INTRODUCTION
Background of the research
Capital structure is crucial in corporate financial management, influencing a company's financial stability and growth potential Numerous research studies focus on identifying the optimal capital structure model tailored to individual businesses, highlighting its significance in strategic financial planning.
The primary responsibility of a financial manager is to achieve an optimal balance between debt and equity capital, thereby enhancing the company's capital structure According to Tong and Green (2005), this pursuit of an ideal corporate capital structure is crucial, as a lower cost of capital can significantly maximize a company's value, as noted by Shah and Kahn (2007).
To address financial deficits, a firm's manager must secure funding for new investments to ensure stable operations and make sound financial decisions One effective approach is to restructure the firm's capital, particularly through debt restructuring This process requires the manager to possess strong financial knowledge and analytical skills, enabling them to minimize capital costs and maximize the firm's value A well-structured capital composition includes debt and equity, with funding sources being retained earnings, debt, and equity Retained earnings are the most cost-effective option as they incur no borrowing costs, while the cost of debt is generally lower than the cost of equity since shareholders demand a higher return than the interest rate By conducting thorough capital analysis, managers can judiciously raise funds for investments through the issuance of debt, equity, or by utilizing retained earnings.
Previously, there are two studies from Franco Modigliani and Merton H Miller in
In 1958, the article "Cost of Capital, Corporate Finance and Theory of Investment" posited that a company's capital structure does not affect its value However, a revised publication in 1963 titled "Corporate Income Taxes and the Cost of Capital: A Correction" argued that corporate income tax does influence a company's value, suggesting that capital structure does indeed impact firm valuation These pivotal theories have inspired extensive research on capital structure models globally, revealing varying outcomes between developing countries (Graham and Harvey, 2001; Tong and Green, 2005; Shah and Khan, 2007) and developed countries (Mazur, 2007; Rajan and Zingales, 1995) concerning the factors that affect a firm's capital structure.
Previous research has explored how leverage within a company's capital structure interacts with various external factors, including growth opportunities, firm size, profitability, ownership type, intangible assets, non-debt tax shields, overall performance, dividend policies, uniqueness, taxation, volatility, and asset structure.
This research examines the impact of six independent variables—growth opportunities, firm size, profitability, tangibility (collateral), ownership type, and the effect of non-debt tax shields—on the dependent variable of leverage.
Research problem
Numerous empirical studies have explored the factors influencing capital structure, employing various techniques, models, and variables across different countries These diverse approaches have yielded mixed results regarding the impact of factors on capital structure For instance, research indicates a negative relationship between profitability and firm size with leverage according to pecking order theory (Kester, 1986; Shyam-Sunder and Myers, 1999; Titman and Wessels, 1988), while trade-off theory suggests a positive impact (Bowen, Daley, and Huber, 1982) This study specifically examines the capital structure of listed companies in Vietnam, addressing the existing gap in understanding capital structure selection globally Additionally, firm managers can utilize these theories to evaluate the costs and benefits of capital structure to effectively finance financial deficits or new investments.
Research question
The research is going to answer the following major research question:
Which factors have significant effects on capital structure of companies in Viet Nam?
Research objectives
The capital structure decision is significantly shaped by the trade-off theory and the pecking order theory This research aims to analyze the impact of six independent variables—profitability, asset tangibility, growth opportunities, firm size, ownership type, and non-debt tax shields—on the debt ratio (leverage ratio) By investigating these variables, the study seeks to uncover the relationship between them and leverage, as suggested by both the trade-off and pecking order theories.
The objectives of the research are to investigate how do firms in Viet Nam finance for investments by internal or external resources?
This research aims to explore the impact of six independent variables on the debt ratio of publicly listed companies in Vietnam, rather than developing a universal theory applicable to all populations It seeks to identify the factors that influence capital structure decisions and how firms finance their investments, whether through internal or external resources Ultimately, this study will guide companies in making informed choices regarding their capital structure.
CHAPTER 1: Introduction CHAPTER 2: Literature review and hypotheses
The structure of the research is depicted in the figure above Chapter 1 offers a comprehensive introduction to the thesis, covering essential elements such as the background, research problem, research question, research objectives, anticipated contributions, and the overall organization of the study.
Chapter 2 reviews about the theoretical framework consisting of capital structure, the trade -off theory, the pecking order theory, market timing theory together with signalling problem, agency cost problem, and the asymmetric information problem This chapter provides an overview regarding to capital structure from previous studies in many countries, and identifies dependent and independent variables and link these to relevant research question, expectation, and hypotheses of the research
The work in chapter 3 is to introduce research methodology Chapter 4 integrates both presentations of data and analysis of results
Chapter 5 is to summarize the main points of the research objectives and draws the conclusions, recommendation, and suggestion for future research Finally, the appendices show information gathered during the research.
Organization of the study
CHAPTER 1: Introduction CHAPTER 2: Literature review and hypotheses
The research organization is depicted in the figure above Chapter 1 offers a comprehensive introduction to the thesis, covering essential aspects such as the background, research problem, research question, research objectives, expected contributions, and the overall structure of the study.
Chapter 2 reviews about the theoretical framework consisting of capital structure, the trade -off theory, the pecking order theory, market timing theory together with signalling problem, agency cost problem, and the asymmetric information problem This chapter provides an overview regarding to capital structure from previous studies in many countries, and identifies dependent and independent variables and link these to relevant research question, expectation, and hypotheses of the research
The work in chapter 3 is to introduce research methodology Chapter 4 integrates both presentations of data and analysis of results
Chapter 5 is to summarize the main points of the research objectives and draws the conclusions, recommendation, and suggestion for future research Finally, the appendices show information gathered during the research.
