UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM THE NETHERLANDS PROGRAMME FOR M A IN DEVELOPMENT ECONOMICS DETERMINANTS OF LEVERAGE case[.]
UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM- THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS DETERMINANTS OF LEVERAGE: case study of VIETNAM SEAFOOD PROCESSING AND EXPORTING INDUSTRY both for listed and unlisted firms By PHAM THI TRUC LAM A thesis submitted in partial fulfillment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS Academic Supervisor: Assoc Prof NGUYEN TRONG HOAI HO CHI MINH CITY, DECEMBER 2012 CERTIFICATION ;; "I certificate that the substance of the thesis has not already been submitted for any degree and is not currently submitted for any other degree I certify that to the best of my knowledge and help received in preparing the thesis and all sources used have been acknowledged in the thesis." Signature Pham Thi True Lam Date ACKNOWLEDGMENTS = First and foremost, I would like to send my dearest thank to my supervisor, Assoc Prof Nguyen Trong Hoai for his guidance and support In addition, I would also like to express my gratitude to all persons and organizations for their support, provision of assistance and information that made this thesis possible I am also grateful to the lecturers and staff of the project who • helped improve my knowledge and fulfill the programme Finally, I am greatly indebted to my family for their love for and support of me, keeping me in good condition for learning I am also grateful to my close friends for their warm encouragement 11 ABSTRACT Although there are many prior studies about leverage as well as capital structure on the world in general and Vietnam in particular, results of these researches are still inconsistent Moreover, in context of Vietnam, most of studies about leverage are of listed firms So, this study works with data of both listed and unlisted firms The purpose of this study is to examine the relative importance of ' some factors to the leverage of Vietnam seafood processing and exporting enterprises A sample of 20 listed and 15 unlisted enterprises for a period of years from 2009 to 20 11 was chosen and tested base on pecking order theory and trade off theory The results finding from the thesis is that firm growth opportunities and firm size have positive related to leverage, profitability, liquidity have a negative effect to leverage whereas tangibility assets and non-debt tax shield have no impact on leverage of Vietnam seafood processing and exporting enterprises Key words: leverage, pecking order theory, trade off theory 111 CONTENTS Certification i Acknowledgement ii Abstract iii Contents iv List of Tables vii List of Abbreviations vii CHAPTER I: INTRODUCTION FOR THE STUDY 1.1 Problem statement: 1.2 Research objectives: 1.3 Research questions: 1.4 Research Methodology: 1.5 Structure of the thesis: CHAPTER II: LITERATURE REVIEW FOR DETERMINANTS OF LEVERAGE 2.1 Key Concepts: 2.2 Related theories: 2.2.1 The Modigliani-Miller theorem: 2.2.2 Agency cost theory: 2.2.3 Trade-off theory: 2.2.4 The pecking-order theory: 2.3 Determinants of leverage: 10 2.3.1 Leverage and Profitability: 12 2.3.2 Leverage and firm size: 13 2.3 Leverage and Firm Growth: 15 2.3.4 Leverage and Non-debt tax shield : 16 2.3.5 Leverage and tangible assets: 17 2.3.6 Leverage and liquidity: 19 2.4 Empirical review on determinants of leverage: 20 2.4.1 Empirical evidences finding from the world: 20 IV 2.4.2 Empirical evidences finding from Vietnam perspective: 24 2.5 Chapter remarks: 25 CHAPTER III: RESEARCH METHODOLOGY 27 3.1 Data and variables description: 27 3.1.1 Data: 27 1.2 Description of variables: 27 3.2 Methods of estimation: 29 3.2.1 Ordinary Least Squares (OLS) estimator: 30 2.2 Fixed Effects (FE) estimator: 31 3.2.3 Random Effects Estimator (RE): 32 3.2.4 Hausman specification test: 32 3.3 Hypotheses 33 3.4 Chapter remarks: 33 CHAPTER IV: OVERVIEW OF SEAFOOD PROCESSING AND EXPORTING ENTERPRISES 4.1 Introduction of the seafood export industry: 35 4.2 Analysis of capital structure of the seafood enterprises: 38 4.2.1 Debt to equity ratio: 38 4.2.2 The equity growth rate: 41 4.3 Chapter remarks: 42 CHAPTER V: EMPIRICAL RESULTS 43 5.1 Descriptive statistics 43 • 5.2 Analysis of the correlation between all variables: 44 5.3 Test multicollinearity: 45 5.4 Empirical results: 46 5.4.1 OLS estimator: 46 5.4.2 Hausman specification test: 48 5.4.3 Fixed effects estimator: 49 • v - 5 Chapter remarks: 53 CHAPTER VI: CONCLUSION, POLICY RECOMMENDATION AND LIMITATION 55 6.1 Conclusion 55 6.2 Policy recommendation 57 6.3 Limitation and suggestion for further