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1 INTRODUCTION growth and performance is necessary Especially, in a developing country with a transition economy like Vietnam, venture capital is not available; government funded programs are struggling with certain limits Rationale Newly established firms are receiving more and more attention from researchers and managers, instead of only focusing on mature firms (Doruck, 2014) due to their developing orientation, creating new jobs, promoting organizational and flexible patterns (Naude and Greis, 2008) Therefore, by allowing new firms to pursue the opportunities and explore new business ideas, they are more capable of coping with the high expectations of the current market (Hyytien et al, 2014) In Vietnam, the ratio of newly established firms accounts for 24% during the period from 2010 to 2015 (VCCI, 2014, 2015), concentrating mainly in Hanoi and Ho Chi Minh From a certain point of view, these firms play an important role as the foundation of future development, the motivation for economic growth and a propelling factor which eventually require businesses to compete and improve business efficiency However, comparing with mature firms, the limits in performance and possibility of surviving during the first few years in operation are certainly a problem widely expected (Diambeidou Gailly, 2011) These disavantages of young firms become a new target for studying to researchers and represent an exciting object for research about determinants affecting the success of these firms In fact, there have been studies relying on the approach to resources, business strategies, competitive ability, or innovating capibility to determine factors affecting the success of start-ups However, in finance, this issue tends to focus mainly on old firms or listed firms Meanwhile, it is apparent that these firms could not represent the entire newly established firms thanks to the differences in the beginning Meanwhile, considering opinions depending on resource approach claiming that should firms not be limited by resource factors, business orientation will be manifested by the performance and affects the growth and development of firms Specifically the decisions about capital resources and using debt loan as well as equity in the capital structure initially appear to be essential toward the operation, possibility of failure, efficiency as well as the expanding potential of firms (Cassar, 2004) Thus, investigating how having an advantage in financial resources in the early years affect the development of young firms including Research objectives The aim of this thesis is to investigate the impact of capital structure during the first period on the development of start - ups, or more specifically, examine the direction and impact level of capital structure to the growth and performance of start - ups It also analyzes the results of using debt loan, whether it would lead to bankruptcy Based on the study results, the thesis is going to deliver certain implications Subject and scope of study The subjects of study are the capital structure and the impact of capital structure on the development of new firms in the early period based on three aspects: the performance, survivability and growth of start - ups The unit of study is truly new establisted firms - The scope of study: The study is conducted on samples of newly established firms in Hanoi, where the number of new businesses are one of the highest, accounting for 28.5% of the total number Besides, Hanoi is the economic and political capital of Vietnam, making it perfect and convenient for approaching information and financial services The thesis studies the early period of firms established in 2010 up until 2015 New contributions - The thesis provides the empirical evidence of the issue that remains uncommon in research on finance, based on the samples of new firms to determine the impact of capital structure on the growth and performance of firms, especially in the content of a transitional economy and financial market not quite developed as Vietnam Based on findings from qualitative research, the thesis proposes using items of bank loans and crisis as control variables in the models The results show the important role of bank debts in initial capital structure decisions in the performance of start –ups This conclusion is significant, especially for developing countries, where other financial resources to young firms are not available In contrast to mature firms, the findings of the thesis provided empirical evidence of the positive impact of capital structure on the growth and performance of newly established firms Also, using high levels of debt in the initial years of operation is not the cause of bankruptcy These results confirm that the business cycle is a factor required to be considered in studies on capital structure In addition, the findings also show that initial financing setting plays an importance role in the development of firms in the early stages The results of identifying determinants on the capital structure of newly established firms also indicate some differences and uniqueness of a developing economy, suggesting a new trend in the organization of equity and characteristics of asset structure resources The findings, however, show that there is a lack of agreement on the extent of total debt use as well as access to bank loans Structure of thesis Structure of thesis consist of chapters (opening and conclusion not included): Chapter 1: Overview of literature and Methodologhy; Chapter 2: Theoretical foundation of the impact of capital structure on the development of newly established firms; Chapter 3: Capital structure of newly established firms – Different cases of enterprises in Hanoi; Chapter 4: Analyzing impact of capital structure on performace of newly established firms in Hanoi; Chapter 5: Implications and recommendations CHAPTER AN OVERVIEW OF LITERATURE AND METHODOLOGHY 1.1 An overview of literature of capital structure of newly established firms 1.1.1 An overview of literature of accessing and using fiancial resourses in the capital structure of newly established firms Newly established firms are highly opaque information firms (Miettinen Virtanen 2013, 2013), lacking data of operation history and reputation (Berger Udell, 1998; Cassar, 2004; Huyghebeart Gutch, 2004) and facing relatively high failure rate during the initial years of operation (Huyghebeart, 2007; Latinien, 1992) These characteristics affect their access to and use of funds in the initial capital structure of the business cycle Therefore, the approach based on agency cost theory assumes that newly established firms will have less debt than mature enterprises However, due to the limited ability to generate cash in the first period of business operation, these young firms will use debt to cover the shortage of capital (Miettinen Virtanen, 2013) Based on the agurment, research aims at examining how start - ups select and use initial funding 1.1.2 The overview of factors affecting the capital structure of new businesses Based on the different characteristics of the business cycle of newly established companies, the