LUẬN văn THẠC sĩ determinants of capital structure of listed firms in the pharmaceutical sector in vietnam

INTRODUCTION

Research Motivations

Enterprises need capital to operate which may be retained earnings, debt, and equity

The source of funds from debt can increase the value of the firm but using too much debt to finance investments, the company may have financial risks which can consequently lead the enterprise into bankruptcy Moreover, an ideal combination of capital structure including debt and equity can also minimize the cost of capital and maximize the firm’s value Therefore, “capital structure decision is an important corporate policy that deals with the firm’s activities, with debts and equity” (Brounen et al., 2006)

In fact, the capital structure will change depending on the characteristics of the situation of each enterprise, the area in which it operates, as well as the effects of macroeconomic fluctuations of the economy, culture, and religion Rather than finding the optimal ratio of debt to equity, finance researchers are often interested in finding out the factors that influence the use of the financial leverage of the business

From the relationship between these factors and the capital structure that we can assess whether the decision to use the loan or the equity of the business is reasonable or not, then propose solutions to improve the efficiency of using financial leverage, maximizing asset value for businesses

In recent years, the theory of modern capital structure has only been studied in developed countries but has not been paid much attention in developing countries

Mouamer (2011) also confirmed that “There is little work done on examining capital structure in emerging countries” In Vietnam, those studies are almost researched at the general level for businesses, but not research much for specific industries, especially pharmaceuticals

Vietnam's economy has been growing in recent years, people's incomes have increased, however, Vietnam is facing an aging population as well as health problems arising from the environment and the process of industrialization This leads to an increased willingness to pay for medical services Therefore, leading to the inevitable development of Vietnam's pharmaceutical industry

According to International Medical Statistics Health, in 2018, Vietnam was one of 17 countries ranked among the highest pharmaceutical growth groups (Pharmerging markets) According to Business Monitor International report “Vietnam pharmaceutical sector had revenue of USD 5.9 billion in 2018, an 11,7% increase from the previous year, which makes Vietnam become the second-largest medicine market in South East Asia” It once again confirms that the pharmaceutical sector not only an essential industry but also an emerging and growing industry in Vietnam in recent years

Figure 1.1: Revenue of Vietnamese pharmaceutical sector (billion USD)

(Source: Business Monitor International Report 2018, Vietnam Business Monitor

Currently, Vietnam's pharmaceutical industry has to import up to 90% of raw material (according to KIS Vietnam Securities Corporation, Pharmaceutical Industry Report (09/01/2019)) In order to avoid being dependent on exchange rates, some domestic

2010 2011 2012 2013 2014 2015 2016 2017 2018 drug manufacturers in Vietnam are thinking of making Active Pharma Ingredient (API) by themselves, but API production infrastructure in Vietnam is not yet well developed, so it will require huge capital and technology investments From the need for capital and technology of the pharmaceutical industry, in recent years, many domestic and foreign investors have invested in Vietnam's pharmaceutical industry

The appearance of new investors will affect the capital structure of the business and its operations, so Vietnamese pharmaceutical enterprises need to make wise decisions on the capital structure for sustainable development in the current competitive economic environment

According to Vo (2017) “Vietnamese enterprises are in the process of financial liberalization, there are new policies that can affect the bond and equity markets in Vietnam, which can affect the capital structure of Vietnamese enterprises” In recent years, there has been very little researches on the capital structure of Vietnamese pharmaceutical enterprises, so this research is very necessary

Therefore, based on the situations mentioned above, I chose the topic “Determinants of capital structure of listed firms in the pharmaceutical sector in Vietnam” to examine which factors and their levels affect to the capital structure of pharmaceutical listed firms in the Vietnam stock market helping financial planners, as well as enterprises, have a suitable view on opting for the optimal capital structure.

Research Objectives

This study aims to study the theory of capital structure, evaluate the status of the capital structure, and identify factors affecting the capital structure of pharmaceutical firms listed on the stock exchange in Vietnam Then propose some recommendations for business managers, investors, and policymakers.

Research Objects and Scope

Research Objects: Capital structure and factors affect the capital structure of pharmaceutical listed firms in Vietnam's stock market

Research Scope: This research collects data and information of listed pharmaceutical firms in Vietnam in the period from 2010 to 2019.

Research Questions

Question 1: Do firm-specific factors affect the capital structure in listed pharmaceutical firms in Vietnam?

Question 2: Is there significant difference in the impact weights among factors that influent the capital structure of Vietnam pharmaceutical listed firms?

Question 3: Is there any difference in the factors affecting the capital structure of companies listed on the Hanoi Stock Exchange and ones listed on the Ho Chi Minh City Stock Exchange?

Motivations lead to research question 3: In Vietnam, listing conditions are different between HNX and HOSE Specifically, a company listed on HOSE must have a charter capital of VND 120 billion or more, while this capital on HNX is only from VND 30 billion HOSE requires listed companies to have at least 2 consecutive years of profitability, while HNX does not require that HOSE requires listed companies to publish debts to members of the board of directors, the board of managers, major shareholders, and related persons, meanwhile, HNX does not require

Therefore, whether there is any difference in the capital structure between companies listed on the two stock exchanges HNX and HOSE or not, in order to give hints to stakeholders Managers should choose which stock exchange to list on, and "should or should not" transfer between two stock exchanges Whether the stock exchange that the company listed in should be considered by investors before making investment decisions or not? Should policymakers merge the two stock exchanges or not, and which listing conditions should be provided to suit the development of companies.

Research Structure

In addition to the introduction, conclusion, table of contents, references, appendices, the content of this study consists of 5 chapters:

Chapter 1: Introduction Chapter 2: Theoretical framework Chapter 3: Methodology

Chapter 4: Data analysis and Findings Chapter 5: Research implications and Recommendations

THEORETICAL FRAMEWORK

Definition relating to capital structure

The definition of capital structure is presented not only in famous books on economics and finance but also in scientific papers of authors in the world “The firm’s mix of debt and equity financing is called its capital structure” (Brealey, Myers, & Allen,

2010) While Ross, Westerfield and Jordan (2013) claimed that “A firm’s capital structure (or financial structure) is the specific mixture of long-term debt and equity the firm uses to finance its operations” From these two definitions, it can be said that capital strucutre is a financial term to describe the source and method to develop capital in enterprises which usually emphasizes the relationship between the proportion of debt and equity

In addition, Kaur and Narang (2010) found that “Capital structure is defined as the ability of a firm in financing by using the combination of equity and debt to optimize the value of the firm It has been a puzzle for the managers to choose the right combination of equity and debt to attract investors and creditors A right capital structure (equity-debt mix) can reduce the cost of capital and firms aim to reduce the cost of capital to create the shareholder value” Therefore, a suitable capital structure has to ensure the harmony between the equity and debt, low cost and acceptable risk which is suitable for the condition of the firms It is really important to every company due to the fact that it is related to the cost of capital, the benefit of the enterprises which affect the business capacity of the companies in the competitive environment

2.1.2 Components in capital structure of enterprises

The basic components in the capital structure include two main parts like debt and equity

Brigham and Houston (2008) said that liabilities mean that the money which the company owes to each other According to Ross et al (2013) “Liabilities are divided based on time of payment including current liabilities and long-term debt”

Current liabilities shows the debt which the companies have the responsibility to pay within one year including short-term bank loan, account payable to suppliers or the government and employees, short-term bond For short-term liabilities, the process is usually easy and simple to implement However, time to pay is short so the companies may be difficult to pay the debt if they do not use them effectively

Long-term debt illustrates the debt which the firms are responsible to pay principle and cost of capital after a certain period including medium and long-term loans from external credit institution such as banks, financial leasing companies, the issuance of bonds or other funds Long-term debt usually has a higher cost of capital than the short-term one, however, the firms are under short-term payment pressure

“The shareholders are equity investors, who contribute equity financing” (Brealey,

Myers, & Allen, 2010) Besides, Hall and Lieberman (2012); Ross et al (2013) claimed that “Equity is the difference between total assets and total liabilities” With different types of firms, equity is developed differently and includes three main types:

Chartered capital is the amount of money contributed by the founders when they open the companies This is the capital written in the companies’ rules Especially, for joint-stock companies, the main capital is the contribution of the shareholders by buying the stock of the firms Each shareholder is an owner of the company and is liable only on the value of shares held by them This is not a debt so joint-stock companies have full rights to use their production and business activities without any restraints about payment This feature shows that the degree of autonomy in the production and business of joint stock companies depends heavily on this source of capital The larger the equity contributes, the higher the financial autonomy is

The capital from retained earnings is the income of the companies which is accepted by the shareholders to reinvest instead of receiving the dividend This is an active and convenient capital for the companies However, companies must commit to paying a higher interest rate than the current dividend

The capital from issuing stock: The enterprises can increase their equity by issuing new stock This is really an important capital mobilization in the long-term financing strategies of enterprises The joint-stock company can issue additional shares through the stock market

Other equity includes funds and specialized funds formed primarily from the distribution of profits, including investment funds, financial reserve funds, capital construction investment funds, exchange rate difference and so on.