LITERATURE REVIEW AND HYPOTHESES
Theoretical background
Capital structure of firms is a combination of debt, equity and other sources of finance that firms use to fund for its operation
The pioneer study of capital structure is coming from Franco Modigliani and
Merton H Miller introduced the M&M theory in 1958, asserting that a firm's value remains unaffected by its capital structure, regardless of whether it finances investments through debt or equity, under ideal conditions of a tax-free, transaction-free, and perfect market This theory posited that an unlevered firm holds the same value as a levered one However, it faced significant criticism for relying on unrealistic assumptions, prompting a revision in 1963 that incorporated the impact of corporate income taxes on firm value Subsequent research has explored the relationship between capital structure and factors like agency costs and bankruptcy costs, revealing a complex interplay that varies across different countries and industries Despite extensive studies, findings on capital structure remain inconsistent due to the diverse methodologies employed in research.
This theory focuses on determining the ideal capital structure by balancing the advantages of corporate income tax benefits from debt against the costs associated with financial distress It emphasizes the importance of tax shields while considering the potential deadweight losses incurred during financial difficulties, as highlighted by Kraus and others.
The theory emphasizes the importance of balancing the tax benefits of debt financing against the costs of potential bankruptcy Companies often utilize debt to fund working capital or new investment opportunities, but they must also carefully manage their debt-to-equity ratio This balance ensures that the advantages gained from the tax deductions on debt outweigh the financial distress costs associated with high levels of borrowing.
The trade-off theory significantly influences capital structure, as various studies indicate that independent variables affect leverage in both positive and negative ways Factors positively impacting leverage include firm size (Marsh, 1982; Rajan and Zingales, 1995; Chittenden et al., 1996) and asset structure (Long and Malitz, 1985), while growth opportunities (Long and Malitz, 1985) and the cost of financial distress (Bradley, Jarrell, and Kim, 1984; Walsh and Ryan, 1997) negatively affect it Additionally, tax shields also contribute positively to leverage (Bradley, Jarrell, and Kim, 1984).
The concept of working capital financing highlights the various methods businesses can use to raise funds, distinguishing between internal and external finance Internal finance, primarily through retained earnings, is favored over external sources, which include debt and equity According to the pecking order theory proposed by Myers and Majluf (1984), companies prefer internal finance due to asymmetric information, ranking retained earnings as superior to debt, and debt as preferable to equity.
Market timing theory posits that firms make financing decisions—whether to issue debt or equity—based on current market conditions Companies tend to issue equity when stock prices are high or on an upward trend, as noted by Hovakimian et al (2004) and Graham and Harvey (2001) This approach suggests that firms are more inclined to issue equity when market valuations are favorable, while repurchasing equity (treasury stocks) during periods of low market values, as highlighted by Baker and Wurgler (2002) Additionally, Mayers (1984) argues that firms strategically time their stock issuances to coincide with high security valuations, favoring equity over debt in such scenarios.
To finance working capital, firms often choose to issue debt when interest rates are lower than historical levels, as noted by Barry et al (2008) Additionally, a survey conducted by Harvey et al (2004) reveals that finance managers tend to issue debt securities during periods of low interest rates.
The market timing theory posits that financial instruments can be mispriced, and firms are capable of identifying this mispricing due to asymmetric information This theory suggests that a firm's choice between debt and equity financing is influenced by the perceived mispricing of financial instruments at the time they seek funding for new investments.
Firms communicate essential information regarding their dividend policies, income, and growth opportunities, which can signal either positive or negative perceptions about the company For example, a high dividend payout often indicates that management is confident about future profitability This positive signal allows external investors to accurately assess stock prices, while creditors and banks can make informed decisions regarding credit support for the company (Baker and Powell, 1999).
Mayers (1984) states that when firms announce a stock issuance, the stock price trends to fall Otherwise the stock price rises when firms announce a stock repurchase
In today's complex economy, the size of a firm presents significant challenges for managers tasked with ensuring smooth and efficient operations on behalf of the owners To effectively manage a large organization, a manager must possess unique skills and qualities that set them apart from others It is essential for firms to delineate management and ownership roles, often necessitating the hiring of external talent to optimize profitability However, this arrangement can lead to conflicts of interest, as managers and owners may have differing objectives, resulting in agency costs that can impact overall firm performance.
Conflicts of interest between managers, who possess more information, and shareholders, who have less, can lead to agency costs, as highlighted by Jensen and Meckling (1976) For example, in the absence of viable investment opportunities, managers may misuse available free cash for overinvestment, aiming to expand the firm or enhance their personal benefits, even if the projects are ineffective This overinvestment can diminish firm value and profitability, prompting shareholders to establish agreements with managers to align firm objectives To further safeguard their interests, shareholders often hire controllers to monitor managerial activities, although this oversight can stifle managers' creativity and initiative, as noted by Burkat, Gromb, and Panunzi (1997).
Asymmetric information theory highlights the disparity in information distribution between inside and outside investors, where larger investors receive more comprehensive data compared to smaller ones This imbalance can lead to variations in a firm's market value relative to its true worth, giving informed investors a competitive edge in transactions For example, managers may manipulate information when issuing debt, potentially misleading creditors and resulting in poor valuation decisions Additionally, internal investors can leverage their superior information to strategically buy or sell stocks for future profits Ultimately, asymmetric information contributes to market failure and exacerbates moral hazard issues.
Asymmetric information creates conflicts between shareholders and debt holders, as managers, representing shareholders, borrow funds from debt holders based on the plans they present Debt holders provide loans for these investments, anticipating fixed interest returns that reflect the associated risks Meanwhile, managers often invest in high-risk projects aiming for greater returns, effectively transferring profits from debt holders to shareholders and shifting the risk burden from shareholders to debt holders.
Empirical literature review
2.2.1 Leverage (Lev) and capital structure
Capital structure refers to the mix of debt and equity used by a company to finance its operations Equity sources encompass various elements such as invested capital, retained earnings, share premium, revaluation surplus, and other forms of capital In contrast, debt is categorized into short-term obligations, which mature within 12 months, and long-term liabilities, with maturities extending beyond 12 months.
Capital structure involves the use of leverage ratios, which are essential financial tools for firms to finance working capital and enhance operational benefits When leveraged effectively, companies can boost profitability for shareholders, enjoy tax deductions, improve credit ratings, secure favorable bank loans, and increase free cash flow However, mismanagement of leverage can lead to difficulties in meeting debt obligations and potential bankruptcy In managing working capital, firms typically utilize short-term debt to finance current assets, while long-term debt is employed for non-current assets.
