allow a to some extent, consistent with that in other countries, the more detailed evaluation about the capital choice decisions of the explainability of the corporate finance theories for the Vietnamese companies in Vietnam listed companies is limited... to the subjective reasons from the company’s perspective and the objective reasons from the perspective of the nature of the economic structure in the transitional period and the status of development of Vietnam s financial market Based on results from the analysis, the thesis has found the solution to improve capital structure of the listed companies, and moreover, proposes recommendations to the. .. performance of the usage of funds etc privatized state-owned companies 5.3.2 - The key measure at the time being is to improve the Pushing ahead financial liberalization - Continue to liberalize the operation of financial institutions on financial market transparency of the companies corporate governance and financial information - Speed up the process of commercial bank restructuring to exploit financial... making model suitable to benefit their specific condition Macroeconomic policies by the government and regulatory authorities should aim at (1) improving the legal CONCLUSION environment of the listed company’s fundraising; (2) developing the Results of the thesis indicate that the capital structure of capital markets to provide companies with another channel of companies in Vietnam is remarkably different... model Therefore, a impact on the listed company’s capital structure policy Whereas, the larger, comprehensive and detailed database is recommended to company’s agency cost of equity does not significantly affect its design new variables to reflect the effect of other qualitative factors capital structure In addition, the capital structure is also affected by such as the corporate governance, the institutional...Second, the government should quickly issue legal capital to include a detail, clear and consistent definition of joint stock company’s capital; supplement basic concepts of joint stock framework that regulates the operation of the credit rating agency company’s capital, including charter capital and authorized share 5.3.4 Building credit rating system and developing the credit capital; (2) Supplement... medium and long term capital mobilization and (3) strengthening developed countries in that the short-term financing is dorminated corporate transparency to reduce cost of funds and the the long-term debt is substantially low This difference might Due to the limitation of data collection, this thesis measures limit the explanatory power of capital structure theory in Vietnam the company’s capital structure. .. strongly upgrade the stock exchange listing standards needs to be solved in time to come Second, reorganize operation of the stock exchanges 5.3.3 5.3.6 Third, amend regulations on foreign investment on stock market Strengthening supervision and sanction of information disclosure violation - Clearly define functions, duties of the organizations and To stimulate the development of corporate bond market . Influences of other factors 2.2.2. Data and sample To test for the impact of the aboved mentioned factors on the the capital structure of listed companies, the thesis uses balanced panel data of companies. capital structure and factors affecting capital structure of the companies listed on the Vietnam stock market. The listed companies are chosen as object of the study because they represent the. Chapter 4: Analysis of factors affecting capital structure of listed companies in Vietnam Chapter 5: Solutions and recommendations to improve capital structure of listed companies in Vietnam