INTRODUCTION
Background of the research
Capital structure plays a very important role in corporate financial management
There are many research papers talking about capital structure and how to find out the particular model for the optimal capital structure for the business
The most important task of the financial manager is to balance the debt and equity capital to ensure capital structure is better, hence strive to find out the optimal corporate capital structure (Tong and Green, 2005), lower cost of capital will lead to maximizing value of a company (Shah and Kahn, 2007)
A firm faces with a financial deficit during doing business, thus the manager of the firm should find out a fund to support new investments in order to maintain the activity of a firm stably as well as making a right financial decision One way that can be chosen is to undertake a capital structure of a firm, especially debt restructuring In order to take a capital structuring, a manager has a high acknowledgement in financial filed and analytic capabilities hence a manager can minimize the cost of capital and maximize the value of the firm, the composition of capital structure consists of debt and equity, the resource of funds include retained earning, debt, and equity Orderly, retained earnings is cheapest fund due to without borrowing cost, cost of debt always lower than a cost of equity due to the shareholders requires a rate of return bigger than the interest rate Based on capital analysis, the managers raise the fund for investments by issuing debt or equity or retained earnings reasonable
Previously, there are two studies from Franco Modigliani and Merton H Miller in
1958 with title “Cost of capital, corporate finance and theory of investment” states that the capital structure is not impacted on the value of the company and the revised publish in 1963 named “Corporate income taxes and the cost of capital: a correction” to reverse that corporate income tax effect on the value of the company it mean that capital structure also impacts to the value of the firm Those great theories above encouraged many researchers around the world to study models of capital structure, the result states that there is different outcome regarding to capital structure comparing between research from developing countries (Graham and Harvey, 2001), (Tong and Green, 2005), (Shah and Khan, 2007) and developed countries (Mazur, 2007), (Rajan and Zingales, 1995) in term of the score factors effect to capital structure of the firm
Previous studies examined the interaction between leverage on behalf of capital structure and exogenous such firm growth opportunities, firm size, firm profitability, ownership type, intangible assets, non-debt tax shied, firm performance, dividend policy, uniqueness, tax, volatility, asset structure, etc
This research will focus on six independent variables such as growth opportunities, firm size, profitability, tangibility (collateral), ownership type, and non-debt tax shields effect to dependent variable defined leverage.
Research problem
There are many empirical researches regarding to the impact of factors on capital structure in many different approaches of researchers in term of techniques, models, variable selections, countries Different approaches leading to many outcomes relating to positive or negative impact of factors on capital structure For instance, there is a negative effect of profitability (Kester, 1986), (Shyam-Sunder and Myers, 1999) and firm size (Kester, 1986), (Titman and Wessels, 1988) to leverage upon pecking order theory whereas trade-off theory is a positive impact (Bowen, Daley and Huber, 1982), table 11 shows some of theoretical results related to capital structure This study identifies the capital structure of listed companies in Viet Nam and responds to the gap that there are many issues related to the selection of capital structure in every country in the world Furthermore, the manager of a firm can consider the cost and benefit of capital structure based on the theories in order to finance their financial deficit 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
Capital structure decision is mainly influenced by the trade-off theory and the pecking order theory, based on the research question, the objectives of this research are to examine the effects of six independent variables such as profitability, asset tangibility, growth opportunities, size of firm, ownership type, and non –debt tax shields to debt ratio (leverage ratio) as implied by the trade-off theory and pecking order theory, then the research finds out the relationship between above six dependent variables and leverage
The objectives of the research are to investigate how do firms in Viet Nam finance for investments by internal or external resources?
The purpose of this research will not produce a theory that applying to all populations, the objectives of research is trying to examine the six mentioned independent variables effect to debt ratio of listed companies in Viet Nam The research finds out what factors influence the choice of capital structure? How firms finance capital for investments, by internal or external resources, since this study will conducts firms to make the choice of capital structure
CHAPTER 1: Introduction CHAPTER 2: Literature review and hypotheses
The organization of the research is illustrated in the above figure In more detail, chapter 1 provides an introduction about the thesis, including the background, research problem, research question, research objectives, expected contribution, and 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 organization of the research is illustrated in the above figure In more detail, chapter 1 provides an introduction about the thesis, including the background, research problem, research question, research objectives, expected contribution, and 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.
