Analysis of the determinants of capital structure evidence from real estate companies in vietnam from 2017 to 2021

Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance FINANCE DISSERTATION ON ANALYSIS OF THE DETERMINANTS OF CAPITAL STRUCTURE: EVIDENCE FROM REAL ESTATE COMPANIES IN VIETNAM FROM 2017 TO 2021 NAME OF STUDENT: NGUYEN MY LINH ID No: 21077625 Intake Supervisor: Assoc Prof Dr To Kim Ngoc September 2022 Tai ngay!!! Ban co the xoa dong chu nay!!! 17014125813641000000 ACKNOWLEDGEMENTS First of all, I am grateful to Ass Prof Dr To Kim Ngoc, lecturer in Banking Academy, who has helped me a lot in completing my thesis With her experience in teaching and researching, her advice has made my work much more coherent and reasonable Next, thanks to the University of the West of England, I have an opportunity to study in an international, dynamic and professional environment I also want to send my thanks to the collaboration between BAV and UWE, for delivering the essential skills and information for me to complete my dissertation After that, I would like to express my sincere gratitude to Mr Dao Tuan Trung – manager at Vietinbank Securities, where I’m working at, who guided and supported me throughout the process of completing my dissertation Besides accumulating practical indepth knowledge, I also had the opportunity to hone my experience as well as soft skills which is one of the important prerequisites to help me build my bright future career after graduation Finally, I deeply appreciate my colleagues at Vietinbank Securities, who supported me in data analysis, distributed questionnaires, and together with me made valid and practical arguments to complete my senior seminar Sincerely thanks for your all supports Table of Contents CHAPTER INTRODUCTION 1.1 Research motivation 1.2 Research objectives and questions 1.3 The research scales 1.4 Synopsis of Chapters CHAPTER 2: LITERATURE REVIEW 12 2.1 Theoretical framework 12 2.1.1 Modigliani and Miller (M&M) 12 2.1.2 Trade-off theory 13 2.1.3 The pecking order theory 15 2.1.4 The agent cost theory 16 2.2 Empirical Findings 17 2.2.1 Overview of capital structure 17 2.2.1.1 Definition of capital structure 17 2.2.1.2 Studies on capital structure 17 2.2.2 Factors affecting the capital structure 19 2.2.2.1 Growth 19 2.2.2.2 Profitability 20 2.2.2.3 Tangible assets 21 2.2.2.4 Liquidity 22 2.2.2.5 Firm size 23 2.2.2.6 Non-debt tax shield 24 2.2.2.7 Inventory 24 2.2.2.8 EPS 25 Chapter Research methodology and methods 26 3.1 Introduction Vietnam real estate sector 26 3.1.1 Historical background 26 3.1.2 Main features of Vietnamese real estate capital structure 28 3.2 Analysis of Vietnamese real estate in 2022: 30 3.2.1 Tightening of credit in the real estate sector and closely monitoring the issuance of corporate bonds 30 3.2.2 Sales revenues boost and slowdown in land fund expansion 30 3.2.3 Pressure on home loan interest rates increases in the context of rising deposit rates 33 3.3 Research method 34 3.3.1 Research methodology 34 3.2.2 Research philosophy 34 3.3.2 Research design 35 3.4 Data sources and sample selection 36 3.5 Model and variables 37 3.5.1 Dependent variable: 37 3.5.2 Independent variables: 37 3.6 Methodology 41 Chapter Analysis and finding 42 4.1 Descriptive statistics 42 4.2 Empirical results: 44 4.3 Diagnostic test 50 4.3.1 Hausman model: 50 4.3.2 VIF testing: 52 4.3.3 Heteroscedasticity Test 53 4.3.4 Autocorrelation Test 54 Chapter Conclusions, discussion and limitation 57 5.1 Conclusion 57 5.2 Recommendation 58 5.2.1 For real estate companies 58 5.2.2 For State Securities Commission 59 5.2.3 For government: 59 5.3 Limitation 61 Bibliography 62 Table of Figures Figure Structure of Vietnam's real estate industry 28 Figure Sales of listed real estate companies in 2022 31 Table of tables Table General credit structure of the real estate industry (unit: trillion VND) 28 Table Revenue of most listed real estate companies dropped sharply in Q1/22 31 Table Summarize dependent and independent variables 42 Table Correlation between variables 43 Table Regression analysis for different measurement of dependent variables 44 Table Hausman model 50 Table Testing multicollinearity by using VIF 52 Table Heteroscedasticity Test 53 Table Autocorrelation Test 55 Table 10 Summary the regression model results 57 CHAPTER INTRODUCTION 1.1 Research motivation Real estate development is said to have an extremely powerful effect that swiftly extends throughout the business and into many other industries, hence speeding the expansion of jobs and money However, investing in residential real estate unsuccessfully entails a number of risks or businesses, commercial banks, financial system, and the overall economy Real estate investment, along with other structural weaknesses, is one of the main causes of the real estate market crisis, which then spread to the financial system and caused significant harm