This research examines leverage by analyzing the distinctions between long-term and short-term debt in different countries, aiming to determine variations in debt structures across firms For example, a study on Chinese listed companies (Chen, 2004) reveals that these firms predominantly rely on short-term loans for financing, unlike firms in G-7 countries (Rajan and Zingales, 1995) and developing nations (Booth et al., 2001), where long-term debt surpasses short-term debt This indicates that equity serves as the primary source of capital investment financing for Chinese firms.
The debate over whether firms should utilize book value or market value for measuring leverage continues, with previous studies predominantly favoring book value in their regression analyses (Hovakimian, Opler, and Titman, 2001; Fama and French, 2002) Book value is often considered a more accurate reflection of a company's target debt, as market value is influenced by various external factors beyond a firm's control, making it a less reliable measure of the debt ratio (Thies and Klock, 1992).
The pecking order theory suggests that firms prioritize retained earnings as their primary source of capital, followed by debt, and finally equity, to avoid the costs associated with issuing new equity and the personal tax implications for shareholders when paying dividends This preference for retained earnings over borrowing is further reinforced by the desire to prevent stock price dilution through equity issuance Research supports the notion that profitability negatively correlates with leverage, as evidenced by studies from Titman and Wessels (1988), Frank and Goyal (2009), Harris and Raviv (1991), and Rajan and Zingales (1995) in developed countries, along with findings from Wiwattanakan (1999) and Booth et al (2001) in developing nations Kester (1986) also highlights significant relationships between profitability and leverage in both the US and Japan, while Wald (1999) asserts the robustness of this connection, further supported by Fama and French.
According to a 2002 study, a firm's debt levels rise when investments surpass retained earnings and fall when investments are lower than retained earnings Companies typically prefer to retain profits rather than distribute dividends to shareholders until their earnings are robust Additionally, publicly traded firms have the option to issue equity to fund new investments.
According to tax based models and trade off theory, high profitability firms do not concern about the loan at mature due to firm can handle principal and interest of
Loan and tax-based models, along with trade-off theory, indicate that profitable firms should increase their debt levels to leverage tax shields, ultimately enhancing shareholder value However, research reveals that while profitability may positively influence leverage, this effect is often weak and statistically insignificant, as noted by Long and Malitz (1985) In contrast, the majority of empirical studies, including those by Harris and Raviv, demonstrate a negative relationship between profitability and leverage.
(1990), Wald (1999), Titman and Wessels (1988), Rajan and Zingales (1995),
Theoretical, profitability has a negative (-) or positive (+) effect to leverage in term of pecking order theory or trade off theory
This research expects that profitability has a negative relationship with leverage under the pecking order theory The hypothesis is given as under:
H1: There is a negative relationship between profitability and leverage
Agency cost theory suggests that after a firm issues debt to finance tangible assets, the agency cost of debt may increase as the firm may engage in riskier investments, resulting in a wealth transfer from creditors to shareholders Tangible assets are easier to collateralize, which helps reduce agency costs, such as preferred interest rates and transaction costs Firms with more tangible assets are better positioned to secure credit and often maintain strong relationships with creditors Additionally, profitable firms tend to acquire new tangible assets to replace older ones, thereby enhancing productivity and quality, while also benefiting from non-debt tax shields through asset depreciation In the event of bankruptcy, tangible assets hold greater value than intangible ones Consequently, an increase in tangible assets correlates positively with increased debt levels, supporting findings from previous empirical research by Harris and Raviv (1991), Rajan and Zingales (1995), Wald (1999), Friend and Lang (1988), Long and Maltiz (1985), and Marsh (1982).
Thus, the study expects that Tangibility has a positive relationship with leverage The hypothesis is given as under:
H2: There is a positive relationship between Tangibility and leverage
2.2.4 Growth opportunities (GROW) and leverage
Firm with high debt level will face with difficulty in finding capital support from creditors for firm activities and purchasing new assets (Lang, Ofek and Stulz,
1996), firms with less debt ratio has more advantages to build up finance for new investment chances, thus firms have low leverage easy to get capital for future growth
Myers (1977) suggests that firms with significant growth opportunities are better positioned for future investments When these firms issue more debt, it can decrease their current market value, particularly for those holding real options Conversely, firms with high growth potential typically prefer to issue additional equity to finance future options, thereby limiting debt issuance to avoid agency costs.
The trade-off theory posits that a firm's optimal capital structure is achieved by balancing the benefits of debt against the costs of borrowing Firms with greater growth opportunities are more likely to secure lower interest loans, as the advantages of borrowing often surpass the costs associated with equity issuance Consequently, these firms tend to favor issuing debt over equity This theory supports the positive correlation between firm growth and leverage, aligning with the empirical findings of Chen and Zhao (2006).
According to Titman and Wessels (1988), growth opportunities are valuable capital assets that cannot be used as collateral and do not help in reducing income tax As a result, companies with significant growth opportunities tend to have lower levels of debt This indicates a negative correlation between growth opportunities and leverage.
Most of the studies predominated support theoretical prediction that growth opportunity negative effects to leverage and consistency with the findings of Wald
Research by Rajan and Zingales (1995), Long and Malitz (1985), and Chen (2004), along with findings from Kester (1986) on Japanese and US companies, indicates a positive relationship between growth opportunities and leverage, although not statistically significant Consequently, this study posits a negative correlation between growth opportunities and leverage, leading to the following hypothesis.
H3: There is a negative relationship between growth opportunity and leverage
2.2.5 Firm size (SZ) and leverage
Large firms often leverage debt to enhance their operations and accommodate growth To increase capacity, these companies seek external funding through loans or equity issuance However, opting for equity can be costly and may negatively impact stock prices (Mayer).
1977) and stock price dilution (Asquith and Mullins, 1984), thus issuing debt is first choice for financing capital for the firm
Trade-off theory posits that larger firms tend to be more diversified, which reduces their bankruptcy risk and allows them to lower borrowing costs through long-term debt issuance Smaller firms, on the other hand, face higher equity issuance costs compared to larger firms (Smith, 1977) This disparity indicates that smaller firms typically carry less debt, while larger firms maintain higher levels of leverage, establishing a positive correlation between firm size and leverage This positive relationship is supported by empirical research conducted by Frank and Goyal (2009), which analyzed data from publicly traded U.S firms.
