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This study investigates the relationship between firm capital structure and firm performance. The author explores both the effect of firm performance on firm captial structure as well as the effect of capital structure on firm market performance using crosssectional data representing of 162 Vietnamese companies in Hochiminh Stock Exchange for 2008. According to the results, a firm profitability is found to have a significant and negative impact on all firm capital structure. This finding support pecking order theory of Myers and Majluf (1984). An interesting finding is that firm size has a positive and significant impact on the leverage, which consistent with a previous study of Rajan and Zingales (1995), and indicating that a firm size is an important determinant of corporate capital structure. Firm capital structure is confirmed to have positive and significant impacts on firm market performance which is measured by Tobin’s Q. The author also finds that firm growth opportunities have a positive and significant impact on the firm value Tobin’s Q.
MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY oOo HUỲNH ANH KIỆT CAPITAL STRUCTURE AND FIRM PERFORMANCE: CASE STUDY: LISTED COMPANIES IN HOCHIMINH STOCK EXCHANGE MASTER THESIS Ho Chi Minh City – 2010 MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY oOo HUỲNH ANH KIỆT CAPITAL STRUCTURE AND FIRM PERFORMANCE: CASE STUDY: LISTED COMPANIES IN HOCHIMINH STOCK EXCHANGE MAJOR: BUSINESS ADMINISTRATION MAJOR CODE: 60.34.05 MASTER THESIS INSTRUCTOR : PROFESSOR NGUYỄN ĐÔNG PHONG Ho Chi Minh City – 2010 i ACKNOWLEDGEMENT I would like to express my deepest gratitude to my research Instructor, Professor Nguyen Dong Phong for his intensive support, valuable suggestions, guidance and encouragement during the course of my study. My sincere thanks are also due to Dr. Vo Thi Quy and Dr. Tran Ha Minh Quan for their valuable time as the members of the proposal examination committee. Their comments and constructive suggestions were of great help in my completing this study. My sincere thanks is extended to Assistant Professor Nguyen Dinh Tho, Dr. Tran Ha Minh Quan, Dr. Truong Tan Thanh, Dr. Pham Huu Hong Thai, Dr. Bui Thanh Trang for their valuable time as members of examination committee. Their comments and suggestions were of great value for my study. I would like to express my sincere gratitude to all of my teachers at Faculty of Business Administration and Postgraduate Faculty, University of Econimics Hochiminh City for their teaching and guidance during my MBA course. I would like to specially express my thanks to all of my classmates, my friends from www.caohockinhte.vn for their support and encouragement. I would also like to avail this opportunity to express my appreciation to Professor Nguyen Dong Phong, UEH Board of Directors for creating MBA program in English and Dr. Tran Ha Minh Quan for his support during the course. Finally, I heartily dedicate this study to my beloved parents and my wife, Vu Thi Huyen who have always sacrificed to encourage and support me during my study. ii ABSTRACT This study investigates the relationship between firm capital structure and firm performance. The author explores both the effect of firm performance on firm captial structure as well as the effect of capital structure on firm market performance using cross-sectional data representing of 162 Vietnamese companies in Hochiminh Stock Exchange for 2008. According to the results, a firm profitability is found to have a significant and negative impact on all firm capital structure. This finding support pecking order theory of Myers and Majluf (1984). An interesting finding is that firm size has a positive and significant impact on the leverage, which consistent with a previous study of Rajan and Zingales (1995), and indicating that a firm size is an important determinant of corporate capital structure. Firm capital structure is confirmed to have positive and significant impacts on firm market performance which is measured by Tobin’s Q. The author also finds that firm growth opportunities have a positive and significant impact on the firm value Tobin’s Q. Keywords: Capital structure, corporate performance, Vietnam, HOSE. iii TABLE OF CONTENTS ACKNOWLEDGEMENT i ABSTRACT ii TABLE OF CONTENTS iii LIST OF FIGURES v LIST OF TABLES vi ABBREVIATIONS vii CHAPTER 1: INTRODUCTION 1 1.1 BACKGROUND 1 1.2 RESEARCH PROBLEMS 3 1.3 