research in this field concentrates on clarifying the factors affecting the capital structure of enterprises during the first stage of operation to explain the level of debt used The findings reveal two main issues: (1) Unlike mature firms, the capital structure of newly established firms is influenced by ownership characteristics and (2) There is no agreement on the direction of impact and the level of influence of factors to initial capital choice throughout the examined studies It is possible to generalize the factors affecting the capital structure of new enterprises throughout the six case studies considered to be relatively homogeneous (Table 1.1) These studies include the studies of Scherrs and Sugrue (1993) (SS), Cassar (2004) (CR), Sanyal and Mann (2010) (SM), Miettinen and Vitanen (2013) Robb and Robinson (2010) (RR) Huyghebeart (2004) (HT) Bảng 1.1: Determinants of the capital structure of start- ups Characteristics CR HT MV Business characteristics Profitability Asset structure Firm size Growth Legal organization Age Gender Work experience Education Experience in the industry + + + (***) + (***) Owner characteristics SM RR SS + + + + + (***) + (***) + - + + + Note: The blank indicates that the particular study did not include the point characteristics specified Resource: Synthesized by the author 1.2 An overview of the impact of capital structure on business development) 1.2.1 The development of newly established firms The impact of capital structure on the development of newly established enterprises should be examined and evaluated in all three aspects: (1) The impact of capital structure on performance (2) The effect of capital structure on the growth of the business and (3) The impact of capital structure on the risk of bankruptcy of newly established enterprises This approach is in agreement with the view in the study given by Yanga et al (2016) studies (Giannageli and Fagiolo, 2016; Avarmaa, 2011; Titman and Wessel (1988), Chittten et al (1996)) confirm this impact, but with specific constraints The results show that research in the case of newly established enterprises is fairly scarce, except for the reports of Huynh and Petrunia (2010) Therefore, this is also the research gap that needs to be filled and clarified 1.2.2 The impact of capital structure on the development of newly established firms 1.2.2.1 The impact of capital structure on the performance of enterprises - The view of the positive impact of capital structure on performance are intepreted based on the approach of the agency cost theory, signal market theory and trade off theory The main hypothesis in the studies with this approach is that high debt levels in capital structure are associated with higher business performance Some othes studies support the independence of capital structure by providing evidence on the irrelevance of debt mentioned by Modgliani and Miller (1954) in their capital structure theory This may include some studies by Krishman Moyer (1997); Ebaid (2011); Phillips and Sipahioglu (2004); Simerly and Li (2000), Chathoth and Olsen (2007) - The view on the negative impact of capital structure on the performance is mainly based on the interpretation of the POT theory and incorporates exogenous limitations relating to agency problem This is the popular trend in most studies, conducted in samples of listed companies, in both developed and developing contries as well as in Vietnam (Doan Ngọc Phi Anh, 2010; Le Phuong Vy Phan Bich Nguyet, 2017; Thang Nguyen and Henry D, 2013; Tran Thanh Tu, 2010; Phan Hong Mai, 2016) 1.2.2.2 Impact of capital structure on business growth The agency cost theory proposes that when debt acts as a discipline for the arbitrary of managers, it also adversely affects growth (Jensen and Meckling, 1986 and Stulz, 1990) The studies by Lang et al (1996); Lin (2015) and (Titman and Wessel, 1988) provide evidence of the negative impact of leverage on growth In contrast, the results of Kiani et al (2012); Huynh and Petrunia (2010); Opler and Titman (1994); Anton (2016); Honjo and Harada (2006) also show evidence of the benefits of using high debt levels on the growth of SMEs Other 1.2.2.3 The impact of capital structure on the existence of businesses The original resource-based approach negates the relationship between capital structure or correlations between financial capital and the survivability of firms Based on the view from capital structure theories, the results of Chung et al (2013) also show that the relationship between capital structure and viability of enterprises is negligible When examining this impact on the samples of newly established firms, much of this relationship was only derived from the results of actual observation, or some indication from the analysis of the financial position of firms, except for Åstebro and Bernhardt (2003) reporting a positive prospect of having a bank loan in the capital structure with the survival of firms based on the samples of US firms In Vietnam, the impact of capital structure on the survival of firms has also been tested in certain industries (Phan Hong Mai, 2012, Dang Phuong Mai, 2016) for listed companies Then, whether the impact on initial financial resources is truly meaningful to the new business or not is not a question that needs to be clarified 1.3 Research gaps and questions 1.3.1 The gaps in research First of all, there is a lack of capital structure studies at the beginning period of business At the same time, these studies primarily focus on examining the factors that influence capital structure decisions and suggesting the effects on the output rather than the impact of capital structure on the performance of start ups, while the findings on the samples of current mature firms either (1) Lack consensus on the direction and magnitude of the impact, and (2) cannot represent new businesses formed by the different characteristics of the business cycle Secondly, in terms of research approaches, existing capital structure studies primarily carry out unilateral tests on the growth, performance or survivability of the business, which lack more comprehensive review of the influence of capital structure on different aspects of the outcome This problem leads to certain limitations in the evaluation and analysis of the results as indicated in the Murphy study (1996) Third, existing research on the capital structure directs the approach towards credit demand At that point, the question is how the constraints from the supply side of credit and the shock from the financial market may affect the relationship between the capital structure and business results is also untested Therefore, examining the impact of the financial crisis and the role of official leverage is significant business opportunities with less financial constraints and therefore having higher levels of fanancial flexibility Accordingly, the study proposed: 1.3.2 Research questions Question 1: What are the determinants of newly established firms? Question 2: How does the capital structure affect the development of newly established enterprises? These research questions are detailed by specific sub-questions: (1): How does capital structure make an impact