The theories about capital structure

2.2.1 Capital structure theory of Modigliani and Miller

The theory of Modigliani and Miller (1958) is the first theory that research the capital structure of enterprises and this is also the basis for later theories

According to the Modigliani and Miller, in a perfectly competitive market with no tax, all the way of combinations of equity and liabilities are the same According to

Bradley, Jarrell & Kim (1984) “At any financial option, whether using equity or choosing short-term or long term debt, the value of the business is unchanged”

In 1963, Modigliani and Miller showed another study with the effect of corporate tax.

Because of benefits from the tax shield, the value of the levered company is higher than value of the unlevered company

The trade-off theory explained why companies are often financed partly by debt and partly by equity One big reason why enterprises cannot fully finance a loan is that besides the existence of a debt tax-shield benefit, the use of debt financing also generates more costs, especially bankruptcy costs including both direct and indirect costs of bankruptcy caused by debt The trade-off theory assumes that the target debt ratio can be different among firms Companies that have secure tangible assets and high profitability have higher debt ratios and vice versa

Thus, this theory shows that the tangible fixed assets and profitability have an impact on capital structure Enterprises with large tangible fixed assets will be able to pay better; firms will use more debt to take advantage of the tax shield The higher the profitability is, the fewer bankruptcy costs are, therefore; companies will tend to use more debt to take advantage of the tax shield

The pecking order theory indicated that there is a priority in the use of funding sources

Accordingly, the investment will be financed first by internal capital (mainly retained earnings), followed by new debt financing and finally new equity issuance The order of using funding sources indicates the negative relationship between profit and debt

This theory shows that growth rates and profitability have an impact on capital structure:

A company with a high growth opportunity means that there is a high demand to borrow when the retained earnings are not enough to meet the firm's demand, it will give priority to choosing a loan to increase the debt ratio The growth opportunity is positively correlated with capital structure

High profitability will allow enterprises to have more conditions to retain more profit, so they will use less debt, therefore; profitability is negatively associated with capital structure

The agency theory was completed by Jensen and Meckling (1976) and it explains the relationship between principal and agent

This theory shows the growth rate is negatively correlated with debt because shareholders often do not want to share benefits with creditors when the firm grows well

Agency theory points out that due to the conflict between shareholders and managers, larger companies choose to borrow more because the terms in the loan agreement will control the behavior of the manager Hence, firm size has a positive impact on the debt

Besides, agency theory also confirmed the conflict of interest between ownership and manager in the corporation According to Nazir, Aslam & Nawaz (2012) “The

Corporate Governance and capital structure of the firms are linked together through the agency cost especially in case of developing economies” The relationship between corporate governance and capital structure has been identified in many studies, for example, Berger et al (1997); Friend and Lang (1988); Wen et al (2002)

One of the most important issues of corporate governance is pluralist executives (CEO duality) When the CEO is the chairman of the board, he will increase the power of the CEO to help make decisions quickly and ensure decisions are implemented But the fact that the CEO is also the chairman of the board of directors is also losing the important function of the chairman of the board of directors Hence, the CEO will act according to his goals, not the shareholders' Besides, according to agency theory, because of agency conflicts, managers of the firms may not always accept leverage choices that are maximizing value for shareholders Instead, managers may tend to select the leverage degree that maximizes their own benefits

Therefore, we can conclude that there is a relationship between pluralist executives and capital structure through explanation about agency conflict of agency theory.

The determinants affecting capital structure

Based on theories of capital structure as well as a variety of research results from previous researchers, there are many factors having impacts on the capital structure of the enterprises

These determinants are as follow:

Titman and Wessels (1988) suggested that “Profitability is an essential determinant of capital structure because it shows how much earning the company retains to keep it going” The pecking order theory showed that enterprises with high profit prefer internal funding to external debt In more detail, internal funding from retained earnings will be used first which is followed by borrowed debt and issued stock This shows that there is a negative relationship between profit and capital structure This opinion was supported by previous studies include Ahmed Sheikh and Wang (2011);

Saeed et al (2014); Titman and Wessels (1988); Wald (1999); Booth et al (2001);

Viviani (2008); De Jong et al (2008); Serrasqueiro and Roga˜o (2009) Besides, the studies of Chen (2004); Tong and Green (2005); Huang and Song (2006) also point to the negative relationship between profitability and capital structure when researchers conduct research related to capital structure in Chinese companies

However, trade-off theory shows the positive relationship between profitability and leverage ratio, it means that “Companies with high profitability should use more debt because of the tax depreciation and lower expected bankruptcy costs” (Frank and Goyal, 2003; Fama & French, 2002)

According to Mouamer (2011) “There is a relationship between growth opportunity and capital structure and this relationship was confirmed in current literature”

Depending on the different theories and researches, the relationship direction is different

Based on the pecking order theory, there is a positive relationship between growth opportunity and capital structure The companies with good growth opportunities mean that they have more demands for borrowing capital, especially when retained earnings are not enough for operating, they will have the priority to choose borrowed capital to increase the debt ratio because the cost of flotation in selling stock is more than the cost of issuing debt

However, according to Myers (1984) “High growth means higher bankruptcy costs”

Besides, Deesomsak, Paudyal and Pescetto (2004) found that growth firms have value come from intangible growth opportunities, so when firms need the money their revenue may not have Based on the trade-off theory, there is a negative relationship between growth opportunities and capital structure due to the firms with growth opportunities like holding intangible assets which can not be collaterals, so they tend to use less debt Furthermore, based on agency theory, the high growth rate also means positive business results so the shareholders do not want to share this advantage with the creditors, and then they will use less debt Researches from Zou and Xiao (2006); Eriotis et al (2007) also confirmed this relationship

Large-sized enterprises usually have advantages in the recent competitive economic market The size of firms is considered to be the first sign for external investors to have information about the companies According to Titman and Wessels (1988)

“Large companies can access the market more easily and can borrow money with better terms” Therefore, most firms have the tendency to expand the size to take this advantage When studying companies of G-7 countries, Rajan and Zingales (1995) found that large companies are more diversified so they were less likely to go bankrupt, so large firms should use more debt Ahmed Sheikh and Wang (2011) claimed that to have external capital, small-sized firms have to bear a higher cost than the large-sized ones Based on the trade-off theory, large-sized companies can borrow more capital than small-sized enterprises to take tax benefits of debt Besides, accroding to agency theory, due to the conflict between shareholders and managers, larger companies choose to borrow more because the terms in the loan agreement will control the behavior of the manager It means that firm size has a positive relationship with leverage This opinion was confirmed by some previous researches including

Deesomsak et al (2004); Eriotis et al (2007); Serrasqueiro & Roga˜o (2009)

However, according to pecking-order theory, larger firms are better known will have fewer problems related to information asymmetric and have enough internal capital, so they will tend to use equity to finance firm activities It shows that firm size has a negative impact on leverage Research from Chen (2004) pointed out the negative relationship between firm size and the long-term debt ratio

As stated by Myers (1984), there is a link between tangible assets and financial leverage due to the fact that companies with lots of collaterals will have a low rate in the matter of asymmetric information Frank and Goyal (2009) claimed that “ It is evident that if the company has mortgage loans, the borrower's risk associated with the cost of the loan will also decrease” This argument is also supported by empirical studies such as Huang and Song (2006); Titman and Wessels (1988) Based on trade- off theory, tangible assets have a positive relationship with capital structure because enterprises which have the larger number of tangible assets usually receive liabilities with the quite more convenient condition than the ones with the smaller number of tangible assets Tangible assets can have an influence on the decision of a company to borrow money because tangible assets are more valuable than intangible assets in case the firm is bankrupt Besides, the level of risk will decrease when the company provides tangible assets to mortgage and creditors can require to sell these assets in case the company can not pay Therefore, tangible assets are good-mortgaged assets for the debt