study: 61 Reference 62 Appendix 68 " • Vl LIST OF TABLES Table 2.1: Summary of leverage determinants Table 3.1: Variable, description and its expected sign Table 4.1: The equity growth rate Table 5.1: Descriptive statistics of sample variables Table 5.2: Correlation coefficient matrix Table 5.3: Result of auxiliary regression models of each dependent variable Table 5.4: Result ofOLS estimator Table 5.5: Result ofHausman test Table 5.6: Result of Fixed effects estimator vii LIST OF ABBREVIATIONS NDTS Non debt tax shield SEAs Seafood processing and exporting enterprises SMEs Small and medium enterprises FE Fixed effects RE Random effects GDP Gross Domestic Product GSO General Statistics Office of Vietnam OLS Ordinary Least Square STD Short term debt LTD Long term debt TTD Total debt EQTY Equity ASS Total assets Vlll CHAPTER 1: INTRODUCTION FOR THE STUDY This chapter will explain the reason for choosing the thesis, its objectives and research questions In addition, this part also presents a brief of methodology and finally abbreviates the structure of the thesis 1.1 Problem statement: One of the most important decisions confronting a firm in corporate finance is the design of its capital structure In order to finance for investment, the firms can choose either internal or external funds Internal fund is the firm retained earnings whereas external fund can be raised from issuing equity or taking debt Sometimes, firms may take too much or without taking debt An effective debt ratio or leverage should not only help reducing the weighted average cost of capital of the firm but also it still can increase firm value To decide how much leverage the firm should take on, the firms need to know which factors affect leverage However, over 50 years since the first research of Modigliani and Miller (1958) about leverage, the question of them about what factors affect leverage are still unresolved until now This seems to be the most enigmatic and interested issue of many researchers However, until now, the effort of researchers to solve the debt equity choice also does not bring results that satisfy all of them The results are still inconsistent between researches at different countries and different industries Moreover, Myers ( 1984) also suggests that "the average debt ratio will vary from industry to industry because asset risk, asset type and requirements for external fund also vary by industry" (p.578) In case of Vietnam, there are also some studies testing for determinants of the leverage of Vietnam companies, such as Nguyen and Ramachandran (2006), Dzung et al (2012) and the empirical results of these studies also contain conflicts as results from many other studies in the world Seafood is considered to be one of major industries and one of the key export sectors of Vietnam Each year, it contributes largely to GDP Particularly, - term leverage are in opposite direction, negative for short term and positive for long term leverage Firms with fewer tangible assets not satisfy loan conditions of bank, so they tend to rely more on short-term liabilities as trade credit They also find the positive relationship between growth and total leverage, long term leverage while effect on short term leverage is not statistically significant The result about liquidity which they find is negative relationship with total and shortterm leverage whereas an insignificant related with long term leverage It seems that long term lenders are not interested in liquidity ratio of the firm The main finding of this research is that Vietnamese enterprises still depend much more on short term debt and "pecking order theory better explains financing decision in Vietnam than trade offtheory" Another research about determinants of leverage of Vietnam firms is research of Cuong (2008) With data of 22 seafood companies in Khanh Hoa province, the study finds that firm size is the strongest factors affect to leverage of companies and it has positive related Fixed assets have inverse related to leverage shows that these firms tend to use equity to finance for long term investment while profitability and growth have positive related to leverage In short, results of some researches in Vietnam context also have inconsistence Although research in Asia group proposes a negative related between firm growth and leverage, researches in Vietnam show a contradiction results Most of them argue a positive related between firm growth and leverage The main findings from the studies about Vietnam context is Vietnamese firms mostly rely on short term debts 2.5 Chapter remarks: This chapter presents four mam points