on business performance of start - ups and how does the use of bank loans affect the relationship between capital structure and profitability of start ups?; (2) How does capital structure affect the growth of newly established firms?; (3) How does the initial capital structure relate to bankruptcy and the inactivity of start - ups? 1.4 Research Methods 1.4.1 Research hypotheses 1.4.1.1 Hypotheses of the factors influencing capital structure This study interprets the determinants of capital structure depending on the framework of the static trade off theory and the pecking order theory These factors include a group of enterprise characteristics (firm size, asset structure, profitability, growth potential, liquidity, and legal organizational form) and a group of owner characteristics (age and gender) Accordingly, eight related hypotheses are proposed for the model of factors influencing the capital structure of newly established firms 2.4.1.2 The hypotheses examining the impact of capital structure on the performance of newly established firms The central argument in this study states that firms could use relatively higher debt leverage comparing with other firms, ceteris paribus, or/and having one bank loan minimum during the first years of operation leading to these firms getting more access to resources as well as having better conditions to implement Hypothesis H2a: Capital structure with higher leverage has more positive impact on the business performance of newly established firms Besides, hypotheses for controlling variables in the models including firm size, age of firms, asset structure and growth of sales variables are also examined in the models 2.4.1.3 Hypothesises on the effect of capital structure on business growth The point of view supported by Myers (1984) suggest that firms with high potential of growth should have higher levels of debt in their capital structure From relevant discussions, the study proposed: Hypothesis H3: Capital structure has a positive influence on the growth of newly established enterprises The relationship between firm size, age, profitability and investment rates in assess with growth of firms suggested by (Evan, 1987; Dunne et al, 1989; Elston, 2002; Chen et al, 1985; Lang et al, 1996; Kiani, 2012) is also controlled in the model by five related hypotheses 1.4.1.4 Assumptions on the relationship between capital structure and the existence of newly established firms The empirical results still fail to provide clear evidenc on the impact of debt on the bankruptcy of enterprises in general Therefore, this study also anticipates that signs of bankruptcy in the case of newly established companies are less related to the level of debt used, or at least not the common cause This assumption is set to examine the relationship between the capital structure of newly established enterprises and the bankruptcy situation based on the analysis of capital structure on the samples of enterprises that have ceased operation It is impossible to analyze correlations because of the lack of information on the data available, the study accepts this assumption as an alternative Therefore, it does not propose the hypothesis in this case 1.4.2 Initial models, variables and variable measures - The models examining the of capital structure CS i,t = β0 + β1 SIZE_DT + β2GRO_DT + β3TANG + β4LIQ + + β5PROFIT1+ β6AGE + β7GTINH+ β8TCPLY + β9YEAR + εi,t (1) - The models examining the impact of capital structure on business performance FP i,t = β0 + β1 10 CS i,t + β2∑Controli,t + εi,t (2.1) And FP i,t = β0 + β1 CS i,t-1 + β2∑ Controli,t + εit - The models examine the effects of capital structure on growth GROWTH i,t = β0 + β1 CS i,t + β2 ∑ Control i,t + εi,t (2.2) (3) Table 1.1: Summarization of variables and variable measures Variables Variables Measures Capital structure CS 1.1 LEV Leverage of firm i in year i and determine by ratio between Total debt and Total assets 1.2 SLEV Short debt ratio = Short debt / Total Assets 1.3 LEV1 Ratio of Debt and comercial trade = (Debt and comercial trade)/ Total assets FP 2.1 PROFT PROFT1 2.2 PROFT2 GROWTH 3.1 GROW_DT Performance Return on Assets (ROA) = Earns before tax, interest and depreciation/ Total Assets Return on Assets = Earns after tax/ Total assets Returns on Equity (ROE)= Earns before tax, interest and depreciation/ Equity Growth of firm Sale growth=(Sales year t- Sales year t-1)/Sales year t-1 Resource: Synthesized by the author 1.4.3 Sampling The initial data of 367 enterprises was registered in 2010, taken by stratified sampling method The data was then reduced to 269 operating enterprises and 56 bankrupted enterprises which temporarily ceased operation Data of 210 listed companies extracted from the source of Bao Viet Securities Company are also used This study was also conducted with a sub-sample of 22 units including 17 firms and banks used for qualitative analysis in semi-structured interviews 1.4.4 Research Methods The thesis using the method of qualitative research was conducted in the form of semi-structured interviews The findings aim to increase the interpretive capacity of the model and add new research variables to the initial model Quantitative research uses the STATA 12 software in data analysis The results are reported in the OLS, RE, and FEM models Advanced endogenous tests based on the Maximal Momentum Approach (D-GMM) and nonlinear regression based on quantile regression at the leverage level in the fourth unit were also performed to examine the impact of corporate capital structure on performance CHAPTER THE THEORETICAL FRAMEWORK OF THE IMPACT OF CAPITAL STRUCTURE ON THE DEVELOPMENT OF NEWLY ESTABLISHED FIRMS 2.1 An overview of newly established enterprises 2.1.1 Business cycle and the stages of development of newly established enterprises According to the business cycle theory, every business can experience some or all stages of its life cycle, including start-up, expansion, rapid growth, saturation growth and retreat With this approach, newly established enterprises are identified as firms that are at the beginning stages of the business cycle, or in other words, the period in which the value source relies entirely on future growth 2.1.2 The concept of new businesses Newly established firms are those registered for the first time by one or more founding members according to the regulations of legal business organization These firms are not separated or individualized from either a new part of an existing business or a new businesses formed by merging previous business activities, in the first period of the business cycle and determined having time of operating around years since the date of being granted the business registration certificate 2.1.3 Characteristics of newly established firms - Newly-established companies often receive low earnings or profitability However, high possibility of growing can be achieved during the early stages The information is lacking Therefore, the problem of information asymmetry becomes serious These firms usually have to face difficulties due to lack of financial resources and human resources as well as disadvantages from business activities 11 12 - Newly established firms