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 published in 1958 (called M and M theory), the theory states that the value of a firm is independent of capital structure, whatever the firms finance the investments by issuing debt or equity under a few assumptions in the context of a market without taxes, without transaction cost, the capital market is perfect and complete Otherwise, the result of M and M theory in 1958 shows that an unlevered company has the same value as a levered one There are many highly critiques of research on being irrelevant due to the theory built on unrealistic assumptions leading to the revision of M and M in 1963 to correct the correct the previous theory by adding the effect of taxes to revise the irrelevance capital structure theory The revised theory in 1963 shows that corporate income taxes effect to value of company, after published research from M and M, since there are a lot of studies focused on capital structure by adding agency cost and bankruptcy cost to fill in the gap of M and capital structure, the exploit studies shows evidence that there are relationship between bankruptcy cost (Sliglitz, 1974), (Krause and Litzenberger, 1973), agency cost (Jensen and Meckling, 1976) with capital structure decision Since there are many researchers in the world studying the capital structure depends on specific countries, industry, fields, etc., in order to find out the effect of independent variables to capital structure The outcome of researches is not total consistence with each other due to there are many approaches to study capital structure in many different ways
The framework of this theory is to identify the optimal capital structure relating to benefit of corporate income taxes/debt and cost of financial distress or the savings from tax shields against the deadweight cost of financial distress (Kraus and Litzenberger, 1973), (Myers, 1984)
The theory mentions about the balance between benefit from taxes on debt and bankruptcy cost, firms tend to use debt to finance working capital on a firm’s activities or for new investment opportunity but firm also carefully considers keeping the balance between Debt and Equity in order to maintain a positive balance from benefit from taxes of debt minus financial distress cost
Trade-off theory impacts on capital structure and following this model many researches find out independent variables effect leverage positive or negative such (+) firm size (Marsh, 1982), (Rajan and Zingales, 1995), (Chittenden Et al, 1996);
(-) Growth opportunities (Long and Malitz, 1985); (+) Asset structure (Long and Malitz, 1985); (-) Cost of financial distress (Bradley, Jarrell, and Kim, 1984), (Walsh and Ryan, 1997); (+) Tax shields (Bradley, Jarrell, and Kim, 1984)
The concept states the different ways of raising the working capital for a business with internal finance and external finance, internal finance denote as retained earning whereas external finance such as debt and equity Pecking order theory prefers internal finance over external finance such as retained earnings are better than debt and debt is better than equity based on asymmetric information (Myers and Majluf, 1984)
Market timing theory told about the way that firms make the right decision by issuing debt or equity depends on current company or market circumstance The market timing theory explains that firms do not care about whether to finance with debt or equity In case of funding by equity, the firm will look at the current by market whichever currently looks more favorable, the firm issues the equity when stock price is high (Hovakimian et al, 2004) or increase on the way (Graham and Harvey, 2001), the firms are more likely to issue equity when the market values are high base on a book and past market values and repurchase equity (treasury stocks) when the market values are low (Baker and Wurgler, 2002) Mayers (1984) argues that in case of external issuance, firms apparently try to time the stock issues when the security are high, then firms like to issue stocks (equity) rather than debt issuance
For debt issuance, a firm decides to finance working capital by issuing debt at the time which the interest rate is low comparing to its historical level of debt (Barry et al, 2008), furthermore, According to the survey from previous empirical research of Harvey et al (2004) finds that the finance manager issue debt securities when the interest is low also
The market timing theory assumes that the mispricing of financial instrument exists and the firms have an ability to detect that mispricing effectively upon asymmetric information and the theory explains that the selection between debt and equity is depending on misprice on financial instrument at timing the firms wants to fund for new investment
Firms send valuable information about dividend policy, income, firm growth opportunities to outside with bad signal or good signal of the firm For instance, high dividend implies that the management is very optimistic about future profitability Base on good signal the outside investments can value the price stock and the creditors/banks can make the right decision on supporting credits for that company and in the conversion (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
Firm size and complication in high level economy made challenges for a manager who is on behalf of the owner to run business smoothly and efficiently The manager must have a good skill, quality to make thing differences with other people in order to run a large firm effectively Firms have to separate management and control right within a company It means that ownerships have to hire good people outside to run businesses in order to maximize the profitability for investment However, there are many problems arising during operating time that is the profit conflict between hiring manager and ownerships due to the difference targets This conflict will make the agency cost for firms