In contrast, other researchers illustrated that there is a negative relationship between tangible assets and debt ratio including Ahmed Sheikh and Wang (2011); Booth et al

(2001) Titman and Wessels (1988) showed that firms with fewer collateral assets can use more debt to prevent managers from the optimal levels of perquisites It is suitable for the implication of agency theory In Vietnam, a study from Tran and Ramachandran (2006) also found out this negative relationship

“Liquidity ratio may have mixed effect to leverage of the firm” (Vo, 2017) Based on the trade-off theory, enterprises with high liquidity usually maintain a higher debt ratio because they can ensure obligations of a contract on time, which shows a positive relationship between liquidity and capital structure

However, as implied in the pecking order theory, enterprises usually have a priority to use internal funding from retained earnings rather than external funding Therefore, businesses that are able to generate retained earnings high enough to finance the investment will not use debt anymore This refers to a negative relationship between liquidity and capital structure Empirical studies supporting this view include

Deesomsak et al 2004; Afza et al (2011); Saeed et al (2014)

According to the theory of trade-off theory, businesses with high-income volatility often face greater risk in paying their debts This implies that businesses with high- income volatility will borrow less and prefer internal funds The enterprises with high risk usually have to deal with the worry about bankruptcy Thus, a negative relationship between business risk and capital structure Empirical research supporting this view is Booth et al (2001) In contrast, according to pecking-order theory, when a company has high risk, the potential investors will require higher returns and it makes the company face expensive costs when the company issues equity, therefore, risky firms will use more debt to finance themselves There are several studies that have found a positive relationship between business risk and capital structure such as Saeed et al (2014); Tran and Ramachandran (2006)

The non-debt tax shield is also an analysis when discussing factors affecting the capital structure While Bradley, Jarrell & Kim (1984) argues that “there is a positive relationship between the non-debt tax shield and financial leverage”, other authors have the opposite view The trade-off theory shows a negative relationship between non-debt tax shield and capital structure When this tax shield is high, net cash flow from operating profit to shareholders is large As a result, enterprises with high depreciation in the estimated cash flow will use less debt in the capital structure

Research results from Wald (1999); De Miguel & Pindado (2001); Deesomsak et al

(2004) also point out the negative relationship between non-debt tax shield and capital structure In addition, Titman and Wessels (1988) found that “there is no relationship between capital structure and non-debt tax shield”

Literature review

The issue of structuring capital has been particularly interesting to the managers as well as the researchers in the world Since Modigliani and Miller’s research of capital structure was awarded the Economy Nobel Prize, there have been more and more empirical researches carried out in order to examine its practice of theory and show their opinion to diversify the effects of the firm’s capital structure

In the research of Chen & Strange (2005), the authors explored the determinants of the capital structure of firms listed on the Shanghai Stock Exchange and Shenzhen Stock Exchange in 2003 The author found out that profitability has an negative impact on the capital structure while size, risk, and firm age have an impact positively on debt ratio In addition, research of Ahmed Sheikh & Wang (2011) reported that four independent variables include profitability, liquidity, earnings volatility, and tangibility are negative impact on the debt ratio, while firm size is positively related to the debt ratio The research of Chen & Strange (2005) showed that intangible assets do not have statistically significant effects meanwhile the research of Ahmed Sheikh

& Wang (2011) declared Non-debt tax shields is not significantly related to the debt ratio Both of these two researches mentioned above showed that growth opportunity does not have statistically significant effects

Research in Turkish companies from Sayilgan et al (2006) also use independent variables related to firm-specific characteristics to analyze Research results showed that the leverage ratio has positive relationships with size and growth opportunity in total assets and have negative relationships with tangibility, non-debt tax shields, profitability, growth opportunities in plant and property and equipment The paper from Imtiaz et al (2016) attempts to determine the factors that affect the capital structure of listed firms in the pharmaceutical sector in Bangladesh from 2009 to 2013

This research used six independent variables including profitability, growth, size, liquidity, tangibility, and operating leverage Profitability, tangibility and operating leverage were statistically significant impact on the capital structure while size, growth, and liquidity were not Besides, profitability, tangibility, growth and operating leverage have negative impacts on leverage, while size and liquidity have positive impacts on the leverage of pharmaceutical firms in Bangladesh

The research of Pacheco & Tavares (2017) suggested that key determinants include profitability, assets tangibility, firm dimension, total liquidity and risk are affecting the capital structure when the authors do a research related to hospitality sector SMEs, while growth, other tax benefits and age are not relevant The size variable explained a negative relationship with short-term debt, indicating that smaller firms are more leveraged in the short term Kieschnick & Moussawi (2018) investigated companies with non-negative total assets or sales during 1996-2016 Research results show that firm age has a negative impact on firm’s use of debt Furthermore, the authors also explains the reason why firm age has a negative relationship with how much debt a firm uses Besides, this research showed dual class firms will not use much debt financing initially but when they age as public firms they seem to use more debt financing

The study of Abor (2007) analyzed 22 listed firms in the Ghanaian Stock Exchange during 1998-2003 to find out the impact of corporate governance on capital structure

The dependent variable is debt ratio, the explanatory variables are board size, board compensation, CEO Duality, and CEO tenure Research results showed that capital structure has a positive relationship with board size, CEO duality, and board composition The results also pointed out that CEO tenure has a negative impact on the leverage but this relationship is insignificant In the research of Pindado & De La

Torre (2011), the authors pointed out that “According to ownership’s view, the person who has the power to control the firm will have an impact on the firm’s capital structure” Besides, the research from Ranti (2013) tried to discover the relationship between capital structure and two independent variables which are board size and CEO Duality To do this research, the author selected and analyzed 40 listed firms in the Nigerian stock exchange in the period 2006-2011 The paper found out that CEO duality has a positive associated with capital structure while board size has a negative associated with capital structure The study of Saeed et al (2014) used different firm characteristics variables and corporate governance variables such as CEO duality, CEO Tenure, Board size and explored their relationship with the debt ratio Research results show that except size, tangibility and CEO duality, all remaining variables have a significant impact on the debt ratio Board size and CEO tenure have a negative impact on debt ratio which indicates that governance avoids debt utilization to keep away from the larger performance pressure

Research from Vo (2017) utilizes data of firms listed on the Ho Chi Minh City stock exchange from 2006 to 2015 According to this research, leverage is a dependent variable and a large number of firm attributes variables comprise asset growth, ratio of tangible assets, profit, firm size and liquidity as explanatory variables This research found out that the growth opportunity coefficients are positive but not significant for both long-term and short-term leverage However, this growth opportunity is positive and significant in explaining the ratio of long-term to short- term debt Meanwhile, in the research of Tran & Ramachandran (2006), growth opportunity has a positive impact on leverage and the result from research of Pham

& Nguyen (2015) also supported this relationship

Reseach results of Vo (2017) showed that tangible assets have a positive and significant impact on long-term leverage but negative and significant in explaining short-term leverage While tangibility has a negative associated with capital structure as a result from research of Tran & Ramachandran (2006).The profitability coefficient is negative and significant for both short-term debt and the ratio of short- term to long-term leverage, and this result is consistent with a result of profitability from research of Pham & Nguyen (2015) However, research of Tran &

Ramachandran (2006) declared that profitability does not have significant effect on the capital structure of Vietnamese SMEs

In addittion, research of Vo (2017) pointed that the coefficient of firm size is positive and significant in explaining long term debt, while negative for short-term debt

Meanwhile, research paper from Tran & Ramachandran (2006) showed firm size has a positive relationship with capital structure In contrast, according to research of

Pham & Nguyen (2015), firm size does not have effects on leverage ratio Liquidity has a negative and significant relationship with short-term leverage while positive but insignificant in long term leverage in the research of Vo (2017), however, it does not have statistical meaning in the research of Pham & Nguyen (2015)

The paper form Tran & Ramachandran (2006) analyzed the determinants affecting the capital structure of small and medium-sized enterprises (SMEs) in Vietnam The research’s findings point out that SMEs utilize generally current liabilities to fund their activities The paper also pointed that firm ownership, firm size, relationships with banks, and networking are strong effect of determinants describe the asymmetric features of the fund mobilization process in a transitional economic system of Vietnam

From the research results of previous researches above, we can see there are some differences in the variables of the above studies that affect the capital structure of companies in different industries and also show the different results and even point out contrary research results This may be due to different industry characteristics, different time and space research scope, or different estimation analysis models