usually have a fairly small scale and high concentration of ownership, considered to be a restriction on reputation, high risk and possibility of failure - Bank loans: Bank loans are external financing available to new firms (Beger and Udell, 1998) However, the chance of getting access to bank loans is low for new companies because of the adverse selection and moral hazard 2.1.4 The role of startups in the economy Newly established firms play an important role in the economic development in every nation because this is the first real estate to construct the foundation for the development of the business sector in the future In addition, even in the nascent stage, these enterprises have played a role in employment growth, contributing to improving the competitive position of the economy, promoting the allocation of resources As a result, it all contributes to boosting the economic performance Therefore, young entrepreneurs dedicate to creating value added, which is the driving force of growth Start-ups are also considered a valuable initiative in creating significant competitiveness in the industry and in the overall economy Commercial credit is considered one of the main financing sources for most firms (Beger and Udell, 1998, Huyghebeart and Gutch, 2007, Akinlo, 2012 and Getachew et al., 2013) This funding plays an important role in both developed and developing countries (Getachew, 2013), since it helps offset the shortage of capital during the early stages of the business cycle (Huyghebeart and Gutch, 2007) 2.1.5 Factors affecting the development of newly established firms Financial capital and financial constraints, innovation and growth, growth intentions, management strategies and marketing, firm size, financial support from the government, and social morphological characteristics of the owner are considered factors affecting the development of enterprises, representing a combination of different resources including financial capital, human capital and business strategy in the operation of enterprises In the first stage of entering the market, capital is an important factor for young firms to cover necessary initial costs when joining the business network Therefore, if the enterprises face serious financial constraints, especially in the start-up period, all the difficulties seem to be parallel can prevent enterprises from operating at the optimal scale, pursuing new investment opportunities and outlining a business strategy The consequence is that the financial constraints, in certain circumstances, might even nullify the business strategy as well as human capital, negatively affecting the survivalability and development of new businesses 2.2.2.2 Equity sources The investment capital of owners and retained earnings account for over 45% of the capital structure of new firms (Berger and Udell, 1998, Huyghebeart and Gutch, 2004, Rob and Robinson, 2010) Loans to family and friends are also included in this category In addition, a small number of start-ups have access to external equity from angel investors and venture capital funds However, this source of capital is primarily intended to help startups in specific fields, such as: information technology, biotechnology, or enterprises with exceptional or innovations 2.2.2.3 Other sources of funding In some countries, startups may receive funding from the government or funding sources with the purpose of investing in start-up projects 2.2.3 Capital structure and indicators of the capital structure of newly established firms The capital structure of newly established firms is the incorporation of debt and equity to finance their business operations, reflecting the ability and extent of total debt use which mainly focuses on short-term debt to finance assets, which young firms can have access to in the early stages of business operations The indicators reflect the capital structure of newly established companies, including: Total debt ratio, debt structure (short-term debt, long-term debt), mixed debt (debt ratio, external debt including debt and comericial trade) 2.2 The capital structure of newly established enterprises 2.3 The impact of capital structure on the development of newly established enterprises 2.2.1 Capital structure theory 2.3.1 The determinants of the capital structure of newly established firms 2.2.2 Financial resources in capital structure of newly established firms 2.2.2.1 Funding from debt 13 14 The group of factors belonging to firm characteristics: firm size, asset structure, growth opportunities and orientation, business industry and legal organization (2002) Hence, capital structure with little debt constraint can have a positive impact on growth The group of factors presented for owner characteristics: age, gender, level of education and work experience The group of factors belonging to the macroeconomic environment: GDP, inflation rate, interest rate, tax policy, level of development of the financial market and financial institutions 2.3.2 The impact of capital structure on the development of newly established firms The impact of capital structure on the development of new enterprises is also explained on the theorical framework of capital structure in from aspects: Growth, business performance and the existence of enterprise In the cases of newly established firms, the benefits of tax shield in improving the business performance are not the center of the main considerations The positive impact of capital structure on business performance is due to the fiancial flexibility that help companies seize business opportunities and decrease business risk as suggested from the view of the trade off theory Besides, young firms in the initial years have little accumulated profit Therefore, the role of debt cannot be taken “down to the second order” as suggested by the pecking order theory Thus, the decision of using debt of firm should be considered stimultaneously based on both the framework theory of capital and business cycle theory The start-up period is the stage of rapid growth, since financial capital plays an important role in the establishment, expansion and survival of young firms In addition, this capital can make a “launcher” to help business succeed in future (Korosteleva and Mickiewicz, 2010) Therefore, capital structure is considered to have a positive effect on the results of new businesses - The capital structure theory suggested that there is a negative relationship between leverage and growth because firms with high leverage may not be able to take advantage of growth-related opportunities However, Robb's study (2012) shows that fast-growing firms are more specific about financial flexibility and have a combination of debt and equity in the capital structure that uses less debt than the slow growing ones This view was also supported from the studíe by Baldwin et al (1994); Becchetti and Trovato, (2002); Capenter and Petersen - Decisions on the capital and use of debt or equity at the time of establishment have been indicated to be important for business operation, the risk of bankruptcy, business performance and possibility of firm expansion (Cassar, 2002) The initial choice of start-up companies will