The pecking order theory suggests that larger firms experience less asymmetric information between insiders and capital markets, making them more adept at issuing equity for financing (Kester, 1986) Additionally, research by Titman and Vessels (1988) indicates a negative relationship between firm size and leverage, highlighting that as firms grow, their reliance on debt financing tends to decrease.
The hypothesis is given as follows:
H4: There is a positive relationship between firm size and leverage
2.2.6 Ownership type (OWNT) and leverage
RESEARCH METHODOLOGY
Sample size and data set
This study analyzed secondary data from the annual reports of 124 non-financial listed companies in Vietnam, covering the period from 2008 to 2012 The financial statements were prepared according to Vietnamese Accounting Standards (VAS), utilizing data from the firms' consolidated financial statements Notably, the balance sheets of financial institutions, such as banks, insurance companies, and stock companies, were excluded from the sample due to their distinct structural differences compared to non-financial companies.
According to Stevens (1976), a reliable regression equation requires approximately 15 subjects per predictor variable Tabachnick and Fidell (2001) provide a formula for determining sample size, suggesting that the sample size (N) should exceed 50 plus 8 times the number of independent variables (m) Additionally, for stepwise regression, a ratio of 40 cases per independent variable is recommended This study utilized data from 124 firms, comprising 602 observations extracted from financial reports, which meets the established sample size requirements.
All sample companies remain operational, with none facing bankruptcy or temporary shutdowns The diverse sample encompasses various sectors, including real estate with 45 firms, rubber with 9 firms, chemicals and pharmaceuticals with 10 firms, minerals with 9 firms, gas and electrical power with 12 firms, steel with 10 firms, crude oil with 11 firms, and trading and manufacturing with 19 firms.
Calculation of the variables
The financial report of a firm consists of an income statement, balance sheet, cash flow statement, and accompanying explanations, all of which provide a comprehensive overview of the company's financial health The balance sheet is divided into two sections: the left side reflects the total assets, while the right side details the sources of financing for those assets.
The Vietnamese accounting standard system presents unique characteristics that differentiate it from those of other countries, particularly in the classification of total debt, which encompasses both short-term and long-term obligations based on their nature Financial reports in Vietnam reflect various debt items, including customer deposits, prepaid expenses, internal payables, short-term payable reserves, and reward funds, all of which represent future repayment obligations for firms To effectively analyze capital structure and mitigate the impact of these debts, it is essential to gather data specifically on "short-term debt and loans" and "long-term debt and loans," which include borrowings from banks and other creditors According to the guidelines set forth by VAS (2006), understanding the value of these debts is crucial for accurate financial reporting and analysis.
Short-term debt and loans refer to borrowings from banks or creditors that mature within 12 months, while long-term debt and loans pertain to obligations with maturities exceeding 12 months According to Rajan and Zingales (1995), total debt should exclude items such as accounts payable and accrued expenses, as these do not accurately reflect a firm's future risk and are often used for transactional purposes rather than financing Additionally, Myers (2002) suggests that a firm's response to various factors may vary based on its unique circumstances This study utilizes data from short-term and long-term debt extracted from the balance sheet to accurately assess the leverage ratio.
There are many measurements from previous studies to define the leverage ratio for capital structure
Leverage is assessed using several key ratios, including Total Debt to Total Assets (TDTA), Total Debt to Total Equity (TDTE), Long-Term Debt to Total Assets (LTDTE), and Short-Term Debt to Total Assets (STDTA).
Many studies typically concentrate on a singular metric of leverage (Frank and Goyal, 2007) In contrast, this study defines leverage by utilizing a ratio that combines short-term debt and loans with long-term debt and loans (TD), measured against the book value of total assets (BVTA).
Profitability ratios assess a company's capacity to generate earnings relative to its sales, equity, and assets, providing valuable insights into its financial health and performance Generally, a higher profitability ratio is preferred, as it signifies stronger financial stability and operational efficiency.
Profitability ratio gives meaningful information only when they are analyzed in comparison to competitors or compared to the ratios in previous periods
Therefore, trend analysis and industry analysis are required to draw meaningful conclusions about the profitability of a company
This article explores the relationship between profitability and capital structure, emphasizing various measures of profitability such as Return on Equity (ROE), Return on Assets (ROA), and the Earnings Before Interest and Tax to Book Value of Total Assets (EBIT/BVTA) ratio To account for the variations in income tax and interest rates among companies, the study utilizes the EBIT index, which effectively eliminates the impact of these factors, making it a preferred metric for assessing and valuing business profitability.
This study used earnings before interest and tax (EBIT) divide by total book value assets (BVTA) to define profitability, data for profitability collected from income statement of a firm
The study predicts that profitability has a negative relationship with leverage The formula is set as: Profitability = EBIT / book value total assets
Research has defined tangibility by calculating the tangibility ratio, which separates tangible and intangible assets from total assets (Frank and Goyal, 2003), as well as by summing fixed assets and inventories in relation to total assets (Chen, 2004).
This study measures tangibility as net fixed assets divided by total assets, utilizing data from firms' balance sheets, consistent with the methodologies of Huang and Song (2002), Li and Yue and Zhao (2006), Mazur (2007), and Shah and Khan (2007) The literature review indicates that tangibility positively influences leverage.
Tangibility = Net fixed assets (NFA)/ / book value total assets (BVTA)
Previous research has defined growth opportunities in various ways, including sales growth relative to total assets (Chen, 2004) and the five-year average of sales growth to analyze its impact on leverage (Wald, 1999) Additionally, Frank and Goyal (2003) utilized the market-to-book ratio to assess firm growth, while Titman and Wessels (1988) focused on capital expenditure as a proportion of total assets Opler and Titman (1994) also examined sales growth in their studies.