Firstly, some main concepts concerning content of the thesis have been explained as capital structure, leverage, optimal capital structure, agency cost and bankruptcy cost Secondly, two main theories which the thesis bases on are also presented as trade off theory and pecking order theory Thirdly, some factors affecting leverage which are 25 withdrawn from many previous researches such as profitability, firm size, NDTS, growth opportunities, tangibility assets and liquidity are forecasted about its effect according to point of view of theories one by one Lastly, this section also includes some empirical evidences from the world as well as Vietnam context The results of these researches are not the same at different countries, different measures of leverage as well as different techniques of regression These variables may be positive or negative significant or even more it shows an insignificant result Learning from the result on the world and Vietnam context, this thesis proposes a positive related between firm size, tangibility assets and firm growth with leverage and a negative related between profitability, NDTS and liquidity with leverage 26 CHAPTER III: RESEARCH METHODOLOGY This chapter will be divided into three sections The first is the introduction of data source as well as description of variables includes dependent and independent variables Next, the description of different estimation methods will be introduced including: Ordinary Least Square, Fixed Effect and Random Effects Hausman test to choose between Fixed and Random Effect method are also presented in this section Finally are some hypotheses which will be tested in the study 3.1 Data and variables description: 3.1.1 Data: The study consist data on balance sheet of 35 Vietnam processing and exporting enterprises during the period 2009 to 2011 including both listed and unlisted enterprises Data of 20 listed enterprises which be taken from either the Ho Chi Minh city stock exchange (HOSE) or the HaNoi stock exchange (HNX) and 15 unlisted enterprises will be tested 35 enterprises for period years will create 105 samples for the study Due to investigating both listed and unlisted enterprises, this study will base on book value of data only 3.1.2 Description of variables: (a) Dependent variable: leverage (L VE) Learning from the research of Rajan and Zingales (1995), dependent variable "leverage" employed here is the ratio of total liabilities over total assets According to them, trade credit should be included in leverage since it also represent for debt which firms have responsibility to pay When the creditors consider of supplying debt for the firm, they not only give attention to long term debt but also care about current debt and trade credit due to it will reduce debt capacity of a firm (Huang and Song (2002)) Jason and Eric (2009) also have the 27 - - - - same idea in using the ratio of total liabilities to total assets to measure for leverage Many researches use three ways separately to measure leverage includes short term debt, long term debt and total debt (Zehra (2008), Dzung (2012)) However, due to most of debt of Vietnam SEAs are short term debt, the ratio of long-term debt is rather small, the study will combine both short term debt and long term debt (b) Independent variables for determinants ofleverage: •!• Firm size (LGSIZE): Size of the firm may be estimated by some indicators such as logarithm of revenues sale (Gurcharan (2010), DeJong et al (2008), Amarjit (2011)), logarithm of total assets (Joshua (2008), Deesomsak (2004), Huang and Song (2002)) This study chooses natural logarithm of assets to measure for firm size •!• Firm Growth (GRO): Firm growth is measured by different ways by different researchers, m general two scales for measurement are percent change of total assets (Liaqat (20 11 ), Akinlo (20 11) or percent change of total revenues sale (Pramuan et al (2003) or Mehdi et al (2011)) In this study, growth will be measured by percent change of total assets •!• Non-debt tax shield (NDTS): is measured by ratio of depreciation to total assets (as Wald (1999), Titman and Wessels (1988), Zehra (2008)) Due to ratio of depreciation is data of whole year while total asset is data at a period, so to calculate for this ratio, the study will use the average total assets of the beginning and the end of a given year •!• Profitability (PRO) is measured by the ratio of earning before interest and taxes (EBIT) to total assets following research of Huang and Song (2002), Ntogwa (20 12) Total assets in this ratio are also average total assets of a given year 28 •!