leave a mark as well as affect their existence in the long term Thus, funding issues are also considered to be the cause of corporate failure by poor finance (Baldwin et al., 1997) or lack of funds (Thornhill and Amit, 2003) CHAPTER 3: AN OVERVIEW OF NEWLY ESTABLISHED FIRMS: CASE STUDY IN HANOI 3.1 An overview of newly established enterprises in Hanoi - During the period of 2010 - 2015, both growth rate and average investment capital of newly established firms in Hanoi significantly decreased The number of new entrants to the market is concentrated in the private sector, accounting for over 97% of the total number of newly established firms during the period of 2010-2015 The scale of investment capital of these firms has improved, but most of them are relatively, if not extremely, small Firms are registered in the form of limited liability companies are the most popular, however only slightly more than the number of new joint stock companies in this period - Although the number of new firms entering the market is large, the rate of withdrawal from the market is also very high and has the potential to increase, especially in the period of 2010-2015 By 2014, the number of businesses withdrawing from the market is nearly equal to the number of new entrants 3.2 The reality of funding resources and capital structure of newly established firms in Hanoi 3.2.1 Analyzing the capital structure of newly established enterprises Newly established firms in Hanoi depend on equity at a relatively high level On average, young firms use up 53.1% of the equity in the capital structure to finance business operation in the initial stage The debt structure of these firms account for an average of 44.9% during the period from 2010 to 2015 This debt 15 16 level is about 1.5 times higher than the initial start-up of the business (year 0), but still lower than the debt levels that new firms obtain after the third year the same time, capital structure established almost remains unchanged over the time The differences presented above suggest that newly established firms are heavily influenced by the supply side of credit and financial constraints 3.2.2 Debt structure and funding sources in the capital structure of newly established firms The debt structure of new businesses is mainly short-term debt and made up of two basic components: credit trade and bank loans On average, businesses use 44.9% of debt in capital structure at the initial stage of operation, in which shortterm debt accounted for 41.4% while long-term debt accounted for only 3.7% New firms used 18.25% of the capital fianced by suppliers in the financial structure, much lower than the level of 23-27%, which have been recorded in several studies (Huyghebeart and Gutch, 2007, Ahassan and Andani, 2008; Alinlo, 2012) Although the loans of new enterprises in the samples increased rapidly after the second year of operation, they nonetheless accounted for a low proportion of only 16% in the whole period, and only 38.48% of the total loan 3.2.3 The analysis of the capital structure of newly established enterprises by business sector The rate of equity of enterprises operating in the industry of agriculture, forestry and fisheries is the highest (77.5%) The rate of using credit trade, however, are considered the lowest (13%) The highest percentage of ulitility credit trade belongs to firms operating in sectors such as energy, construction materials and steel (24.9%), much higher than the average (18%) Newly established firms operating in the industries of transportation and warehousing have the highest level of debt use These companies have the total leverage of 55.69%, and ratio of debt up to 26.98% The building sector was recorded to have the total leverage at the lowest level of 9% The above results also reflect the difficulties faced by these companies in this industry recently, a period heavily affected by economic recession The businessé operating in the sector of commercial and services and of manufacture have a quite similar debt structure 3.3 Assessing the reality of the capital structure of newly established firms in Hanoi 3.3.1 Assessing the differences between the capital structure of newly established firms and mature firms On average, the tendency to use external debts of listed firms is not significantly higher than the new ones (38% and 34%, respectively), but listed companies tend to use far higher levels of official loans than start-ups (26% against less than 16%) and almost no dependence on capital from suppliers At 3.3.2 Evaluating the reality of the capital structure of newly established firms in Hanoi - Debt structure: Newly established companies tend to use low external debt The debt structure is mainly taken up by short-term debt, whereas long-term debt accounted for a very small proportion - Mobilization and selecting funding sources: Enterprises have very few options of funding sources for the initial capital structure Credit trade and bank loans are still two important components The low level of bank debt can be seen as the limited ability to raise capital for production and business activities of young enterprises CHAPTER ANALYZING THE IMPACT OF CAPITAL STRUCTURE ON THE DEVELOPMENT OF NEWLY ESTABLISED FIRMS: CASE STUDY IN HANOI 4.1 Findings of qualitative research 4.1.1 Description of qualitative research sample 4.1.2 Identifications of the financial constrants in the capital structure on newly established firms The commercial credit constraints: the tight policy with the big cost and imbalance between the receivables, payables and the hidden debts affecting cash flow are the two main findings in this content Bank credit constraints: It is generally hard for new businesses to have access to this source of funds when needed Most new companies can only use this capital if it is secured by the owner's personal assets With these difficulties, newly established companies have no choice but to give up profitable investment opportunities 4.1.3 The impact of economic crises on financing considerations and business performance of newly established enterprises The findings of the study show that, while the effects of the recession were recorded in 2008, it had not spread to Vietnam until three years later 64.7% of the total number of enterprises reported a drop in sales and profits starting in 2012 and reaching its peak in 2013 and 2014 In this segment, capital structure decisions differ considerably: The official debt level of enterprises tends to decrease even 17 18 when interest rates fall sharply, even though businesses still achieve certain profitability; however not making improvement, obtaining bad debts which leads to the decline in business performance The growth rate of revenue might then decrease sharply With these identities, it is clear that controlling the effects of economic crises is a factor to be considered in the research models 4.1.4 Identifications of the impact of capital structure on start-up development - Financial resources are one of the significant factors for the materialization of the investment opportunities, profitability and growth of newly established enterprises in the context of the economy not encountering