1999), growth rate of employment (Lang and Stulz, 1996), Market to book ratio (Billett, King and Mauer, 2007)
The growth ratio of a firm can be assessed through various metrics, including the growth of assets calculated as (BVTA t – BVTA t-1)/BVTA t-1 (Sha and Khan, 2007), capital expenditure relative to total assets (Titman and Wessels, 1988), sales growth (Opler and Titman, 1994; Wald, 1999), and the growth rate of employment (Lang and Stulz).
1996), Market to book ratio (Billett, King and Mauer, 2007)
This study defines growth opportunities by analyzing the percentage change in total assets over a five-year period for each firm The measurement utilized aligns with the formula established by Shah and Khan (2007), ensuring consistency in the computation of this ratio.
Growth opportunities = (book value total assets (time t) – book value total assets (time t-1))/ book value total assets (time t-1)
The size of a company, whether large or small, is often measured using the natural logarithm of net revenue from sales, as seen in studies by Huang and Song (2006), Shah and Khan (2007), and Titman and Vessels (1988) In this study, we adopt the logarithm of total assets, consistent with the methodologies of Frank and Goyal (2003) and Chen (2004), to examine the relationship between firm size and leverage We anticipate a positive correlation between firm size and leverage, defined as Firm size = logarithm of total assets.
State ownership continues to be a significant factor in the reform of the Vietnamese economy, with a centralized financial system that relies heavily on state-owned banks for financing access.
The government aims to equitize state-owned companies, targeting a reduction of state shareholding to 51 percent by 2010 Currently, five state-owned commercial banks dominate the banking sector, holding approximately 70 percent of both the sector's assets and total bank loans (Truong, 2013).
Model specification
The study employed a multiple regression equation model, previously utilized by Rajan and Zingales (1995) and Bevan and Danbolt (2002), to enhance prediction accuracy This regression model enables researchers to achieve more precise forecasting outcomes.
LEV=b 0 +b 1 (PRO) + b 2 (TANG) + b 3 (GROW) + b 4 (SZ) + b 5 (OWNT) + b 6 (NDTS) + α
LEV = Leverage b 0 = Constant b1,2,3,4,5,6 = Coefficient to be estimated α = error of term
NDTS = Non-debt tax shields
Method of data analysis
The study collected data from 124 non-financial companies based on consolidated (if any) financial statements, arranging following panel data from 2008 – 2012
The study employed multiple regression models to analyze the relationship between the dependent and independent variables The results were interpreted through descriptive statistics and the coefficient of correlation, providing insights into the data.
Coefficient of determination, Durbin Watson, Sig value, normality distribution and together with checking multicollinearity problem and autocorrelation problem.
RESULT ANALYSIS
Screening and cleaning the data
Before using data for analysis, the researcher checked data set for error due to error data can mess up the analysis
To ensure data integrity, it's essential to check for errors and verify that all values for a variable fall within the acceptable range Utilizing Excel tools can simplify this process, as they allow users to easily identify missing data or erroneous values by sorting the variable column Once identified, these items can be efficiently deleted, ensuring a clean and accurate dataset.
By using excel tool, researcher used filter function to check and finds stranger values for each variable column for correction
After uploading the corrected data from an Excel file to SPSS software, the researcher utilized the "Casewise diagnostics" table to identify outlier cases Subsequently, all identified outliers were removed prior to conducting multiple regression analysis.
Checking assumptions of multiple regression
Scatter plot from table 8 of appendices showed that standardized residuals are roughly rectangular distribution with most of scores concentrated in the center (along zero value)
4.2.2 Checking normality, linearity, homoscedasticity of residuals
To verify the assumptions of the regression analysis, the normal probability plot (P-P) of the standardized residuals was examined The results, illustrated in Table 7, indicate that the points align closely along a straight diagonal line from the bottom left to the top right, suggesting that there are no significant deviations from normality Therefore, it can be concluded that the assumptions of the regression analysis were not violated.
Table 1 presents the Collinearity Statistics, indicating that there are no violations in the regression model, as the VIF values are below 10 and all tolerances exceed 0.77 (1-R²) Additionally, Table 5 confirms that the correlation among the independent variables remains at acceptable levels, ensuring the robustness of the model.
Tabanick and Fidell (2001) suggested that the correlation among the dependent variables should be less than 0.7 ( 0.05), suggesting that they do not statistically significantly predict leverage In contrast, other independent variables such as profitability, tangibility, firm size, ownership type, and non-debt tax shield demonstrate a significant contribution to explaining leverage.
The negative profitability coefficient for leverage (-0.573) indicates that firms with high profitability tend to have lower levels of debt, aligning with the pecking order theory This inverse relationship between profitability and leverage has been supported by studies in both developed countries, such as Rajan and Zingales (1995) and Wald (1999), as well as in developing countries, including research by Wiwattanakantang (1999) and Boot et al (2001).
Chinese firms, as highlighted by Chen (2004), face challenges in emerging markets like Vietnam, where companies often encounter a shortage of working capital alongside high loan interest rates and income taxes Consequently, highly profitable companies tend to rely on retained earnings to finance their investments, aligning with the expectations outlined in this study.
Tangibility demonstrates a positive correlation (+0.134) with leverage, indicating that companies with higher fixed assets are more likely to utilize these assets as collateral to secure loans at lower interest rates from creditors This significant relationship underscores the importance of collateral for banks in mitigating risk when extending credit.
The study indicated a positive relationship between growth opportunities and leverage in predictions; however, empirical testing revealed no significant correlation, as evidenced by a B coefficient of +0.000 and a significance value of 34.8% This lack of relationship may stem from the measurement of growth opportunities, which was based on percentage changes in total assets, reflecting past growth rather than future potential To achieve more meaningful results, it is suggested that alternative measures, such as the market-to-book ratio, be employed as proxies for expected growth.
The study found a positive correlation (0.111) between firm size and leverage, indicating that larger firms tend to carry more debt This trend is attributed to their strong reputation and favorable relationships with banks, which allow them to secure loans more easily and at lower interest rates Consequently, these firms are less likely to face bankruptcy and often utilize debt to finance new investments, benefiting from tax shields associated with borrowing These findings align with the expectations of this research and are consistent with the work of Harris and Raviv (1991) and Rajan and Zingales (1995).