In particular, factors of previous studies included in the review are: profitability, growth opportunities, tangibility of assets, liquidity, firm size, business risks, the non- debt tax shield, tax, firm age, corporate governance and variables for the capital structure are total debt to total assets, long-term debt to total assets, and short-term debt to total assets

Although previous studies have contributed significant achievements related to the factors that affect the capital structure, there are very few studies related to the capital structure of developing countries In addition, “There are very few studies related to the effect of corporate governance on capital structure in developing countries but only focus mainly on developed economies with inconclusive results” (Abor, 2007)

Besides, "Empirical results on the relationship between corporate governance and capital structure appear to be varied and inconclusive" (Abor, 2007)

Research gaps

Previous studies have provided valuable research results on capital structure, however,

“there is little work done on examining capital structure in emerging countries”

Particularly, according to Črnigoj & Mramor (2009) “The capital structure differences of companies can be explained by modern capital structure theory for developed countries, but for developing countries, it is still a question for researchers to continue looking for answers”

This study aims to provide more understanding of capital structure decisions in a developing country Despite a large number of previous researches on capital structure, research using data of Vietnamese enterprises is still limited According to

Le and Do (2017), “Despite the abundant theoretical and empirical literature on capital structure, the shortage of research in the Vietnamese context is obvious”

Therefore, it is important to investigate the factors that influence the capital structure of companies in the Vietnam market

Research on factors affecting the capital structure of the pharmaceutical industry listed companies has been done in different countries before Previous studies used a different set of independent and dependent variables and also gave different, even contradictory results Besides, existing theories also show different research results

Therefore, this is the motivation for the author to conduct research on the capital structure of the pharmaceutical industry in Vietnam As indicated above, there are few studies on capital structure in the Vietnam market, and it only focuses on companies in general, not in any specific industries According to the data and evidence cited by the author in the practical motivation, Vietnam's pharmaceutical industry is an emerging and extremely important industry, so studying the factors affecting the capital structure of listed pharmaceutical companies in Vietnam is essential

In addition, corporate governance is different between countries, because of the political and legal differences between countries for ownership and control authorities of public companies (Roe, 1990) Besides, there are very little researches on corporate governance's influence on capital structure in Vietnam Especially, there are little researchess related to the influence of pluralist executives on the capital structure of pharmaceutical companies in Vietnam – Pharmerging Therefore, to fulfill this gap, this study will examine the impact of pluralist executives on the company's capital structure

Besides, previous capital structure studies in Vietnam focused on companies listed on both two stock markets, namely Hanoi Stock Exchange and Ho Chi Minh City Stock Exchange However, there is a limited number of researches done on the capital structure of companies listed by each stock market Therefore, this study will compare the factors affecting the capital structure of pharmaceutical companies listed on the Hanoi Stock Exchange with factors affecting the capital structure of those listed on the Ho Chi Minh City Stock Exchange

The pharmaceutical industry has been an emerging industry in Vietnam in recent years, so there have been very few studies conducted on the capital structure of the pharmaceutical industry in Vietnam in recent years This study will research the pharmaceutical industry in the last 10 years, from 2010 to 2019, so this research will be topical.

METHODOLOGY

Research methodology

Based on results of previous reseachers, hypothesises in this research are tested by using the linear regression model, using firm characteristics and source of finance as respective independent and dependent variables Hence, in order to suit with the research model as well as the data collected, the thesis uses Ordinary Least Square (OLS) to estimate the parameters of the model Multicollinearity in this model is tested through the coefficient of correlation matrix and variance – inflation factor (VIF)

The detail steps in this study:

Step 1: Collecting data from financial statements and annual reports of listed pharmaceutical firms in Vietnam from 2010 to 2019

Step 2: Choosing the variables and hypotheses based on the theories in chapter 2

Step 3: Suggesting a regression model and doing the calculation by using Excel and Eview

Step 5: Discussing the results and giving a conclusion for the study.

Research Data

There are 20 pharmaceutical firms listed on Vietnam's stock market, of which 9 pharmaceutical companies are listed on the Hanoi Stock Exchange and 11 pharmaceutical companies are listed on the Ho Chi Minh City Stock Exchange

The data was collected from financial statements of 20 listed pharmaceutical firms in

Ha Noi and Ho Chi Minh City Stock Exchange during the ten year period from 2010 to 2019 (Hanoi Stock Exchange divides listed firms into different sectors based on Hanoi Stock Exchange Standard Industrial Classification in which revenue is the main criteria to decide the main industry of the firm, while Ho Chi Minh City Stock Exchange divides listed companies into different sectors based on Global Industry Classification Standards including four levels from sector, industry group, industry to sub-industry) After that, I also used Excel to collect data and calculate the necessary ratios To analyze and test the regression model of determinants affecting listed pharmaceutical firms in Vietnam, the thesis used the Eview program to analyze the data.

Research Model

Empirical studies in Vietnam as well as in the world about factors affecting capital structure of firms almost used linear regression model to test the hypotheses between capital structure and determinants affecting it

Based on the capital structure theories as well as domestic and foreign studies mentioned in chapter 2, especially the study of Saeed et al (2014) which researched the determinants influencing on pharmaceutical firms in Pakistan, therefore, the author could compare the results of pharmaceutical companies in Vietnam which were different from the ones of Pakistan or not Also, the author has consulted the study of Vo (2017) which studied the factors influencing the capital structure of emerging markets, case study in Vietnam, it helps the author to better understand the capital structure situation and urgency of studying capital structure in Vietnam

Moreover, to match the development situation as well as characteristics of pharmaceutical companies listed on stock exchange in Vietnam, the public data in the financial statements of companies listed on the stock market, the author has inherited, adjusted and issued a regression model as shown below In this thesis, the author uses the dependent variable which is the debt ratio The independent variables consist of Profitability, Growth opportunity, Firm size, Tangible assets, Liquidity, Firm age, and Pluralist Executives

I will denote variables as follows: Debt ratio – TD, Profitability - PROF, Growth opportunity - GROW, Firm size – SIZE, Tangible assets – TANG, Liquidity – LIQ, Firm age – AGE, Pluralist Executives - PLU Therefore, the detailed model is:

Variables measurement

The data of this study comes from financial statements, annual reports and management reports of listed companies, therefore, all variables in this study are estimated using book value Besides, estimates of these variables are adopted from existing researches

TD: Debt ratio Total debt/ total assets Saeed et al., (2014);

EBIT/ Total assets Chen (2004); Sinha

Change of percentage of total assets

Titman and Wessels, (1998); Saeed et al.,

(2014) SIZE: Firm size Logarithm of total assets Chen (2004); Vo

Fixed assets/ Total assets Sinha & Samanta,

(2011) LIQ: Liquidity Current assets/ Current liabilities

Sinha & Samanta, (2014); Ahmed Sheikh & Wang,

(2011) AGE: Firm age The number of years present year – year of listing

1 if CEO is a chairman of the board; 0 if CEO is not a chairman of the board

Hypothesis

Profitability (PROF): Based on the pecking order hypothesis, enterprises with high profit prefer internal funding to external debt In more detail, internal funding from retained earnings will be used first which is followed by issued external debt or preferred stock Finally, common stock will be the final priority if necessary This shows that there is a negative relationship between profit and capital structure The empirical researches did a favor for this opinion including Ahmed Sheikh and Wang

(2011); Saeed et al (2014); Titman and Wessels (1988); Wald (1999); Booth et al

(2001); Viviani (2008); De Jong et al (2008); Chen (2004) However, as implied in the trade-off theory, companies with high profitability should use more debt because of the tax depreciation and lower expected bankruptcy costs In Vietnam, the researches of Pham and Nguyen (2015); Vo (2017) proved that there is a negative between profitability and capital structure Therefore, based on the pecking order theory and previous researches in Vietnam, I hypothesize that:

H1: Profitability has a negative relationship (-) with debt ratio

Growth opportunity (GROW): Based on the trade-off theory, the firms which have larger growth opportunities usually maintain a lower debt ratio because the risk level may be high with growth-oriented investment Besides, firms with growth opportunities like holding intangible assets which can not be collateral, so they tend to use less debt Therefore, according to the trade-off theory, there is a negative relationship between growth opportunities and capital structure Some researches supported for this opinion are Saeed et al (2014); Imtiaz, Mahmud & Mallik (2016)