Manager inside with more information and outside shareholders with less information will raise benefit conflicts between managers and shareholder leading to develop agency cost (Jensen and Meckling, 1976) For instance, in case of absence investment opportunities, managers will use available free cash to finance new investments (overinvestment) to enlarge the firm size or maximum their personal benefit event that projects is ineffective, overinvestment problem decrease firm value and minimize profitability thus shareholders make agreement with manager to determine the firm target otherwise manager receive benefit from that agreement, additional shareholders hire controllers to oversee manager in order to ensure targets keep on track, moreover, monitoring operation will limit the creative power and initiative of manager (Burkat, Gromb and Panunzi, 1997)
Firstly, linking with agency cost Asymmetric information theory show that firms send information to inside investors and outside investors are different, more information for inside or big investors and less information for outside or small investors Under this theory, the firm value over the market can be low or high around real value, as the result the people who have more information will get more advantage to win the transaction than the less one For instance the managers want to issue debt by sending documents with some fake information to the creditor in order to get loan, in this case the creditor easy to make the mistake in making the right decision on the valuation Another case is that the internal investors who have more information can use this advantage to sell or buy the bulk of stock in the market to get a profit in the future, etc Asymmetric information is the form of market failure leading to moral hazard problem
Secondly, asymmetric information made the conflicts between shareholders and debt/bond holders in that the manager on behalf of shareholders borrow money from debt holders who depends on the plans issued from manager then put money for that project Debt holders release loan for investment and expect to get a fixed interest base on the risk of collateral and risky projects while managers invest money to projects with high risk and expect more returns (high risk, high return), since profit transfer from debt holders to shareholders and risk shifted from shareholders to debt holders.
Empirical literature review
2.2.1 Leverage (Lev) and capital structure
Capital structure including is a combination of debt and equity Equity including many sources from investing capital, undistributed profit, share premium, differences upon asset revaluation and other capital Debt including short term debt which is below 12 moths mature while long term debt that has mature time over 12 months
Capital structure uses leverage ratio Financial leverage is one of the financial tools that firms use to finance working capital and maximizing the benefit during operation, a firm that successfully use leverage tool will magnify the profitability for shareholders, tax deductible, improvement of credit rating, credit approach from banks, increase of free cash Conversely, the firm will face with inability to pay debt on time and facing with bankruptcy situation Under working capital management, firms will use short-term debt to fund current assets while long term debt is for non-current asset
In order to study the leverage and its measurements, the research can separate the long term debt and short term debt in debt structure in order to identify whether the debt structure of the firms in each environment in every country will differ another one or not For instance, according to information collected from previous research in China listed company (Chen, 2004) states those Chinese firms usually use short term loans rather than long term debt to finance the investment while other countries such as G-7 countries (Rajan and Zingales, 1995), developing countries (Booth et al., 2001) has long term debt higher than short term debt ratio, meaning that equity is the main source of finance for capital investment in Chinese firms
Another argument about whether firms should choose a book value or market value to measure the leverage Almost previous studies chose a book value to measure leverage instead of market value when run regression (Hovakimian, Opler and Titman, 2001), (Fama and French, 2002), furthermore, book value was used to better reflect the target debt of business due to market value also depend on many factors far away firm control and can not be measured exactly the debt ratio (Thies and Klock , 1992)
According to the pecking order theory, retained earnings are the first choice for raising capital then debt and equity Otherwise, firms tend to avoid a cost of issuing new equity and also personal tax for shareholders in paying dividends thus firm tendency forward retained earnings to build up capital instead of borrow debt, further more, firm do not like to issue equity to avoid stock price dilution Base on pecking order theory, profitability has a negative relationship with leverage and familiar with previous research from Titman and Wessels (1988) in the US, Frank and Goyal (2009), Harris and Raviv (1991), Rajan and Zingales (1995) in developed countries, Wiwattanakan (1999) and Booth et al (2001) in developing countries, Kester (1986) in the US and Japan, even strongly claims that profitability has robust relation with leverage, Wald (1999) Fama and French