RESEARCH OBJECTIVES 4 1.4 RESEARCH METHODOLOGY AND SCOPE 5 1.5 STRUCTURE OF THE STUDY 5 CHAPTER 2: LITERATURE REVIEW 7 2.1 INTRODUCTION 7 2.2 CAPITAL STRUCTURE 7 2.3 FIRM PERFORMANCE 11 2.4 HYPOTHESIS AND EMPIRICAL MODEL 12 2.4.1. Model 1: The Leverage Model 12 2.4.2. Model 2: The Firm Value Model 15 CHAPTER 3: RESEARCH DESIGN 18 3.1 INTRODUCTION 18 3.2 DATA 18 3.3 RESEARCH DESIGN 18 3.3.1. Research Sample 19 3.3.2. Data Analysis Method 20 3.4 VARIABLES MEASUREMENT FOR MODEL 1 20 3.4.1. Dependent Variables 20 3.4.2. Independent Variables 21 3.5 VARIABLES MEASUREMENT FOR MODEL 2 21 3.5.1. Dependent Variables 21 3.5.2. Independent Variables 22 3.6 FRAMEWORK OF THE STUDY 23 3.7 SUMMARY 24 CHAPTER 4: EMPIRICAL RESULTS OF THE RESEARCH 25 4.1 INTRODUCTION 25 4.2 CHARACTERISTICS OF RESEARCH SAMPLES 25 4.3 DESCRIPTIVE STATISTICS 26 4.4 REGRESSION ANALYSIS 29 4.4.1. Model 1: The Leverage Model 29 4.4.2. Model 2: The Firm Value Model 32 CHAPTER 5: CONCLUSIONS, RECOMMENDATIONS AND LIMITATIONS 38 5.1 INTRODUCTION 38 5.2 CONCLUSIONS 38 iv 5.3 RECOMMENDATIONS 39 5.4 LIMITATIONS 40 REFERENCES 41 APPENDIX A 44 APPENDIX B 45 APPENDIX C 51 v LIST OF FIGURES Figure 1: The Leverage Model 14 Figure 2: The Firm Value Model 17 Figure 3: Research Process 19 Figure 4: Framework of the study 23 vi LIST OF TABLES Table 1: Dependent variables for model 1 20 Table 2: Independent variables for model 1 21 Table 3: Dependent variables for model 2 22 Table 4: Independent variables for model 2 22 Table 5: Summary Statistics of the Explanatory Variables 26 Table 6: Correlation Matrix of the Explanatory Variables for Model 1 28 Table 7: Correlation Matrix of the Explanatory Variables for Model 2 28 Table 8: Estimate Results for Model 1 29 Table 9: Estimate Results for Model 2 Using TDTA 32 Table 10: Estimate Results for Model 2 Using TDTE 33 Table 11: Estimate Results for Model 2 Using LTDTA 34 Table 12: Estimate Results for Model 2 Using STDTA 35 vii ABBREVIATIONS HOSE Hochiminh Stock Exchange GROWTH Growth opportunities LTDTA Long-term debt to total assets PE Price-to-Earnings Ratio PROF Profitability ROA Return on assets ROE Return on equity ROI Return on investment SIZE Firm Size STDTA Short-term debt to total assets TA Asset tangibility TDTE Total debt to total equity TDTA Total debt to total assets TOBIN Tobin’s Q Capital Structure and Firm Performance Page 1 CHAPTER 1: INTRODUCTION 1.1 BACKGROUND The theory of the capital structure is an important reference theory in firm's financing policy. The capital structure refers to firm includes mixture of debt and equity financing. The topic of optimal capital structure has been the subject of many studies. The modern theory of the capital structure originate from the contribution of Modigliani and Miller in 1958, under the perfect capital market assumption 1 Jensen and Meckling (1976) introduce the concept of agency costs and investigate the nature of the agency costs generated by the existence of debt and outside equity. When considering corporation tax, bankrupt costs and agency costs at the same time, trade-off theory can be introduced to derive the existence of the optimum capital structure. Leland (1994) extends the results of Merton (1974) and Black and Cox (1976) to include taxes, bankruptcy costs to derive the optimal capital structure. Deangelo and Masulis (1980) argue that the existence of non-debt corporate tax shields such as depreciation deductions is sufficient to overturn the leverages irrelevancy theorem. Hovakimian, Opler, and Titman (2001) test the hypothesis that firms tend to a target ratio when they either raise new capital or retire or repurchase existing capital. They found firms should use relatively more debt to finance assets in place and relatively more equity to finance growth opportunities. that if there is no bankrupt cost and capital markets are frictionless, if without taxes, the firm value is independent with the structure of the capital. In 1963, under considering the corporate taxes, Modigliani and Miller modified the conclusion to recognize tax shield. Because debt can reduce the tax to pay, so the best capital structure of enterprises should be 100% of the debt. But this seems to be unreasonable in the real world. It has also been argued that profitable firms are less likely to depend on debt in their capital structure than less profitable ones. It has been argued that firms with a high growth rate have a high debt to equity ratio. Bankruptcy costs (proxied by firm size) are also found to be an important effect on capital structure (Kraus and 1 Perfect capital markets means that the following assumptions hold: (a) there are no taxes, (b) there are no transaction costs, (c) there is symmetrical information, (d) there are homogenous expectations, and (e) investors can borrow at the same rate as corporations. [...]