disadvantages from crisis shocks The initial data of 367 enterprises was registered in 2010, taken by stratified sampling method The data was then reduced to 269 operating enterprises with 1614 observes Total observes of growth variables in estimating of regession models are 1345 because some of these values cannot be determined at year Some missing values are reported in details in regression results Firms in the research samples are distributed in major industries In addition, the sample is connected to the information system of the Department of Investment and Planing of Hanoi Description results show that new firms run by men account for 69.5%, while firms owned by women account for only 30.5% 4.2.2 Descriptive statistics 4.2.2.1 The characteristics of the capital structure of newly established enterprises On average, the total leverage of newly established companies is approximately 44% during the first five years of operation Short-term debt accounted for around 41.1% and 2.8% for long term debt The growth rate of newly established companies has increased over time but remains fairly low (less than 18.5%) Newly established companies use loans with relatively low rates and mainly short-term debt On average, new enterprises use only 15.5% of loans in capital structure during the first five years of operation Most of them are shortterm loans Long-term debt accounts for less than 3% of total debt The total debt and outstanding loans reach about 33.75% 4.2.2.2 Descriptive statistics on the business performance of newly established firms During the early years of operation, businesses started out in the research sample reporting extremely poor results On average, the ROA of startups was (-2.4%) and (1.4%) for ROE However, the median value shows that not all companies fully reported losses during the first few years of operation when the ROA, ROE and ROS values were 0.002%, 0.03% and 0.01%, respectively As measured by EBITDA, the results show that the average ROA of ROA and ROE are 0.058% and 0.037% 4.2.3 Quantitative analysis of factors influencing the capital structure of newly established firms The results show that enterprise size, growth rate, profitability and age are the most influential factors in the capital structure of new enterprises (LEV), short-term debts (SLEV), and Debt to Equity ratio (LEV1) The coefficients reported for these variables in order are (0.067), (0.412) and (0.074) - Bank debt tends to affect the development of enterprises not only in the start-up phase but also in the later stages of finance - Newly-established companies tend to use more debt and would prefer to use bank loans that seem to have better business results 4.1.5 Adjusting the proposed research model and additional research hypotheses The research model proposes control over the use of official capital in the debt structure of startups and the control of the impact of the ultimate financial crisis on this relationship Hypothesis H2b: The impact of capital structure on business performance of newly established firms may be more positive if enterprises use official debt in capital structure Hypothesis H2.5 & H3.5: A negative impact remained from economic crises affect on bussiness performance and growth of newly established enterprises Table 4.2: Variables and additional measures Variables Scales CRISIS Crisis Variable: A dummy variable labeled value if year of operation is 2013 and 2014, other equal BDEBT Binary variable is label value if firms has at lest a bank loan presented on financial statements, other equal The official model of the impact of capital structure on the performance and growth of new firms is proposed with the additional two variables above 4.2 Quantitative results 4.2.1 Sample 19 Unlike mature firms, which indicate the negative impact of business age on debt use, new firms illustrate their debt levels by the time they enter the market This impact is statistically significant at the 5% level Firms are organized under the model of limited liability companies and male bosses tend to use more debt than enterprises organized under the form of joint stock companies and / or legal representation of women Legal organization form is also a factor tested in the model but only becomes significant in FE models Liquidity and asset structure factors have a negligible impact on the decisions of capital structure 4.2.4 Analyzing the impact of capital structure on the development of newly established firms 4.2.4.1 The impact of capital structure on the business efficiency of newly established enterprises - The impact of total debt ratio With the final result obtained from the FEM model, it is found that the increase in debt levels has a positive effect on the business performance of newly established firms On average, a 1% increase in leverage would signify a 0.051% increase in ROA (EBITDA) The marginal effect of leverage on business outcome is greater in the case of enterprises owning official loans from banks For controlling variables, the results were positive for firm size (0.007) and growth (0.0129) The negative impact of financial crises on the performance was also shown in the regression result with the coefficient (-0289) The impact of age and asset structure is positive for ROA, but this impact is negligible - The impact of short-term leverage, leverage on debt and credit trade ratio to the performance of newly-established enterprises Findings from the study also provide evidence of a consistent, positive effect on business performance on short-term debt (SLEV), debt and trade credit (LEV1) The results indicate that a 1% change in the debt ratio measured in these scales would mean an increase of 0.0127% and 0.0293% in ROA, respectively Although the effect on business performance in this case would be lower than the effect of total debt leverage, the models show the importance of using official debt as it affects business performance The coefficients of the BDEBT were reported to be (0.097) and (0.082) in the fixed effects model (FE) respectively determined on the existing sample of data in these cases 20 - Robustness check To test the sustainability of the estimation results, the study conducted a lag1-based alternative approach with the aim of verifying the stability of the estimated result and the individual test on the quaternary quartile at 25% of the highest leverage levels before legitimizing research results 4.2.4.2 Analyzing the impact of capital structure on the growth of newly established firms The estimated results have shown that the debt ratio has a positive and significant impact on the growth of enterprises during the first stages of operation On average, the debt ratio in the capital structure increasing by 1% is equivalent to a likelihood of a 5.5% increase in revenue growth The factors of profitability and scale of asset investment have a positive relationship with statistical significance for growth The coefficients reported for these two explanatory variables are (.477) and (.0915) The growth of newly established enterprises was also negatively affected by economic crises and the age of enterprises 4.2.4.3 Analyzing the impact of capital structure on the