(2002) argued that debt increases when investment exceed retained earnings and decrease when the investment is lower than retained earnings, firm trend to save profit instead of paying out dividends to shareholders from beginning until earnings is strong Published firms can issue equity for 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, tax based models and trade off theory suggest that firms with high profit should borrow more debt in order to reduce income tax to maximize profit for shareholders and firm value thanks to tax shields, fewer studies found that profitability positive effect to leverage but it seem to be weakness and statistically insignificant (Long and Malitz, 1985) Most of empirical studies show that profitability is a negative relationship with leverage such as Hariss and Raviv
(1990), Wald (1999), Titman and Wessels (1988), Rajan and Zingales (1995), Booth et al (2001), Wiwattanakantang (1999)
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 indicated that the agency cost of debt of the firm may shift to riskier investment after issuing debt to sponsor tangible assets Under this theory, wealth will be transferred from creditors to shareholders Tangible assets are easy to collateralize thus lead to reduce the agency costs such as preferred interest rate, transaction costs, etc A firm with more tangible assets have more chance to approach the credit and firms have close relationships with creditors Furthermore, a profitable firm trend to purchase new tangibility to change the old one in order to enhance either productivity or quality and firms also get profits from non–debt tax shields by depreciating tangible assets Moreover, the value of tangible assets should be higher than the value of intangible assets in case of bankruptcy All above explanations indicate that an increase of tangible assets will lead to increase debts, in other words, tangibility has a positive relationship with leverage, this argument similar with previous empirical research such Harris and Raviv (1991), Rajan and Zingales (1995), Wald (1999), Friend and Lang (1988), Long and Maltiz (1985), 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) argues that a firm with high growth opportunities may have a more realistic option for future investment and firms issue more debt may lead to reduce the present market value of a firm who hold real option, otherwise, firms with high growth opportunity trend to issue extra equity to finance option in the future and limit to issue debt for avoiding agency cost
The trade off theory shows that the firm's optimal chose the capital structure by balancing benefits against borrowing cost, the firm with higher opportunities has a chance to approach the lower interest loan, the benefit from borrow exceeds the cost of equity issuance so the firm trend to issue more debt than equity The trade off theory explains the positive relationship between firm growth and leverage
The explanation is in line with empirical study from Chen and Zhao (2006)
Titman and Wessels (1988) argue that growth opportunities are capital assets that add value to a firm but can not be collateralized and cannot contribute to the reducing income tax thus company with high growth opportunities has low debt
This suggests that growth opportunities have a negative relationship with leverage
Most of the studies predominated support theoretical prediction that growth opportunity negative effects to leverage and consistency with the findings of Wald
(1999), Rajan and Zingales (1955), Long and Malitz (1985), Chen (2004) except for the researches from Kester (1986) in Japanese and US companies shows a positive relationship between growth opportunities but not a statistic significant
Thus this research expects that there is a negative relation between growth opportunities and leverage Thus the hypothesis will be as follows:
H3: There is a negative relationship between growth opportunity and leverage
2.2.5 Firm size (SZ) and leverage
Large firms with the profitability trend to use debt to support firm’s activities in order to meet with increase of capacity, the firm need to find more capital from external sources such as loan from creditors or issuing equity, equity choice will spend too much cost of issuing equity and lead to decrease stock prices (Mayer,
1977) and stock price dilution (Asquith and Mullins, 1984), thus issuing debt is first choice for financing capital for the firm
According to trade off theory, large firms are more diversified so that firm has less exposed to the risk of bankruptcy (too big to fail), since the firm can reduce borrowing cost from long term debt issuance The cost of issuing debt and equity related to firm size, small firm pay much more cost of equity issuance than the large one (Smith, 1977) This suggests that small firm has less debt and large firm has more debt level leading to the result that there is a positive relationship between firm size and leverage A positive relationship is consistent with empirical study from Frank and Goyal (2009) based on the data from publicly traded U.S firms According to the pecking order theory, asymmetric information between insiders and capital markets within a firm are lower expected in large firms, thus large firms may be more capable of issuing equity for financing (Kester, 1986) The empirical research from Titman and Vessels (1988) found that there is a negative effect between firm size and leverage
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
Government ownership proxies for Ownership type, Previous researchers states that private owned enterprises run business better than state owned enterprise after privatization in term of productivity, revenue and performance (Frydman, Gray, Hessel and Rapaczynski, 1999) Too much government control lead to no good for enterprises although there are political supports from government (Sun, et al,