In contrast, as implied in the pecking order hypothesis, companies with good growth opportunities will tend to borrow more in the future Because if the companies have good growth opportunities with good investment but they lack internal funds, they will tend to use debt to finance themselves In other words, there is a positive relationship between growth opportunity and capital structure The empirical studies supported for this opinion include Vo (2017); Pham and Nguyen (2015); Tran and Ramachandran (2006) Therefore, based on the pecking order theory and some previous researches, I hypothesize that:

H2: Growth opportunity has a positive relationship (+) with debt ratio

Firm size (SIZE): According to pecking-order theory, larger firms will have fewer problems related to information asymmetric, they will tend to use equity to finance firm activities It means that firm size has a negative impact on capital structure Chen

(2004) also showed the negative relationship between firm size and long-term leverage ratio However, accroding to agency theory, due to the conflict between shareholders and managers, larger companies choose to borrow more because the terms in the loan agreement will control the behavior of the manager As implied in trade-off theory, large-sized companies can borrow more capital than small-sized enterprises In more detail, to have external capital, small-sized firms have to bear a higher cost than the large-sized ones Therefore, the large firms are more convenient than the small ones to enter the capital market which shows that there is a positive relationship between debt ratio and the size of firms Another reason is that bigger firms are more diversified and thus they will have a lower variance of profit and can get tax benefits from debt, making them able to endure a higher cost of debt than smaller firms Besides, lenders prefer lending to larger firms because such firms are seen to have lower levels of risks This opinion was supported by a lot of empirical studies in the world including Abor (2007); Ahmed Sheikh and Wang (2011); Saeed et al (2014) In Vietnam, the positive relationship between the size of firms and capital structure was also proved in the research of Tran and Ramachandran (2006)

Based on the trade-off theory and the results of previous empirical research, I hypothesize that:

H3: The size of firms has a positive relationship (+) with debt ratio

Tangible assets (TANG): Tangible assets are considered to be one of the determinants of the firms’ capital structure As implied in the trade-off theory, tangible assets have a positive relationship with capital structure Based on this theory, previous researchers thought that the enterprises which have the larger number of tangible assets usually receive liabilities with the quite more convenient condition than the ones with the smaller number of tangible assets due to the fact that it looks like a positive sign for creditors Empirical studies supported this opinion including

Saeed et al (2014); Frank and Goyal (2009); Titman and Wessels (1988) In contrast, other researchers illustrated that there is a negative relationship between tangible assets and debt ratio According to Titman and Wessels (1998) the firms with fewer collateral assets can use more debt to prevent the managers from the optimal level of perquisites Empirical studies conducted in various countries that support this view include Booth et al (2001); Sayilgan et al (2006); Ahmed Sheikh and Wang (2011);

Tran and Ramachandran (2006) Therefore, based on the previous empirical studies as well as the trade-off theory, I hypothesize that:

H4: Tangible assets have a positive relationship (+) with debt ratio

Liquidity (LIQ): Based on the trade-off theory, enterprises with high liquidity usually maintain a higher debt ratio because they can ensure obligations of a contract on time, which shows a positive relationship between liquidity and capital structure

However, as implied in the pecking order theory, enterprises usually have a priority to use internal funding from retained earnings rather than external funding Therefore, if firms are able to make higher retained earnings, their demand for external funding will not be important when their assets are enough to be used for investing This shows that there is a negative relationship between liquidity and debt ratio The empirical studies proved this opinion including Deesomsak et al (2004); Ahmed Sheikh & Wang (2011); Saeed et al (2014) Therefore, based on the pecking order theory and some empirical studies, I hypothesize that:

H5: Liquidity has a negative relationship (-) with debt ratio

Firm age (AGE): Based on the trade-off theory, the profits of younger firms may be small to pay for the cost of debt and may not be useful to utilize the tax benefits of debt, it means that they gave the research result that firm age has a positive relationship with the leverage ratio Chen and Strange (2005) also supported this opinion Besides, Diamond (1989) also pointed out that the older listed companies have a reputation and debt repaying history will be easier to finance their company at a lower cost In contrast, the pecking order theory showed that older companies will use less debt than younger companies because these older companies have more time to attract, collect and accumulate funds To support pecking order theory, researches from Hall et al (2000); Kieschnick & Moussawi (2018) found out that firm age has a negative relationship with the leverage ratio According to pecking order theory and previous researches, I hypothesize that:

H6: Firm age have a negative relationship (-) with debt ratio

Pluralist Executive (PLU): Based on the agency theory, when owners and managers are independent, if the owners lose their control, the managers will operate the companies to make them profitable which may harm the benefit of the owners On the other hand, when the CEO is also a chairman, they can impact directly the financing decisions of the firms, they usually prefer using less debt to avoid bankruptcy and loss their control According to Fosberg (2004) “there is a negative relationship between pluralist executives and leverage ratio” However, according to

Abor (2007), the author found out that the positive relationship between pluralist executives and the use of debt While Jaradat (2015) points out that “there is no significant impact of CEO duality on capital structure” In Vietnam pharmaceutical industry context, recently, many domestic and foreign investors have invested in Vietnamese pharmaceutical companies, so to fund their activities, companies will use capital from new investors and shareholders instead of using debt Moreover, according to agency theory, shareholders do not want to share benefits with creditors, the CEO as a chairman will use less debt to avoid the risk of bankruptcy, loss of benefits, and loss of their control I hypothesize that:

H7: Pluralist executives have a negative influence (-) on debt ratio

DATA ANALYSIS AND FINDINGS

Analyzing the pharmaceutical sector in Vietnam during the 10-year period

4.1.1 The characteristics of pharmaceutical sector in Vietnam

The pharmaceutical industry is one of the important sectors in the national economy which has the function of producing, importing and distributing many types of medicine in order to serve the treatment, healing, restoration, and enhancement of human health

The operating activities of pharmaceutical firms are divided into two main types including producing and distributing drugs The producing medicines groups include materials for the production of pharmaceuticals suppliers, domestic pharmaceutical enterprises and FDI enterprises The distribution groups include wholesale distributors, local and foreign retailers, and retail markets

Besides, according to Business Monitor International Research, in 2018, Vietnam's pharmaceutical market size reached about 5.9 billion USD, up 11.5% compared to the previous year Vietnam has become Southeast Asia's second-largest pharmaceutical market and is among the 17 fastest growing countries in the world

Although growing rapidly, Vietnam's pharmaceutical production capacity currently meets only 53% of the domestic pharmaceutical demand, the rest is through imports

In 2018, Vietnam's pharmaceutical imports nearly 2.8 billion USD; this level continues to increase by 10% in 2019 Vietnam is also highly dependent on imported pharmaceutical raw materials, mainly from China with more than 60% of demand

Vietnam has completed the "golden population" phase from 2016, beginning its aging population from 2017 According to the Department of Population and Family Planning, Ministry of Health, by 2050, 21% of Vietnam's population has been over

65 years old, leading to high consumer demand for drugs over the next 30 years

According to statistics of the Ministry of Health, spending per capita on drugs in Vietnam has increased from 9.85 USD in 2005 to 22.25 USD in 2010 and continues to nearly double in 2015, with 37.97 USD Particularly in 2017, the average spending on Vietnamese medicine was about 56 USD / person (about 1.3 million VND) In

2018, Vietnam increased to 124 USD (equivalent to nearly 2.9 million VND)

Another supporting factor for the pharmaceutical industry is the merger and acquisition (M&A) trend in the pharmaceutical industry which is also opening up growth potential for businesses with foreign investment

According to the forecast from Business Monitor International, the size of Vietnam's pharmaceutical industry could reach 7.7 billion USD by 2021, rising to 16.1 billion USD by 2026 The compound growth rate can reach 11%

4.1.2 Current status of capital and capital structure of pharmaceutical listed firms

As far as I know, the financial structure of enterprises shows asset structure, capital structure and the relationship between asset structure and capital of companies

The indicators reflect the asset structure of the firm include the current assets ratio and the long – term assets ratio The research results illustrate these indicators to pharmaceutical companies as below:

Table 4.1: Overview of asset structure of pharmaceutical firms

Year CA/TA LA/TA

(Source: Author’s calculation from financial statements of pharmaceutical listed firms)

The average short-term assets of pharmaceutical enterprises also tend to increase from 2010 to 2018, slightly decrease in 2019 and account for a high proportion of total assets The proportion of current assets on total assets of the industry is 76.78%

This shows that short-term assets account for the majority of total assets of the enterprise, which are mainly receivables from customers and inventories