The ownership type (OWNT) coefficient for total debt was found to be negative (-0.042) and significant, contrary to the researcher's expectations This can be attributed to the undervaluation of state-owned companies' assets prior to privatization, which is likely to increase their value in the near future Consequently, insider investors, such as managers and CEOs, may prefer to issue equity for financing to maximize personal profits, resulting in lower debt levels for state-controlled companies Additionally, investors may perceive state-owned companies as safer investments, bolstered by government guarantees, leading them to be more willing to purchase shares This aligns with signaling theory, suggesting that higher share prices in the market encourage state-owned companies to favor equity issuance over debt Furthermore, a negative relationship between non-debt tax shields and leverage indicates that companies tend to utilize retained earnings or issue equity rather than incur debt for financing their investments.
Finally, non debt tax shield had a weak positive (+0.067) correlation with leverage The main factor ware depreciation charge According to the minister of finance
In 2009, it became mandatory for firms to register their chosen depreciation methods with tax authorities prior to implementation These methods are applied consistently on an annual basis, adhering to regulatory timeframes However, firms often calculate monthly depreciation charges based on profit objectives rather than leveraging strategies Consequently, this has led to a weak correlation between non-debt tax shields and leverage, aligning with the expectations outlined in this research.
CONCLUSIONS AND IMPLICATIONS
Conclusions
This study aims to analyze how factors such as profitability, tangibility, firm size, growth, ownership type, and non-debt tax shields influence the capital structure of 124 publicly listed companies in Vietnam.
The trade-off theory and pecking order theory are key frameworks used to analyze the relationship between independent and dependent variables through multiple regression analyses conducted with SPSS software The findings indicate that the measurements of defined variables are significantly influenced by various factors, including the context, the structure of financial statements, and the specific object of analysis, as noted by Rajan and Zingales (1995).
The study's descriptive statistics reveal that from 2008 to 2012, listed companies maintained an average debt ratio of approximately 24.2 percent, which is comparable to the debt ratios observed in the U.S., Japan, and France (Wald, 1999).
Research indicates that highly profitable companies prefer using retained earnings for capital investments due to the high borrowing costs relative to their profitability from 2008 to 2012 This situation exposes firms to significant financial distress risks, leading them to avoid debt despite the potential tax benefits associated with it Consequently, these firms favor financing through retained earnings.
Under the pecking order theory, listed firms in Viet Nam have a negative relation with leverage
The findings indicate that firms with high tangibility listed on HOSE tend to utilize more debt, as those with a greater proportion of fixed assets are likely to secure loans at lower costs due to collateral This aligns with the trade-off theory, suggesting a positive correlation between fixed assets and leverage, as companies often leverage debt to acquire new fixed assets.
Larger firms experience lower bankruptcy costs, reduced agency costs, and less asymmetric information, which positively influences creditor behavior Consequently, these firms find it easier to obtain credit from banks at lower borrowing costs This relationship indicates that firm size is positively correlated with leverage, aligning with the trade-off theory, as larger firms can effectively utilize tax shield benefits.
The depreciation of fixed assets serves as a proxy for non-debt tax shields, particularly among listed companies on the HOSE, which utilize depreciation to reduce their income tax liabilities With Vietnam's income tax rate set at 25%, firms are incentivized to invest in more fixed assets through debt issuance to gain tax shield benefits and enhance their output capacity Consequently, there is a positive correlation between the depreciating value of assets and the leverage of companies.
Ownership type is represented as a dummy variable, assigned a value of 0 or 1 based on whether state ownership is below or above 50% While existing literature suggests a positive relationship between ownership type and leverage, the findings indicate a negative correlation This suggests that state-owned firms in Vietnam prefer to finance their investments through retained earnings, which offer a lower cost, while also opting to issue equity to support their working capital needs.
The findings indicate that growth opportunities, assessed through changes in total assets, exhibit an insignificant statistical relationship, contrary to the research hypothesis that anticipated a negative correlation between growth opportunities and leverage.
Limitation of the study
This study analyzes panel data from the financial statements of 124 listed companies on the HOSE, applying models from Rajan and Zingales (1995) and Bevan and Danbolt (2002) to the Vietnamese context However, it faces several limitations, including the lack of transparency in financial market information, insufficient understanding of capital structure, and inadequate use of financial tools in annual reports Additionally, the absence of industrial classification, limited banking data for statistical analysis, and differences in accounting systems between Vietnam and other countries further complicate the research Consequently, data availability poses a significant challenge in capital structure studies within emerging markets, leading to an unclear understanding of the optimal capital structure for specific firms and complicating comparisons with other nations.
Implications
To enhance firm value and stock price, companies must thoroughly evaluate all factors influencing their decision-making processes A strong emphasis on capital structure analysis is essential for making informed decisions that drive company performance and growth.
High-profitability firms should prioritize using retained earnings for working capital investments rather than relying on debt issuance Companies with significant fixed assets may issue debt to benefit from tax advantages, but they must weigh the financial risks and potential costs of financial distress associated with increased debt levels Poor management of high debt can lead to bankruptcy or default Larger firms often leverage their reputation and size to secure loans at lower costs, benefiting from the "too big to fail" perception Depreciation should be maximized from the outset to enhance tax reduction benefits, thereby attracting more investments and facilitating access to new credit Additionally, companies need to address agency costs when hiring external managers, implementing specific policies to incentivize them to increase firm value and stock prices.
The recommendations for future research based on the limitation of this study The future research will be collected more data available with long time spread from each firm
Future research will separate company data into many groups depends on field, industry in order to analysis capital structure for specific industries
Measurement plays a crucial role in analysis, and future research should focus on the asset structure of specific companies A thorough understanding of financial report data is essential for obtaining accurate information, as various variables can effectively reflect the capital structure.