... is to examine the effect of firm performance on firm capital structure combined with others variables such as firm size, growth and asset tangibility on firm capital structure In addition, the author will explore the effect of firm capital structure on firm market performance, known as firm value of listed firms in Hochiminh Stock Exchange Page 3 Capital Structure and Firm Performance 1.3 RESEARCH OBJECTIVES... investigate the relationship between firm capital structure and firm performance, is an issue for both academics and practitioners There is lack of empirical evidence that investigate the relationship between firm capital structure and firm performance in Vietnam In 2008, Trần Hùng Sơn and Trần Viết Hoàng tested the relationship between capital structure and firm performance by using data sample of... efficiency and other economic and political factors could affect a firm performance and its reliability (See Abdel Shahid, 2003) Firm performance may also affect the choice of capital structure As Berger and Bonaccorsi di Patti (2006) point out, regressions of firm performance on leverage may confound the effects of capital structure on performance with the reverse relationship from performance on capital structure. .. STDTA, LTDTA) H4 Firm Asset Tangibility (TA) Page 14 Capital Structure and Firm Performance 2.4.2 Model 2: The Firm Value Model A firm performance could be affected by the capital structure choice and by the structure of debt maturity Debt maturity affects a firm investment options Also, the tax rate is expected to have an impact on a firm performance So, investigating the impact of capital structure variables... in Hochiminh Stock Exchange? • What are the relationship between firm capital structure, size, growth opportunities and firm market performance of listed firms in Hochiminh Stock Exchange? Two research variables of the topic: • Capital structure • Firm performance Page 4 Capital Structure and Firm Performance 1.4 RESEARCH METHODOLOGY AND SCOPE The object of this research is all listed non-financial... model to estimate the relationship between firm profitability, size, growth opportunities, asset tangibility and capital structure, and the effect of capital structure on corporate market performance The research process was presented as figure 3: Page 18 Capital Structure and Firm Performance Figure 3: Research Process Literature Review (Capital Structure, Firm Performance, Hypotheses, Model) Colleting... Page 16 Capital Structure and Firm Performance Figure 2: The Firm Value Model Firm Leverage (Leverage) Firm Growth (Growth) H5 H6 Firm Value (Tobin’s Q, PE) H7 Firm Size (Size) Page 17 Capital Structure and Firm Performance CHAPTER 3: RESEARCH DESIGN 3.1 INTRODUCTION Based on the research objectives and scope, research methodology concerned in chapter 1, and literature review and empirical model presented... smaller firms Gleason, among others, finds that firm size has a positive and significant effect on firm performance (ROA) Tian & Zeitun (2007) find that firm size has a positive and significant impact on firm performance ROA, PROF, and Tobin’s Q In contrast, many other researchers such as Mudambi and Nicosia (1998), Lauterbach and Vaninsky (1999), Durand and Coeuderoy (2001), and Tzelepis and Skuras... issue regarding the capital structure and firm performance are important for both academics and practitioners There is lack of empirical evidence about the effect of firm performance on capital structure in Vietnam Then, the first objective of this study is to examine the effect which firm performance has on capital structure of listed companies in Hochiminh Stock Exchange Trần Hùng Sơn and Trần Viết Hoàng.. .Capital Structure and Firm Performance Litzenberger, 1973; Harris and Raviv, 1991) If these three factors are considered as determinants of capital structure, then these factors could be used to determine the firm performance In practice, firm managers who are able to identify the optimal capital structure are rewarded by minimizing a firm s cost of finance thereby maximizing the firm revenue