From the table above, we can see the average ratio of long-term assets to total assets is 23.22%, this index tends to decrease from 2010 to 2017, but then tends to increase in recent years and reach 24.21 % in 2019

The capital structure reflects the proportional structure of the types of capital formation the capital of companies Equity and debt are the main sources of capital

The indicators reflect the capital structure of enterprises are debt ratio including current liabilities, long-term debt ratio, and equity ratio Research results of these indicators for pharmaceutical enterprises are shown in the table below:

Table 4.2: Overview of capital structure of pharmaceutical firms

Year CL/TC LD/TC TE/TC

(Source: Author’s calculation from financial statements of pharmaceutical listed firms)

The table above clearly shows the capital structure of pharmaceutical enterprises, through which we can see that the main sources of funding for business activities are short-term debt and equity; Long-term debt accounts for only a very small proportion of the total capital of the business Besides, specific analysis in the financial statements of each enterprise shows a clearer financial picture In the short-term debt, the account payables to the supplier account for the highest proportion

Administrators see this as a trading credit

It could be seen that almost the pharmaceutical listed enterprises on the two stock exchange markets had higher debt to equity ratio than 1 indicating that the domestic pharmaceutical companies used short-term debt in combination with equity in order to invest in which were mainly account for receivables and inventories Because the pharmaceutical industry had many materials and pharmaceutical materials to import from abroad, so firms had an intention to import more for gradual storage using for production Moreover, the pharmaceutical market is now quite competitive with ordinary pharmaceutical products, in order to consume the products; the companies apply deferred payment policy so the account receivables tend to increase higher The above is an overview of the financial situation of listed pharmaceutical companies on two stock exchanges To find out more about the issue of using the financial leverage we will study the quantitative model in the next section.

Descriptive statistics

4.2.1 Descriptive statistics of dependent variable

Table 4.3: Descriptive statistics of dependent variable

(Source: Author’s calculation from the EViews software)

The average debt ratio of pharmaceutical companies from 2010 to 2019 is 42.65%, the highest is 97.06% of Vimedimex Medi – Pharma Joint Stock Company (VMD) in 2015, and the lowest is 9.63% of American Vietnamese Biotech Incorporation (AMV) in 2019 The gap between the maximum debt value and the minimum debt vale is 88%, which shows the diversity of capital structures among firms

4.2.2 Descriptive statistics of independent variables

Table 4.4: Descriptive statistics of independent variables

Obs Mean Std Dev Min Max

(Source: Author’s calculation from the EViews software)

The average profitability (PROF) is 12.72%, the highest is 43.18% of Central Pharmaceutical Joint Stock Company No 3 (DP3) in 2018 and the lowest is -35.29% of American Vietnamese Biotech Incorporation (AMV) in 2014 This shows that although pharmaceutical firms always occupy a good position and average growth rate in the market, profitability is always fluctuating

The growth opportunity is measured by the percentage change in total assets (GROW) on average 25.09%, the highest is 1933.6% of American Vietnamese Biotech Incorporation (AMV) in 2017 and the lowest is -21.24% of SPM Joint Stock Company in 2017

The firm size (SIZE) is the logarithm of the average total assets which is 13.1105 unit, the highest is 16.0926 unit of Vimedimex Medi - Pharma Joint Stock Company (VMD) in 2018 and the lowest is 9.8212 unit by Cai Lay Veterinary Pharmaceutical Joint Stock Company (MKV) in 2012 which illustrates that the size of the enterprise is very diverse

The average fixed assets over assets (TANG) is 26.95%, the highest is 73.64% of Phong Phu Pharmaceutical Joint Stock Company (PPP) in 2013 and the lowest is

0.49% of Vimedimex Medi Pharma Joint Stock Company (VMD) in 2015 Therefore, the fixed asset structure in enterprises is unequally distributed among total assets

Current assets over current liabilities (LIQ) averaged 235.70%, the highest is 1332.78% of American Vietnamese Biotech Incorporation (AMV) in 2017 and the lowest is 88.66% of Phong Phu Pharmaceutical Joint Stock Company (PPP) in 2017

The firm age (AGE) averaged 4.35 years, the highest is 13 years of DHG Pharmaceutical Joint Stock Company (DHG) and Imexpharm Corporation (IMP) in

2019, the lowest are listed companies in 2017 included Binhdinh Pharmaceutical and Medical Equipment JSC (DBD), Pymepharco Joint Stock Company (PME) and Vidipha Central Pharmaceutical Joint Stock Company (VDP).

Testing the model

(Source: Author’s calculation from the EViews software)

“The overall goodness of fit of the regression model is measured by the coefficient of determination, 𝑅 2 It tells what proportion of the variation in the dependent variable is explained by the explanatory variable 𝑅 2 lies between 0 and 1; the closer it is to 1, the better is the fit” (Gujarati & Porter, 2012)

It can be seen from figure 4.1 that R-squared is equal to 0.637594, which means that 63.7594% of the volatility of total debt is due to the independent variables including profitability, growth rate, firm size, tangible assets, liquidity, firm age, and plural executives In other words, this regression model explains 63.7594% of the capital structure, the rest is due to errors and other factors

According to Gujarati & Porter (2012) “if F > 𝐹𝛼 (k-1,n-k) and the P-value of F is sufficienly low”, one can reject null hypothesis that is “all slope coefficients are simultaneously zero” We can see in the firgure 4.1, F = 48.25603 > 𝐹𝛼 (k-1,n-k) 𝐹0.05 (7,192) = 2.0096, besides, Prob (F-statistic) = 0.0000 < 0.05, so we can reject null hypothesis and conclude that F value is significant at about the 5 percent level and the regressors have impact on the regressand

4.3.2 Correlation matrix and multicollinearity testing Correlation matrix

Before going into regression analysis we need to look at the correlation between independent variables

Figure 4.2: Correlation matrix of research variables

(Source: Author’s calculation from the EViews software)

Figure 4.2 illustrates the correlation between independent variables For more detail, TANG and SIZE have the strongest correlation with each other (the absolute value of the correlation coefficient is 0.616202 The author will test the regression model without one of these two variables

Figure 4.3: Regression model without “SIZE” or “TANG” variable

(Source: Author’s calculation from the EViews software)

It can be seen from figure 4.3 that when one of the two variables is removed from the model, the results of the remaining variables remain unchanged Therefore, it can be concluded that the strong correlation between the two variables TANG and SIZE does not affect the results of the regression model

The ideal model does not have the correlation between independent variables as well as each variable contains information of dependent variables which is different from the others Then the regression coefficient indicates the effect of each independent variable on the dependent variable when assuming other independent variables do not change, in which case there is no multicollinearity However, If there are any independent variables that correlate with one or more independent variables, this means that the model is multicollinear The author examines multicollinearity by examining the VIF

(Source: Author’s calculation from the EViews software)

It can be seen clearly from Figure 4.3 that VIF value is from 1.164304 to 1.748104 which is all smaller than 10 Accroding to Gujarati & Porter (2012), the regression model does not have multicollinearity

To test heteroskedasticity, we have many methods, however, in this thesis, I used the White test to check

Testing the pair of hypotheses as below:

𝐻0 : The same variances with reliability 95%

𝐻1 : The variances change The result is shown as below:

(Source: Author’s calculation from the EViews software)

From figure 4.4, we can see that P-value = 0.0000 < 0.05, so I reject 𝐻0 which means that the variances in the regression model has changed

We also have many ways to check the autocorrelation of the regression model, however, in this model I used Breusch-Godfrey to test Testing the pair of hypotheses:

𝐻0 : There is no serial correlation in the model with reliability 95%

𝐻1: There is the serial correlation in the model

The result is shown as below:

(Source: Author’s calculation from the EViews software)

From figure 4.5, P-value = 0.1081> 0.05, so I accept 𝐻0 which means that there is no serial correlation in the regression model

4.3.5 Overcoming the Heteroskedasticity of the model

I used the standard errors model to fix the heteroskedasticity of the model and the result as below

Figure 4.7: Overcoming the Heteroskedasticity of the model

(Source: Author’s calculation from the EViews software)

When the model has heteroskedasticity, the OLS estimations for the coefficients remain unbiased, only the variance of the coefficients of estimation and the covariance between these coefficients collected from the OLS method is biased Since then, White (1980) proposed a standard error model with the following thought: the coefficients of estimation from the OLS method are still used; however the variance of the estimated coefficients is recalculated without using the assumption of homoscedasticity Estimation of the standard error model will give a correct result of estimation which accepts the presence of heteroskedasticity.