risk of bankruptcy of newly established enterprises The survey results on the capital structure of newly established enterprises belonging to the group of bankrupt enterprises within years from the date of establishment registration show that: (1) Most of these companies used only equity for business operation (89%); The low debt ratio is reflected in three aspects: the number of enterprises using low debt, the small size of the debt and the official debt almost not being used; (3) The percentage of credit trade invoices on the sample is very small, accounting for 0.041% of the total capital, much lower than the average use of capital structure in the case of newly established enterprises; (4) Enterprises with a higher debt ratio than those in the sample tend to have a longer lifespan before a complete termination of operation Thus, along with identifying the characteristics for the state of the new business going bankrupt or ceasing operation in the above content, a detailed examination of capital structure through debt use as well as equity suggests that there is insufficient proof or evidence to conclude that the use of debt causes risk of bankruptcy for new businesses CHAPTER CONCLUSIONS AND RECOMENDATIONS 21 22 5.1 Discussing the research results 5.1.1 Selecting funding sources and determining the capital structure of newly established enterprises The results have shown that: - A strong overall dependence on retained earnings and equity and debt financing is explained by the POT theory and suggested by the trade off theory stating that new enterprises more likely to encounter risky situations would limit their debt use (Harris and Ravid, 1991) - The structure of the capital of new enterprises in terms of short-term debt and credit trade is explained as information asymmetry, which is unobservablr contents Thus, the indicators established in the model show that profitability, business size and growth potential are the three most influential factors for the level of debt used - There is a strong connection among the capital structure of newly established companies, personal finance and ownership characteristics Enterprises in Hanoi face limitations in their ability to get access to sources partly because the supply side is not always available The investments mainly coming from the whole income and the accumulation are more sensitive than the considerations of liquidity and cash flow Unlike most research, fixed assets are not the factors that influence the level of debt use in capital structure This difference is due to the collateral in the case of newly established enterprises owned by the owner instead of the enterprise This is a prerequisite for optimizing loan agreements for new businesses (Ravid and Spiegle, 1997) Combined with the findings of identification from the results of financial analyses, it can be seen that the difficulties of young enterprises in financial connection in a developing country are seriously affected by incompleteness The market is weak, the financing mechanism is underdeveloped Affected by the institutional environment, the quality of the legal system, property rights and the scope of financial sector control, these are serious barriers preventing access to external funding, including both official and credit trade 5.1.2 The impact of capital structure on the development of newly established enterprises First of all, in terms of business performance, the positive relationship between initial capital structure and performance indicates the dependence on debt, which emphasizes the role of official debt as a characteristic of the business conditions affecting business success in the early stages of the business cycle Enterprises with higher debt levels tend to have higher profitability, or at least fewer losses than those with lower debt levels, given that other factors stay unchanged This is also an important contribution showing the difference between the direction of impact of capital structure on business performance of new businesses and that of mature business The argument for this study is that newly established firms that use higher debt levels may have better resources, knowledge and capabilities that might not be immediately obvious in financial reports Business owners probably have a previous reputation, personal assets and business experience, which they can apply into making better business decisions with less credit constraints The actual borrowing arises from the need to expand the business or to execute profitable projects with the level of risk presumed to be within their control Therefore, when the problem of the agency cost is reduced, the new business "quality" or having good business opportunities tend to involve more borrowing to achieve higher business results The results of this study may be a certain contribution to the financial literature, from the view of the necessity of a link between the theories of capital structure theory and the approaches to resources The point of the business cycle in the case of start-ups is to clarify the role of corporate financial planning as well as the support needed to optimize the scale of the entity operations in the economy Although results confrim in the positive impact of capital structure on business results of newly established companies consistency, a careful consideration in the study, the thesis additionally made a leverage check on leverage in The fourth quartile to control the results among the data Although discovering the opposite relationship is not statistically significant at the debt level of above 71%, it nonetheless implies two possible issues that need to be further investigated in the future: - The positive impact of capital structure on the performance of newly established firms also has a threshold constraint at which the cost of debt exceeds the gain from profitability - A high level of debt can be a sign that businesses are achieving unsatisfactory results, since the debts that enterprises have not paid or can not pay are still deposited on financial statements Secondly, the positive relationship between the ratio of total debt, short-term debt and revenue growth indicates that firms use debt at a relatively higher level 23 24 in capital structure during the initial financial period or/and have used an official loan from a bank that has a higher turnover - Businesses operating in the industry of trade and services should take better advantage of the financial leverage However, this is not recommended for the industry of building and construction materials This problem shows that new businesses mostly rely on debt in their capital structure decision to finance business opportunities However, financial constraints preventing new entrants from accessing official credit demonstrate the inefficiencies in credit allocation and the operation of financial markets in Vietnam today This may also be part of the reason why it is difficult for enterprises to expand in the period considered to be the highest growth rate Third, from the detailed analysis, there are insufficient grounds for concluding that the use of leverage increases the risk of bankruptcy This finding is not entirely