In order to enlarge R square value from the model, the future researches should add more independent variables together with more measurements of leverage
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* Correlation is significant at the 0.05 level (2- tailed)
** Correlation is significant at the 0.01 level (2- tailed)
Table 7: Normal P-P Plot of regression standardized residual
List of non-financial companies
1 APC Công ty cổ phần Chiếu xạ An Phú
2 ASM Công ty cổ phần Đầu tư và Xây dựng Sao Mai tỉnh An Giang
3 ASP Công ty cổ phần Tập đoàn Dầu khí An Pha
4 BCE Công ty cổ phần Xây dựng và Giao thông Bình Dương
5 BCI Công ty cổ phần Đầu tư xây dựng Bình Chánh
6 BGM Công ty Cổ phần Khai thác và Chế biến Khoáng sản Bắc Giang
7 BMC Công ty cổ phần Khoáng sản Bình Định
8 BMP Công ty cổ phần nhựa Bình Minh
9 BRC Công ty Cổ phần Cao su Bến Thành
10 BTP Công ty cổ phần Nhiệt điện Bà Rịa
11 CCL Công ty cổ phần Đầu tư và Phát triển Đô Thị Dầu khí Cửu Long
12 CLG Công ty cổ phần Đầu tư và Phát triển Nhà đất Cotec
13 CNG Công ty Cổ phần CNG Việt Nam
14 CSM Công ty cổ phần Công nghiệp Cao su Miền Nam
15 D2D Công ty cổ phần Phát triển Đô thị Công nghiệp Số 3
16 DAG Công ty cổ phần Tập đoàn Nhựa Đông Á
17 DCL Công ty cổ phần Dược phẩm Cửu Long
18 DHC Công ty cổ phần Đông Hải Bến Tre
19 DHG Công ty cổ phần Dược Hậu Giang
20 DIG Tổng công ty cổ phần Đầu tư Phát triển Xây dựng
21 DLG Công ty cổ phần Tập đoàn Đức Long Gia Lai
22 DMC Công ty cổ phần Xuất nhập khẩu Y tế Domesco
23 DPM Tổng Công ty Phân bón và Hóa chất Dầu khí – CTCP
24 DPR Công ty cổ phần Cao su Đồng Phú
25 DQC Công ty cổ phần Bóng đèn Điện Quang
26 DRC Công Ty Cổ Phần Cao Su Đà Nẵng
27 DRH Công ty cổ phần Đầu tư Căn nhà mơ ước
28 DRL Công ty cổ phần Thủy Điện - Điện lực 3
29 DTA Công Ty Cổ Phần Đệ Tam
30 DTL Công ty cổ phần Đại Thiên Lộc
31 DTT Công ty Cổ phần Kỹ nghệ Đô Thành
32 DXG Công ty cổ phần Dịch vụ và Xây dựng địa ốc Đất Xanh
33 EVE Công ty cổ phần Everpia Việt Nam
34 GAS Tổng Công ty Khí Việt Nam – CTCP
35 GDT Công ty cổ phần Chế biến Gỗ Đức Thành
36 GMC Công ty Cổ phần Sản xuất Thương mại May Sài Gòn
37 GTA Công ty Cổ phần chế biến gỗ Thuận An
38 HAG Công ty cổ phần Hoàng Anh Gia Lai
39 HAI Công ty cổ phần Nông Dược Hai
40 HAP Công ty cổ phần Tập đoàn HAPACO
41 HDC Công ty cổ phần Phát triển nhà Bà Rịa – Vũng Tàu
42 HDG Công ty cổ phần Tập đoàn Hà Đô
43 HLA Công ty cổ phần Hữu Liên Á Châu
44 HMC Công ty Cổ phần Kim khí Thành phố Hồ Chí Minh
45 HQC CTCP Tư vấn – Thương mại – Dịch vụ Địa ốc Hoàng Quân
46 HRC Công Ty Cổ Phần Cao su Hòa Bình
47 HSG Công ty cổ phần Tập đoàn Hoa Sen
48 IDI Công ty Cổ phần Đầu tư và Phát triển Đa Quốc Gia
49 IJC Công ty cổ phần Phát triển Hạ tầng Kỹ thuật
50 IMP Công ty cổ phần dược phẩm Imexpharm
51 ITA CTCP Đầu tư Công nghiệp Tân Tạo
52 ITC Công ty Cổ phần Đầu tư - Kinh doanh nhà
53 JVC Công ty cổ phần Thiết bị Y tế Việt Nhật
54 KAC Công ty cổ phần Đầu tư Địa ốc Khang An
55 KBC Tổng Công ty Phát triển Đô Thị Kinh Bắc – Công ty Cổ phần
56 KDH Công ty cổ phần Đầu tư và Kinh doanh Nhà Khang Điền
57 KHP Công ty cổ phần Điện lực Khánh Hòa
58 KMR Công ty cổ phần Mirae
59 KSA Công ty cổ phần Khoáng sản Bình Thuận Hamico
60 KSB Công ty cổ phần Khoáng sản và Xây dựng Bình Dương
61 KSH Công ty Cổ phần Tập đoàn Khoáng sản Hamico
62 KSS Tổng công ty cổ phần Khoáng sản Na Rì Hamico
63 KTB Công ty cổ phần Đầu tư Khoáng sản Tây Bắc
64 LBM Công ty cổ phần Khoáng sản và Vật liệu xây dựng Lâm Đồng
65 LCG Công ty cổ phần LICOGI 16
66 LCM Công ty Cổ phần Khai thác và Chế biến Khoáng sản Lào Cai
67 LGL Công ty cổ phần Đầu tư và Phát triển Đô thị Long Giang
68 LHG Công ty cổ phần Long Hậu
69 LIX Công ty cổ phần Bột giặt Lix
70 MCP Công Ty Cổ Phần In và Bao bì Mỹ Châu
71 NBB Công ty Cổ phần Đầu tư Năm Bảy Bảy
72 NSC Công ty Cổ phần Giống cây trồng Trung Ương