• Tangibility (TANG- value of tangible assets) is measured by ratio of fixed assets to total assets It has been argued by Bevan and Danbolt (2000), Husni and Ali (2010) •!• Liquidity (LIQ) is measured by current asset over current liabilities as De Jong et al (2008) All proxies in the model are compared with total assets to assure about logical of the model Table 3.1: Variable, description and its expected sign Description Variable Expected sign Dependent variable LEV Total liabilities/total assets Independent variables Earning before interest PRO - and taxes (EBIT)/total assets LGSIZE NDTS ORO TANG LIQ Logarithm of total assets + Total depreciation/total - assets Percent change in total + assets Fixed assets/Total assets + Current - asset/current liabilities 3.2 Methods of estimation: The relationship between leverage and other factors as profitability, size, tangibility assets, growth opportunities, non-debt tax shield and liquidity will be examined with quantity method by using different empirical techniques of panel 29 regression analysis data which is a combination of times series data and crosssection data Using panel data has many advantages such as it can controls for individual heterogeneity, supply more degrees of freedom as well as more variables Moreover, it still can reduce problem of multicollinearity which is the problem time series data method usually meet (Baltagi (2001)) Comparing with only cross section or times series method, panel data method seem the better method to use for analyzing with both cross-section and time series data and this method is also usually used by many researchers in term of investigating determinants of leverage Next is the description about Ordinary Least Squares (OLS) method and then about Fixed Effects (FE) and Random Effects (RE) In order to choose which model is more suitable between FE and RE, a test which is called Hausman test will be done 3.2.1 Ordinary Least Squares (OLS) estimator: Sample of the thesis include both data across firms and overtime, so using of panel data is more appropriate to study the dynamics of change First, ordinary least square estimator, the most simple method will be applied Given a model as follows: Yit = ao + X\t~ + ui,t (*) Where Yit is dependent variable, Xi,t is a (K-l)xl vector of exogenous regressors and ui,t ~ N(O,cr~: ) is random disturbance The error term ui,t in OLS method is assumed to be independent and normally distributed with zero mean and constant variance It means: cr/~0 E(ui,t Uj,s) = E(Xi,t Uj,s) = 0, i:;t:j, tt:s, V i,j,t,s Panel OLS may increase sample size, however with data contained observations on the same cross-sectional units over several time periods, maybe there is cross sectional effects on each firm or on a set of group of firms The 30 results may be biased since it ignores firm heterogeneity So it likely to use some other techniques of panel regression to deal with this problem, particularly there are two specific methods as fixed effect and random effect method might be used Both these two model may control heterogeneity by adding error term and assuming that each firm has its own intercepts The fixed effects models takes into account the individuality of each firm or cross-sectional unit included in the sample by letting the intercept vary for each firm but still assumes that the slope coefficients are constant across firms With random effects, the coefficients under the assumption are that the individual or group effects are uncorrelated with other explanatory variables and can be formulated 3.2.2 Fixed Effects (FE) estimator: As running regression with fixed effect method, the equation (*) will be rewritten as follows: Yit = Uj + X\t~ + Ujt (**) Yit: dependent variable with i represents for firm and t represents for time (year) Xit: independent variable (i=l n) : intercept for each entities ~:slope of independent variable (X) Uit: residual With uit = 8i + Eit 8i represents individual specific fixed parameter to be estimated; and Eit is independent and identically distributed errors with zero mean and constant variance It means cr/~0, E(Ei,t.Ej,s)= 0, i:;t:j, t:;t:s, E(8j,Ej,t) = \j i,j,t, E(Xi,t.Ej,s) = V i,j,t,s In fixed effects model, slopes are constant whereas intercepts that differ according to the cross-sectional unit, namely here the enterprise In this type of 31 - -· model, there are no significant temporal effects; yet there are significant differences among enterprises However, heteroskedasticity problem could easily arise from enterprise-specific differences in this type of model that would further plague estimation Solution to this problem is the