Result of the research and discussing them

The regression model is written as follow:

TD = 0.894411 – 0.840931*PROF + 0.037161*GROW – 0.000393*SIZE – 0.349202*TANG – 0.096137*LIQ – 0.006012*AGE – 0.040173*PLU + ε

The beta coefficient of profitability (PROF) is -0.840931 which shows that profitability has a negative impact on financial leverage This coefficient illustrates that when profit in the pharmaceutical industry increases 1 unit, the funding from debt decreases 0.830972 units This negative relationship can be explained by the pecking order theory If an enterprise has high profit, it will use the internal source of funding like retained earnings rather than borrow from external sources This result is suitable with the research results of Titman and Wessel (1988); Booth et al (2001); Sayilgan et al (2006); Tran and Ramachandran (2006); Ahmed Sheikh and Wang (2011);

Saeed et al (2014), Pham and Nguyen (2015) as well as consistent with the hypothesis H1 of this thesis

The coefficient β of the growth opportunity is 0.037161 which means that a growth opportunity has a positive relationship with capital structure This shows that a 1% change in growth rates (measured as the percentage change in total assets) leads to 0.037339% change in financial leverage Although this correlation is contradictory with the predictions of the trade-off theory, it supports the pecking order theory explaining that the growing companies require more capital but they do not have enough retained earning so the enterprises must prioritize funding from debt rather than equity The results of this study are consistent with the results of the study of

Sayilgan et al (2006); Tran and Ramachandran (2006); Pham and Nguyen (2015);

Vo (2017) This result is supported by hypothesis H2

The beta coefficient of the size of the firms (SIZE) is -0.000393 which means that the size of the companies has a negative associated with total debt This result is suitable with the pecking order theory, the study of Titman and Wessel (1988); Chen (2004) which showed that asymmetric information in large-sized companies is less than the small – sized ones because the big enterprises usually have the tendency to provide information for external investors Therefore, they usually prefer using equity to debt

However, this result is not supported by hypothesis H3

The beta coefficient of tangible assets is -0.349202 which means that there is a negative impact of tangible assets on the financial leverage Nowadays, the pharmaceutical enterprises in Vietnam have a higher import percentage than export one which shows that the production technology is low and pharmaceutical companies invest less tangible fixed assets like machines They mainly invest in the inventories, however, due to the fact that account receivables have still not received, so the firms still have to borrow to finance these activities In addition, when using debt, the company will avoid maximizing profit of managers This result is consistent with the research results of Booth et al (2001); Sayilgan et al (2006); Tran and Ramachandran (2006); Ahmed Sheikh and Wang (2011); Imtiaz, Mahmud & Mallik

(2016) However, it is not supported by hypothesis H4

The coefficient of the liquidity ratio (LIQ) in the regression result is -0.096137, which points out that liquidity has the opposite impact on debt ratio This correlation supports the predictions of pecking order theory that when looking for capital, firms usually do a favour of internal funding by retained earnings rather than using external funding This result is supported by the study results of Saeedi and Mahmoodi (2011),

Saeed et al (2014) Hypothesis H5 also supported for this result

The coefficient of the firm age (AGE) in the regression result is – 0.006012, which means that firm age has a negative effect on debt ratio The pecking order theory supports this result Because this theory points out that older companies will use less debt because these companies have more time and more opportunities to get and collect funds from investors Besides, this finding is suitable with the research findings of Hall et al (2000); Kieschnick & Moussawi (2018) However, the firm age does not have the statistic meaning in this regression model because P-value = 0.3639

> 0.05 Hence, hypothesis H6 does not support for this result

The coefficient β of the pluralist executives (PLU) in the regression result is – 0.04017 which shows that pluralist executives have a negative associated with debt ratio This result is consistent with research results from Fosberg (2004) The meaning of this negative relationship is when the CEO is also a chairman in the pharmaceutical industry in Vietnam, they will prefer using less debt to finance firm activities to avoid the risk of bankruptcy and loss of control Besides, nowadays, with the increasing trend of investment in Vietnam's pharmaceutical industry, according to pecking-order theory, pluralist executives can use financial resources from the company's shareholders to finance the company's operations to avoid diluting power, preserving their control However, because P-value = 0.1721 > 0.05 so the plural executives do not have the statistical meaning in this regression model Hence, this result is not supported by hypothesis H7.

Comparing factors affect to capital structure between companies listed on

In Vietnam, the pharmaceutical companies are listed on two stock markets which are Hanoi Stock Exchange (HNX) and Ho Chi Minh City Stock Exchange (HOSE)

In Hanoi Stock Exchange, there are 9 companies in pharmaceutical industry listed on this stock market While, there are 11 companies in pharmaceutical industry listed on

Ho Chi Minh City Stock Exchange

Requirements for companies listed on the two stock exchanges are different:

Table 4.5: Requirements for companies listed on the HOSE and HNX stock exchanges

(Source: Decree 58/2012 / ND-CP about listing requirements on HOSE and HNX)

Figure 4.8: Regression model of firms listed on HNX and HOSE stock exchanges

(Source: Author’s calculation from the EViews software) Regression model of firms listed on HNX:

TD = -0.006482 - 0.884236*PROF + 0.021888*GROW - 0.095995*TANG - 0.067709*LIQ + 0.071165*SIZE - 0.011320*AGE - 0.095790*PLU

Regression model of firms listed on HOSE:

TD = -0.731030 - 1.053415*PROF - 0.010075*GROW - 0.147103*TANG - 0.103218*LIQ + 0.113888*SIZE - 0.010748*AGE + 0.0018052*PLU

From two regression models above, we found that:

PROF has a negative associated with the capital structure of firms listed on both HNX and HOSE This result is consistent with the results from the pecking order theory, which means that if businesses on both two stock markets have high profitability, it will prefer using internal capital to finance the business instead of borrowing debt

GROW has a positive impact on debt ratio of companies listed on the HNX

Specifically, when looking at the total assets of companies, we can see that the financial potential of companies listed on the HNX is smaller than HOSE, so when firms listed on HNX have good growth opportunities, the company does not have enough capital, according to pecking order theory, firms will borrow from external

In contrast, GROW have a negative impact on debt ratio of companies listed on HOSE, because based on agency theory, the high growth rate also means positive business results so the shareholders do not want to share this advantage with the creditors However, this correlation is not statistical meaning because P-value 0.6361> 0.05

There is a negative correlation between tangible assets and the capital structure in both stock markets, but tangible assets are not statistically significant in both two regression models

Liquidity has a significant impact on leverage of firms listed on both HNX and HOSE

It is suitable for results of the pecking order theory Because of firms with high liquidity, it can use internal capital for operating activities

Firm size has a positive impact on leverage of companies listed on both HNX and HOSE Based on the trade-off theory, large-sized firms can borrow more capital than small-sized enterprises to take tax benefits of debt Besides, according to agency theory, because of the conflict between shareholders and managers, larger companies choose to borrow more because the terms in the loan agreement will control the behavior of the manager

Firm age has a negative and significant impact on debt ratio in both stock markets, because according to pecking order theory when years of listing are high, it means that the company has more time to get funds and market experiences

Pluralist executives have significant negative relationships with the debt ratio of firms listed on the HNX Because based on the agency theory, when there is independence between owners and managers, if the owners lose their control, the managers will operate the companies to make them profitable which may harm the benefit of the owners Especially, on HNX, the company does not need to disclose debts information to shareholders Therefore, pluralist executives will use less debt to reduce the risk of bankruptcy and avoid loss of control In contrast, the pluralist executive has a positive impact on leverage of companies listed on HOSE but not statistically significant.

RESEARCH IMPLICATIONS AND RECOMMENDATIONS

Research implications

Theoretically, it is possible to identify the capital structure of an enterprise including the relationship between equity and debt as expressed by the debt ratio, as well as the use of equity or debt financing, which is the reason for the different views of modern capital structure theories

The thesis also systemized some capital structure theories, the principles of capital structure’s construction, and at the same time found out the factors that affect the company in theory

Practically, this study identified the factors impacting the capital structure of pharmaceutical firms, and measured the impact of each factor, indicating the correlation as well as what impact has meaning or not to capital structure In addition, research also compared factors affecting capital structure between companies listed on the Hanoi Stock Exchange (HNX) and ones listed on Ho Chi Minh City Stock Exchange (HOSE) Since then, making recommendations for pharmaceutical enterprises choose a reasonable capital structure and related parties want to invest in pharmaceutical enterprises.