The agency cost theory shows that there is benefit conflicts between manager and outside shareholders, manager tend to use free cash flow to finance new projects when there is absence a new investment opportunity whereas outside shareholders who own firm always want to build up their finance by increasing debt Assuming that outside shareholders are representative of government and shareholders have a strong power in financial decision in firm together with strong financial support from banks, of course, there is good chance for firm approaching the credits from the banks or creditors in order to finance the working capital hence debt will increase, in other words, State-controlled ownership will lead to increase debt or positive relation to leverage This argument is also familiar with the previous research (Gul, 1999), (Dewenter and Malatesta, 2001)
Moreover, the state controlled companies face with a shortage of budget (Truong,
RESEARCH METHODOLOGY
Sample size and data set
This study used secondary data from the annual report of 124 Vietnamese non- financial listed companies for the period 2008 -2012 The financial statements are prepared under the Vietnamese Accounting Standard (VAS) and data achieved from consolidated financial statement of a firm The balance sheet from financial sectors (for instance: banks, insurance companies, stock companies) has a different structure from non-financial companies which are excluded from the sample
Stevens (1976) recommends that a predictor is needed about 15 subjects for reliable equation Tabachnick and Fidell (2001) give a formula for calculating sample size requirements, taking into account the number of independent variables Since sample size N > 50 + 8m (where m is the number of independent variables) For stepwise regression there should be a ration of 40 cases for every independent variable This study used data of 124 firms with 602 observations extracted from its financial reports, those numbers are suitable with the requirement
All sample companies are still working, either none of them are bankruptcy or temporary stop The sample includes many fields such as: real estate (45 firms);
Rubber (9 firms); Chemical and pharmaceutical (10 firms); Mineral (9 firms); Gas, electrical, power (12 firms); Steel (10 firms); crude oil (11 firms); trading and manufacturing (19 firms).
Calculation of the variables
The financial report of the firm includes income statement, balance sheet, cash flow and the explanation to the financial statement All reports indicate the picture regarding the financial status of the firm The left side of balance sheet shows the value of total assets and the right side indicates the source to finance the total assets
The Vietnamese accounting standard system has some difference from other countries together with the uniqueness of each national thus total debt is a combination of short term debt and long term debt should be classified according to nature of debt The debt on the Vietnamese financial report includes many items that the firm has an obligation to refund in the future such as a deposit from customers, prepaid expense, internal payable, standby for short term payable, fund for a reward, etc In order to mitigate the effects of these debts when studying capital structure, the data in term of debts should be collected from “short term debt and loan”, “long term debt and loan” where a firm either borrows money from banks or other creditors According to VAS (2006) guides that the value of a
“short term debt and loan” that borrowed from the banks, creditor with less 12- month mature plus “long term debt mature” The value of “long term debt and loan” extracted from debt that borrowed from banks, creditors with over 12 month mature Rajan and Zingales (1995) imply that total debt should not include items like account payables, advances from customers, Accrued expenses, Other payable, etc., due to these items does not provide a good indication whether the firm is at risk in the future, which may be used for transaction purposes rather than for financing Furthermore, Myers (2002) argues that the manner in which a firm reacts to a given factor may depend on the firm’s circumstances Since this study uses data from the two those items such as “short term debt and loan” and “long term debt and loan” extracted from the balance sheet for finding the real picture about leverage ratio
There are many measurements from previous studies to define the leverage ratio for capital structure
Leverage is measured by some ratios as follows: (1) Total debt to total assets (TDTA), (2) total debt to total equity (TDTE), (3) long-term debt to total assets (LTDTE), (4) short-term debt to total assets (STDTA)
Most studies focus on a single measure of leverage (Frank and Goyal, 2007) This study uses the ratio of combination of “short term debt and loan” and “long term debt and loan” (TD) over book value total assets (BVTA) to define leverage
Profitability ratios measure the ability of a firm to generate earnings to sales, equity, assets The different profitability ratios indicate the insights of financial health and performance of a firm A higher value is desirable However,
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
Finding the relationship between profitability and capital structure, there are many measurements to define profitability Profitability ratio defined as return on total equity (ROE) or returns on total asset (ROA) or earnings before interest and tax over book value total assets (EBIT/BVTA) Due to income tax, interest rate is the differences between companies so the study uses EBIT index in order to ignore the effect of interest rate and income tax rate when compared with other firms, EBIT is preferable use to clarify and value the profitability of business
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
Some studies computed a tangibility ratio by separating tangible and intangible assets over total assets (Frank and Goyal, 2003) to define tangibility, sum of fixed assets and inventories to total assets (Chen, 2004)