choice of cross-section weights in GLS weights and the use of White coefficient covariance estimator The former (cross-section weights) would allow for the presence of cross-section heteroskedasticity; whereas the latter (White coefficient covariance method) facilitates acquistion of robust coefficient standard errors (Yaffee, 2003) Null hypothesis testing: with this estimator, the F-test for the joint significance of the fixed effects is employed to check null hypothesis that the effect is redundant It can be inferred that the null hypothesis is rejected means the fixed effect is statistically significant 3.2.3 Random Effects Estimator (RE): The equation(**) will be re-written as follows: Yit =a+ X'i,t~ + wi,t With =a+ Ei Eit~ N (0, crE ) Ujt ~ N (0, cru2 ) E (Ei Uit) (***) (i=l n) =0 3.2.4 Hausman specification test: Hausman test will be done for the selection of fixed effects model versus random effects model Null hypothesis: difference in coefficients between FE andRE not systematic 32 If the null hypothesis is rejected, it means RE model is not suitable Then we will use fixed effect model Otherwise, we will use random effects model 3.3 Hypotheses This study will base on trade-off theory and pecking-off theory and above technique regressions to check following hypotheses and these theses have been built up from chapter II: 1/ Profitability will have negative effect on leverage 2/ Firm size is expected to have positive effect on leverage 3/ Growth rate will favorably influences leverage 4/ Non-debt tax shield is expected to have adverse relationship with leverage 51 Tangible assets will have positive effect on leverage 6/ Liquidity is expected to have negative related to leverage The study use panel data regression with general model as followings: Yit= ao + ~!X lit+ ~2x2it + ~3x3it + ~4x4it + ~5x5it + ~6x6it + l':it (I) Where i refers to the firms (from 1-35) and t refers to the time period from 2009 to 2011 Meanwhile, E: represents error term The model ( 1) is fully specified for OLS, fixed effects and random effect respectively as following: +For OLS: LEVit= ao + ~IProit + ~2sizeit + ~3tangit + ~4groit + ~sNDTSit+ ~6 Liqit + Uit + For fixed effects: LEVit= + ~~proit + + ~2sizeit + ~3tangit + ~ groit + ~ NDTSit+ ~ Liqit + Uit +For random effects: 3.4 Chapter remarks: In short, this chapter mentions source of data, variables of the empirical model and their measurements as well as hypotheses will be tested It also 33 presents different technique of regression include OLS, fixed effect/random effect which will be applied in the study together with way to test the significant of the employed model 34 CHAPTER IV: OVERVIEW OF SEAFOOD PROCESSING AND EXPORTING ENTERPRISES This chapter presents two main points First is overview about seafood industry, its tum over through some years, market share as well as main export products Second part will analyze capital structure of seafood firms through some ratio as short term/long term debt over equity, equity over total assets and debt over total assets This section also considers equity growth of firms The data used for analysis that were collected from the following sources: information from the General Department of Vietnam Customs (GDC), VietNam Association of Seafood Exporter and Producers (VASEP) and the Financial Statements of listed and unlisted seafood processing and exporting enterprises 4.1 Introduction of the seafood export industry: Seafood export plays an important role in the overall export turnover of Viet Nam In year 2011, Vietnam seafood export turnover reached 6.11 billion US Dollars and accounted for 6.3% of the total export turnover In the first nine months of 2012, sales of seafood exports reached on 4.5 billion US Dollars increased 4.3% compared with the same period last year Projected sales of the fiscal year 2012 of seafood exports will reach 6.5 billion US Dollars (Source: VASEP 2012) Currently there are about 600 enterprises joining in exporting seafood Refinement and restructuring trends of enterprises in the industry is going on strongly and this trend will continue as the difficulties in capital, input cost and market still exist Overall, the seafood export turnover increased continuously over the past 10 years and average increase was 13% 35 Graph 4.1: seafood export turnover (USD billion) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Website of General Department ofCustoms Tải FULL (79 trang): https://bit.ly/3BMyk9O Dự phòng: fb.com/TaiHo123doc.net The main markets of seafood export enterprises in VietNam are now EU, USA and Japan Turnover on each market are presented as follows: Graph 4.2: seafood export market of VietNam (USD billion) 3000] ~ 2500~ ~ 2000~ ~ 1500~ ~ liEU 1000~ ~ II USA 500 II JAPAN 2002120031200412005120061200712008120091201012011 EU 84 127 244 437 724 908 1144 1096 1181 1332 USA 656 782 593 634 664 720 745 713 972 1178 JAPAN 538 583 755 813 843 746 828 758 897 1004 OTHER 744 724 809 538 1117 1389 1792 1684 1984 2597 Source: Website of General Department of Customs 36 OOTHER Graph 4.3: The market share of VietNam's seafood export industry by countries/region (%) 100% 80% DOTHER DJAPAN 60% •usA •Eu 40% 20% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Website of General Department of Customs The main products of the seafood export enterprises in VietNam now are shrimp and fish accounted for 64.6% of total export turnover In addition, the sales of items such as: squid, octopus, tuna are also more and more high Graph 4.4: Product structure of the seafood export products in VietNam (USD billion) 3000 2000 1000 DPangasius 2002 2004 2006 2008 2010 Source: Website of General Department of Customs 37 ~ en •other •shrimp 4.2 Analysis of capital structure of the seafood enterprises: Capital structure analysis generalizing the use of capital m the seafood enterprises supports the analysis of the general situation of the enterprise as well as the assessment of the risks in a comprehensive manner 4.2.1 Debt to equity ratio: This part will analyze annual debt statement of the SEAs during period 2009 2011 Tải FULL (79 trang): https://bit.ly/3BMyk9O Dự phòng: fb.com/TaiHo123doc.net 2009 2010 02011 Graph -Capital structure ratio of listed enterprises 2009 2010 02011 Graph 6- Capital structure ratio of unlisted enterprises Due to the industry's characteristics, the seafood enterprises use mainly short-term debt to purchase materials to maintain the business In particular, the 38 majority of short-term loan is based on revenues from export orders Therefore, the short-term debt to equity ratio is rather high The use of high short-term debt ratio could cause operation' risk, the enterprises could lose the ability to pay in case of the difficult economic situation, or failed orders Basing on graph 4.5 and 4.6, the seafood enterprises have not really focused in ensuring liquidity in the long-term investment Therefore, the long-term debt to equity ratio at a low degree of 4% in 2009, 5% in 2010 and 12% in 2011 for listed enterprises For unlisted enterprises, this rate is 6% in 2009, 8% in 2010 and 43% in 2011 There is strongly change in this ratio in year 2011 due to in this year, some enterprises have expanded factories, bought machinery and equipment leading to increase this rate sharply, especially for unlisted enterprises In general, debt to equity ratio of the seafood enterprises is quite high Average of the 20 listed enterprises on the Stock Exchange surveyed in 2009 was 175%, 199% in 2010 and in 2011 is 218% For the 15 unlisted enterprises in the survey, this rate is also as high as rate of listed enterprises such as 202% in 2009, 208% in 2010 and in 2011 is 205% In 2009, the debt to equity ratio of some listed enterprises is high such as: MPC (101 %), TS4 (112%), VTF (116%), HVG (118%), VHC (129%), AGD (139%), FBT (149%), ACL (255 %), ATA (289%), FMC (314%), GFC (415%), CMX (478%) and AVF (511%) In particular, almost short-term debt used to meet additional working capital for production as: VTF (110%), HVG (112%), FBT (144%), ACL (236 %), ATA (278%), GFC (413%), CMX (471%) and AVF (503%) In this year, total number of enterprises had debt to equity ratio more than 100% is 13 In 2010, this number is 15 enterprises include SFC (1 08%), ICF (110%), VTF (166%), HVG (174%), AGD (327%), FBT (207%), ACL (218%), ATA (380%), FMC (202%), GFC (657%), CMX (518%), AVF (266%), AGF (117%), MPC (185%) and TS4 (127 %) These enterprises used principally shortterm debt to meet additional working capital for production and business By 2011, the number of enterprises with debt to equity ratio more than 100% down to 14 39 6680416 ... works with data of both listed and unlisted firms The purpose of this study is to examine the relative importance of '' some factors to the leverage of Vietnam seafood processing and exporting enterprises... Statements of listed and unlisted seafood processing and exporting enterprises 4.1 Introduction of the seafood export industry: Seafood export plays an important role in the overall export turnover of. .. Data: The study consist data on balance sheet of 35 Vietnam processing and exporting enterprises during the period 2009 to 2011 including both listed and unlisted enterprises Data of 20 listed enterprises