Công ty cổ phần Đầu tư Xây Dựng và Khai thác Công trình Giao thông 584
74 NTL Công ty cổ phần Phát triển đô thị Từ Liêm
75 NVN Công ty cổ phần Nhà Việt Nam
76 NVT Công ty cổ phần Bất động sản Du lịch Ninh Vân Bay
77 OGC Công ty cổ phần Tập đoàn Đại Dương
78 OPC Công ty cổ phần Dược phẩm OPC
79 PAC Công ty Cổ phần Pin Ắc quy miền Nam
80 PDR Công ty cổ phần Phát triển Bất động sản Phát Đạt
81 PET Tổng Công ty cổ phần Dịch vụ Tổng hợp Dầu khí
82 PGC Công ty Cổ Phần Gas Petrolimex
83 PGD CTCP Phân phối Khí thấp áp Dầu khí Việt Nam
84 PHR Công ty cổ phần Cao su Phước Hòa
85 PHT Công ty cổ phần Sản xuất và Thương mại Phúc Tiến
86 POM Công ty cổ phần Thép Pomina
87 PPC Công ty cổ phần Nhiệt điện Phả Lại
Công ty cổ phần Phát triển hạ tầng and Bất động sản Thái Bình Dương
89 PTL Công ty cổ phần Đầu tư hạ tầng và Đô thị Dầu khí
90 PVD Tổng công ty cổ phần Khoan và Dịch vụ khoan dầu khí
91 QCG Công ty cổ phần Quốc Cường Gia Lai
92 RAL Công ty cổ phần Bóng đèn Phích nước Rạng Đông
93 RDP Công ty cổ phần Nhựa Rạng Đông
94 REE Công ty cổ phần Cơ điện lạnh
95 SAM Công ty cổ phần Đầu tư và Phát triển SACOM
96 SAV Công ty cổ phần Hợp tác kinh tế và Xuất nhập khẩu SAVIMEX
97 SC5 Công ty cổ phần Xây dựng số 5
98 SHI Công ty cổ phần Quốc tế Sơn Hà
99 SJD Công Ty Cổ Phần Thủy Điện Cần Đơn
Công ty cổ phần Đầu tư Phát triển Đô thị và Khu công nghiệp Sông Đà
101 SMC Công ty cổ phần đầu tư thương mại SMC
102 SRC Công ty cổ phần Cao su Sao vàng
103 SSC Công ty cổ phần Giống cây trồng miền Nam
104 SZL Công ty cổ phần Sonadezi Long Thành
105 TBC Công ty Cổ phần Thủy điện Thác Bà
106 TCM Công ty cổ phần Dệt may - Đầu tư - Thương mại Thành Công
107 TDH Công ty Cổ phần Phát triển nhà Thủ Đức
Công ty Cổ phần Sản xuất Kinh doanh Xuất nhập khẩu Dịch vụ và Đầu tư Tân Bình
109 TLG Công ty cổ phần Tập đoàn Thiên Long
110 TLH Công ty cổ phần Tập đoàn thép Tiến Lên
111 TMP Công ty cổ phần Thủy điện Thác Mơ
112 TNC Công ty cổ phần Cao su Thống Nhất
113 TRC Công ty Cổ phần Cao su Tây Ninh
114 UDC CTCP xây dựng và phát triển đô thị tỉnh Bà Rịa - Vũng Tàu
115 UIC Công ty cổ phần Đầu tư phát triển Nhà và Đô thị IDICO
116 VES Công ty cổ phần đầu tư và xây dựng điện MêCa VNECO
117 VFG Công ty cổ phần Khử trùng Việt Nam
118 VIC Tập Đoàn VINGROUP - Công ty cổ phần
119 VIS Công ty Cổ phần Thép Việt Ý
120 VMD Công ty cổ phần Y Dược phẩm Vimedimex
121 VNI Công ty cổ phần Đầu tư bất động sản Việt Nam
122 VPH Công ty cổ phần Vạn Phát Hưng
123 VRC Công ty cổ phần Xây lắp và Địa ốc Vũng Tàu
124 VSH CTCP Thủy điện Vĩnh sơn Sông hinh
Table 9: List of non-financial companies
Interest rate from banks in Viet Nam
28-Mar-08 11.78% 21.85% 30-Dec-10 12.44% 14.96% 25-Apr-08 11.05% 20.85% 21-Jan-11 12.44% 15.74% 30-May-08 14.19% 17.40% 22-Feb-11 13.04% 16.23% 13-Jun-08 16.42% 21.00% 20-Mar-11 13.75% 16.23% 25-Jul-08 18.67% 21.00% 21-Apr-11 13.41% 17.00% 27-Aug-08 17.52% 21.00% 19-May-11 14.00% 18.30% 24-Sep-08 17.47% 20.50% 20-Jun-11 14.00% 18.74% 21-Oct-08 16.00% 19.50% 20-Jul-11 14.00% 18.64% 26-Nov-08 12.57% 16.45% 19-Aug-11 14.00% 18.73% 24-Dec-08 8.01% 12.75% 23-Sep-11 14.00% 18.00% 31-Jan-09 7.43% 11.17% 20-Oct-11 14.00% 19.50% 28-Feb-09 7.15% 9.25% 25-Nov-11 14.00% 20.00%
31-Dec-09 10.25% 12.00% 28-Aug-12 8.90% 16.75% 30-Jan-10 10.25% 12.00% 26-Oct-12 8.90% 16.75% 26-Feb-10 10.45% 12.00% 30-Nov-12 8.90% 16.75% 25-Mar-10 10.45% 16.00% 12-Aug-12 7.90% 16.75% 20-Apr-10 11.70% 14.50% 25-Jan-13 7.90% 16.75% 20-May-10 11.70% 14.50% 23-Feb-13 7.90% 16.75% 24-Jun-10 11.25% 15.00% 29-Mar-13 6.75% 15.00% 30-Jul-10 11.10% 14.00% 26-Apr-13 6.75% 15.00% 30-Aug-10 10.90% 14.00% 24-May-13 6.25% 13.25% 30-Sep-10 11.10% 14.75% 28-Jun-13 7.25% 12.50% 30-Oct-10 11.00% 14.75% 26-Jul-13 7.50% 12.50% 26-Nov-10 12.50% 16.00% 30-Aug-13 7.50% 12.50%
Source: SBV Monthly Reports and Other sources
Table 10: Interest rate from banks in Viet Nam