Recommendations

5.2.1 Recommendations for the pharmaceutical listed companies in Vietnam

Increasing company profits is inevitable for companies to work towards, and the results of this study reaffirm that

Profitability has the negative associated with the debt ratio, meaning that highly profitable pharmaceutical firms will often be able to generate large free cash flows through retained earnings Therefore, in order to increase profitability leads to keep high retained earnings, pharmaceutical companies should pay close attention to take advantage of available domestic resources to reduce import costs, promote the application of science and technology to increase drug production efficiency, and diversify products to increase profits of the company

The growth opportunity is positively correlated with the capital structure It means that the medical listed enterprises in Vietnam using more debt for growth purposes as well as the more growing the companies are, the higher the loan capacity is This is consistent with the realities, when banks review credit, the purpose and efficiency of capital use is always a top concern Therefore, in order to access credit as well as attract investors, pharmaceutical enterprises in Vietnam should prove the efficiency of capital utilization and have long-term growth opportunities

In addition, because of the difference in listing requirements between two stock markets, in the process of operation, businesses should consider selecting stock exchanges to list on, businesses can switch stock exchanges to suit the development orientation of the company

5.2.2 Recommendations for related parties Recommendations for investors

Because growth opportunities have a positive impact on leverage of pharmaceutical enterprises, so investors should ask high growth opportunity companies that want to borrow capital have to provide financial situation information, present a plan for payment of its debts reasonably to demonstrate that the enterprises can control its finances

Tangible assets are inversely related to capital structure, meaning that companies with less tangible assets will use more debt Therefore, investors should assess whether the company's current assets are sufficient to cover its current or short-term debt

Stocks listed on HOSE often have high liquidity, higher transparency in information than stocks on HNX, which is a good signal for investors, especially foreign investors, when choosing companies to invest

Recommendations for the capital market

Although the bond market has made remarkable progress, the size of this market is small when compared with the size of the stock market in terms of the number of issuers and deal volume Most of the bonds are government bonds, the number of businesses issuing bonds is still low compared to the potential This also affects the capital structure of pharmaceutical enterprises, when the channel to mobilize loans by issuing bonds is not effective Specific measures of this solution include establishing a professional credit rating organization to objectively assess the prestige as well as the financial capacity of the bond issuing pharmaceutical enterprises This will create peace of mind for investors when participating in the trading of corporate bonds Also, there should be mechanisms to develop the secondary bond market

When this market is developing, the increased bond liquidity will help businesses easier to issue new bonds

Completing the mechanism of managing listed enterprise information and financial reporting standards of enterprises This recommendation directly affects the quality of information published by businesses If the standards are built on a rigorous scientific basis, it will improve the transparency of information from business activities to the public, improving investor confidence On the contrary, when the information published is falsified compared to reality, it will reduce trust in investors, and it will be a big difficulty for businesses to raise capital from the public through both bond and stock channels.

Limitation and the following research directions

The number of samples is limited due to the low number of pharmaceutical companies listed on the Stock Exchange during the study period Another limitation of data collection and processing is the estimation of financial data generated entirely from financial statements of enterprises which means that asset value or debts are calculated by book value without considering their market value

This study has limitations but may open the door for further researches in this area

The results of the study can be improved by adding new explanatory variables or expanding the research period of time

Today, many large domestic and foreign enterprises invest in Vietnam's pharmaceutical industry, either through capital investment or through M&A activities

In the context that Vietnamese pharmaceutical enterprises are limited in the capital, raw materials as well as production capacity, receiving investment from large domestic and foreign enterprises, will impact on the capital structure and operation of the enterprise In fact, some foreign enterprises have already purchased shares and became the largest shareholder in Vietnam's pharmaceutical industry, which will have impact on the decision of companies’s capital structure Therefore, the author thinks that the variable "Largest shareholder" or "Rate of foreign investment" may be one of the factors affecting the capital structure of Vietnam's pharmaceutical industry

During the research process, the author considered this issue, however, the data system and the financial statements of Vietnamese pharmaceutical companies did not publish this data fully as well as did not publish every year from 2010-2019 for each listed pharmaceutical company Therefore, the author hopes that the next researchers who can collect data related to these two variables and do the research to draw conclusions about the effects of them on the capital structure

This study discovered the determinants affecting the capital structure of the sample of 20 listed pharmaceutical enterprises on Hanoi Stock Exchange and Ho Chi Minh City Stock Exchange by using the OLS regression method Data is collected from each financial statement and annual report during the period from 2010 to 2019 The regression model is used to test the effect of seven explanatory variables like profitability, growth opportunities, tangible asset, firm size, liquidity, firm age and pluralist executives to the ratio of total debt to total assets Research results show that profitability, tangible assets, and liquidity have a negative correlation with capital structure However, research also illustrates firm size, firm age and pluralist executives have a negative impact on debt ratio but they do not have statistical significance In contrast, growth opportunities have a positive relationship with capital structure Generally, the results are most consistent with previous studies on capital structure

In addition, research also compared factors affecting capital structure between companies listed on the Hanoi Stock Exchange (HNX) and ones listed on Ho Chi Minh City Stock Exchange (HOSE) The results show that profitability and liquidity have negative correlations with the debt ratio in both HNX and HOSE stock markets

Tangible assets also have a negative effect on the leverage in both stock markets but they do not have statistical significance In contrast, firm size has a positive correlation with the capital structure in both stock markets Growth opportunities have positive relationships with firms listed on HNX but have negative relationships with firms listed on HOSE, however, they do not have statistical meaning Firm age has a negative associated with the capital structure in both stock markets but it only has statistical meaning with firms listed on HOSE Pluralist executives have negative and significant relationships with the leverage in HNX but have positive, insignificant relationships with the leverage of firms listed on HOSE Also, the research proposed some recommendations for pharmaceutical listed firms to get a reasonable capital structure as well as investors and related parties when they would like to invest in pharmaceutical listed firms in Vietnam

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Appendix 1 List of pharmaceutical listed firms in Vietnam

(Source: Author’s calculation from financial statements of pharmaceutical listed firms)

Appendix 2 Statistic data of 20 listed pharmaceutical firms in Vietnam in 2019

No Securities TD PROF GROW SIZE TANG LIQ AGE PLU

(Source: Author’s calculation from financial statements of pharmaceutical listed firms)

Appendix 3: Statistic data of 20 listed pharmaceutical firms in Vietnam in 2018

No Securities TD PROF GROW SIZE TANG LIQ AGE PLU

(Source: Author’s calculation from financial statements of pharmaceutical listed firms)

Appendix 4: Statistic data of 20 listed pharmaceutical firms in Vietnam in 2017

No Securities TD PROF GROW SIZE TANG LIQ AGE PLU

(Source: Author’s calculation from financial statements of pharmaceutical listed firms)

Appendix 5: Statistic data of 20 listed pharmaceutical firms in Vietnam in 2016

No Securities TD PROF GROW SIZE TANG LIQ AGE PLU

(Source: Author’s calculation from financial statements of pharmaceutical listed firms)

Appendix 6: Statistic data of 20 listed pharmaceutical firms in Vietnam in 2015

No Securities TD PROF GROW SIZE TANG LIQ AGE PLU

(Source: Author’s calculation from financial statements of pharmaceutical listed firms)

Appendix 7: Statistic data of 20 listed pharmaceutical firms in Vietnam in 2014

No Securities TD PROF GROW SIZE TANG LIQ AGE PLU

(Source: Author’s calculation from financial statements of pharmaceutical listed firms)

Appendix 8: Statistic data of 20 listed pharmaceutical firms in Vietnam in 2013

No Securities TD PROF GROW SIZE TANG LIQ AGE PLU

20 VDP 0.2325 0.1043 -0.1547 12.7372 0.3619 2.8766 0 1 (Source: Author’s calculation from financial statements of pharmaceutical listed firms)

Appendix 9: Statistic data of 20 listed pharmaceutical firms in Vietnam in 2012

No Securities TD PROF GROW SIZE TANG LIQ AGE PLU

(Source: Author’s calculation from financial statements of pharmaceutical listed firms)

Appendix 10: Statistic data of 20 listed pharmaceutical firms in Vietnam in 2011

No Securities TD PROF GROW SIZE TANG LIQ AGE PLU

(Source: Author’s calculation from financial statements of pharmaceutical listed firms)