In this study, tangibility is measured as net fixed assets scaled by total assets which is extracted from the balance sheet statement of firms, the measurement is the same calculation with Huang and Song (2002), Li and Yue and Zhao (2006), Mazur (2007), Shah and Khan (2007) As the argument from literature review, Tangibility has a positive effect to leverage
Tangibility = Net fixed assets (NFA)/ / book value total assets (BVTA)
Previous works define growth opportunities is computed sales growth total assets growth (Chen, 2004), Wald (1999) defined as the five year average of sales growth to test what effect growth has on leverage, Frank and Goyal (2003) use market to book ratio to define firm growth, Titman and Wessels (1988) use capital expenditure over total assets, growth of sales (Opler and Titman, 1994), (Wald,
1999), growth rate of employment (Lang and Stulz, 1996), Market to book ratio (Billett, King and Mauer, 2007)
Firm’s growth ratio has many measurements such as growth of assets based on t time and t-1 (BVTA t – BVTA t- 1)/BVTA t-1 (Sha and Khan, 2007),capital expenditure over total assets (Titman and Wessels, 1988), Growth of sales (Opler and Titman, 1994), Wald, 1999), growth rate of employment (Lang and Stulz,
1996), Market to book ratio (Billett, King and Mauer, 2007)
This study used a percentage of total assets change in five years of each firm to define growth opportunities The measurement for this study is the same with formula from Shah and Khan (2007) Thus the computation for this ration is:
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 the company shows whether the company is large or small, some empirical researches use the natural logarithm of net revenue from sales such as Huang and Song (2006), Shah and Khan (2007), Titman and Vessels (1988) This study uses the logarithm of assets to compute the size of the firm as same as the measurement from Frank and Goyal (2003), Chen (2004) in order to access the relation between firm size and leverage The study predicts that there is a positive correlation between firm size and leverage Thus, Firm size = logarithm of total assets
State ownership is still playing an important role in the progress of reform in the Vietnamese economy The financial system is typically centralized and heavily dependent on state-owned banks to provide access to finance Vietnamese Government is trying to equitize state owned company in order to reduce the state’s shareholding to 51 percent by 2010 There are five state owned commercial banks (SOCBs) controlling about 70 percent of banking sector assets and 70 percent of total bank loans (Truong, 2013)
Ownership type is dummy variable and this study implies that there are two groups of the company, the division depends on whether a firm has stating–owned shareholder or not According to enterprise law (2005) of Viet Nam, there are many criteria to determine whether a company is controlled by another company depends large on stock holdings and the regulation of company This study is based on the value of stocks on hand that government whether is holding more or less 50 percent over owner’s equity in a company A firm with more 50 percent should be controlled by government As a dummy variable, the calculation takes 1 for the value over 50 percent, and takes 0 if the value is less than 50 percent There is a positive relationship between ownership type and leverage
Ownership type = 1 (Yes): There is an impaction of state-ownership to leverage Ownership type = 0 (No): There is not an impaction of state-ownership to leverage
Non-debt tax shields (NDTS)
Model specification
The research used model of multiple regression equation, this model has already been used in the earlier by Rajan and Zingales (1995), Bevan and Danbolt (2002)
The researcher can get a more accurate prediction by using this model The regression model is:
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
PRO = Profitability TANG = Tangibility GROW = Firm growth
SZ = Size of firm OWNT = Ownership type 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 multiple regression models tested and analyzed the data to see the relationship between the dependent variable and independent variables In this study the results are interpreted by using: Descriptive Statistics, Coefficient of correlation,
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
Checking for error to ensure that there are no values that fall outside the range of possible values for a variable by using an excel tool Excel tool can easily find missing data or error value for each variable by sorting variable column then delete all those items
By using excel tool, researcher used filter function to check and finds stranger values for each variable column for correction
After uploading corrected data from excel file to SPSS software The researcher ran the data for finding outliers case from “Casewise diagnostics” table, and then deleted all showed outliers before running multiple regression for 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
One of the ways that these assumptions can be checked by inspecting the normal probability Plot (P-P) of the regression standardized residuals In the normal P-P plot (table 7) showed that the points lie in a reasonably straight diagonal line from bottom left to top right This would suggest no major deviations from normality
Thus, there were not violations of the assumption
Table 1 showed the Collinearity Statistics to find whether there are violations under regression model or not violation VIF value is less than 10 and all tolerances are well over 0.77 (1-R 2 ), table 5 also checks that the correlation between each of the independent variables is not too high
Tabanick and Fidell (2001) suggested that the correlation among the dependent variables should be less than 0.7 (