similar to the suggestion of the effect of financial exhaustion leading to the risk of bankruptcy from the use of debt proposed by trade off theory The controversy on this issue has shown that the weaknesses of busiess might come from mistakes in selecting business strategies There might even be disorientation in business and strategies in the long run Spontaneous activities have been mentioned in many studies on the business development in Vietnam in the past In addition, not using debt is not only the result of a lack of orientation, but it also unveils the entrepreneur's willingness not to put pressure on business operation to avoid the risk of being forced to withdraw from the market 5.2 Recommendations Recommemdation for the businesses: - The increase in the external debts in capital structure during the starting period of joining the market and establishing relationships with banks brings about certain benefits for newly established firms In the context of the market not suffering from crisis shocks, the decisions involving lending and borrowing when a business expanding plan is presented, or the new investments could be an opportunity for businesses in the present time Capital structure concentrating on debts is recommended by: (1) The number of firms using debts is relatively small; in fact, it is much smaller than the ratio reported in recent empirical studies, and (2) The mentality and tendency to avoid risks seem to be easily found among new firms established across Hanoi, leading to the decision of rejecting external loans This limits the ability to expand their business activities, lacking the motivation to extend the business in order to compensate the expense Consequentially, the ability to accumulate profit cannot reach the optimal scale, which leads to the obstacles faced by businesses in the future, especially when dealing with exgenerous shocks from the market Recommendations for banks: - Banks should actively participate in establishing financial connections with new firms They should also consider suitable packages of bank loans that are capable of optimizing the financing contracts without depending only on colleration assets Recommendations for the government: - In order to accelerate the rate of development of newly established companies, the government should issue specific policies supporting and encouraging entrepreneurship They should at the same time come up with solutions in order to help new businesses to get access to long-term capital for investing and developing Last but not least, the government should a system of mechanism with the purpose of encouraging commercial banks to participate in providing loans for start-ups - The government also need to continue reforming institution, policies, creating an ideal business environment, especially establishing a better merchanism of asset right, helping new businesses to further participate in the financial market 5.3 Limitations The research acknowledges certain limits in the size of samples, the lack of examination on the scale of commercial credit trade, not being able to provide correlation analysis regarding the impact of capital structure on the risk of bankruptcy In addition, the research has not synchronized the findings with the task of dealing with posibility of endogennous problem on models is also a limit of this study These are the topics that need to be clarified in any following research In addition, this research also suggests that the impact of capital structure on the development of firms requires a further investigation into issues related to entrepreneurship, institution and business environment This shows a large research gap for future research to go further into the impact of capital structure on new businesses through the median variables Finally, when the data on the timeline are sufficient to examine how the initial choices affect the future development of businesses and carrying out tests on correlation analysis based on the non-financial scale to come to suitable conclusions and predictions for policy implications, which is what the research wishes to accomplish in the future CONCLUSION 25 Based on the controversy of the impact of initial forces and power on the development of businesses, the study has made an effort to connect between the beginning financial forces through the capital structure choices in the early stages and the development on three aspects: survivability, ability to grow and business performance to clarify the importance of financial leverage, official and external debts These conclusions take into account the financial constraints, the impact of financial slacks caused by economic recession along with an accurate record of the factors belonging to different industries, the size and the crises They can be explained based on specific theories, assumptions or the results of quantiative research The positive impact of capital structure on business performance and growth has shown the importance of business cycle in research on capital structure The thesis has also provided evidence on the significance of bank loans to the growth ability and performance of newly established companies Finally, besides from the results achieved, the research acknowledges the downsides that need improving, as well as the future research orientation presented in the content of the study LIST OF THE PUBLISHED WORK RELATED TO THE THESIS: Bui Thi Thu Loan and Vu Duy Hao (2017), “Effect of capital structure on performance of Start ups” - Journal of Economics and Development, International Conference Proceedings, Emerging Issues in Economics and Business in the Context of International Integration, 12/2017, pp.655-668 Bùi Thị Thu Loan, Vũ Kim Anh ( 2017), “ An analysis on the Role of Funding resources for the growth of start ups: A case study in Hanoi”, Trade Science Rewiev No 12/2017, pp.43-52 Bùi Thị Thu Loan and Vũ Duy Hào (2017), “Impact of capital structure on bussiness performance in period of crisis: A case study in Hanoi”, Journal of Science and Technology No (41), trang 122-128 Vũ Duy Hào and Bùi Thị Thu Loan (2017), “Analyzing the capital structure of start- ups”, National Conference Proceedings, Applying Base II in risk managment of Vietnam comercial, 12/2017 Bùi Thị Thu Loan (2016), “Start ups financing”, Vietnam trade and industry review, No 7/2016, pp 101 - 106 Bùi Thị Thu Loan andPhạm Hương Giang (2017), “Analyzing constraints of start ups in intergrating period” Journal of Science and Technology, No 38, 4/2017, pp 264-267 Bùi Thị Thu Loan and Vũ Duy Hào (2016), “ Capital structure of start ups and the role of comercial banks”, National Conference Proceedings – Institutional improvement for substainable development of Vietnam banking system in period of 2016 to 2010, National Economic University, 11/2016, pp 187-194 Bùi Thị Thu Loan (2014), “Financial structure of start ups”, Review of Finance, No 592, 1/2014, pp 64-66 Bùi Thị Thu Loan (2013), “ Valuation of enterprise in M&A activities in Vietnam”, Review of Finance, No 10(588), pp 56- 58 10 Bùi Thị Thu Loan (2014), “Identifiation of extraordinary iterms in analyzing fianance statement”, Review of Finance, No 590, pp 56- 58