to the economy The East Asian currency crisis, which originated in Thailand in 1997–98, and particularly the Global Financial Crisis 2007–2008 (starting in the US) both revealed weakness in policy and market management The corporate bond market is a significant avenue for raising money for investments in the real estate sector, alongside the stock market This market assists in limiting risks associated with too significant currency and term variances in the balance sheet, which is a major contributor to risk in the financial system and for enterprises, triggered the monetary crisis in East Asia Our country, Vietnam, which is a country that lack of adequate risk assessment and management, particularly in relation to the effects of the Russia-Ukraine War on economic growth, income and interest rate/inflation This increases the pressure on real estate enterprises to repay their debt and raises the liquidity risk for distribution agents who have pledged to buy back bonds, which are financial institutions such as securities and banking, especially the Government's moves to tighten regulations related to real estate bond issuance activities Maximizing business or shareholder value should be the ultimate objective of all financial actions One of the crucial choices in business financial management is the choice of capital Businesses can raise funds from a wide range of sources to fund their operations The capital structure of a company reveals how money is financed The capital structure of an enterprise is a combination of the use of borrowed capital and equity in a specific proportion to fund financing for business activities, according to Stephen A Ross, Randolph W Westerfield, and Bradford D Jordan (1997) According to Horne et al (2005), "capital structure is the combination of debt and equity of the firm" Ahmad et al (2012) held the fact that "capital structure is the ratio between debt and equity in the trade of theoryal capital of an enterprise to finance production and business activities" Thus, it can be seen that in general, the capital structure is the level of debt and equity use to finance the business activities of the enterprise Enterprise value maximization is the ultimate objective of company managers Tobin's Q (Havey et al., 2003), market price/price ratio book value (Harjito et al., 2009), economic value added-EVA (Rayan, 2008), market capitalization, and other factors can all be used to assess a company's value (Dang Ngoc Hung et al., 2019) Examining how capital structure affects an enterprise's value will aid managers in developing strategies for managing risks, determining the likelihood of bankruptcy, and enhancing enterprise value Given how capital structure affects enterprise value, managers' decision-making and implementation of policies change over time In addition, those who are involved in the business operations of firms might benefit from an assessment of the capital structure's effect on enterprise value A general overview of the capital structure of real estate enterprises in Vietnam in the period 2017-2021, it can be clearly seen that the ratio of loans of enterprises is at a high level (including bank loans and issuance of bonds) According to data from Finnpro, 14% of capital structure of real estate enterprises comes from bank loans, 17% is from bond issuance, the remaining more than half of capital structure comes from other sources of loans (mainly including business cooperation contract) The capital ratio in the last years has fluctuated, especially the impact of the Covid-19 epidemic, the epidemic situation and legal issues affecting the progress of projects, thereby making the investment access to capital from limited channels, and the government's supporting institutions need to be in harmony with the general socio-economic situation of the country, therefore, there is a stricter than before The author can make the following argument by using the macro context to describe the problematic capital structure of real estate businesses First, growing input costs and capital costs are a result of rising inflation and interest rates Due to rising pressure on the pricing of essential commodities and global geopolitical tensions driving up energy prices, inflation is thought to have peaked and will rise in the near future Additionally, the investment cost structure of a typical project demonstrates that real estate developers are under increasing cost pressure, particularly for steel Between 15% and 20% of each project's overall investment expenditures are made up of steel costs, which represent a sizable percentage of real estate development projects The cost of investing has dramatically grown as a result of the significant rise in raw material prices, particularly those of steel When compared to April of 2019, steel prices have climbed by 46%, which means that the average cost of equipment has increased by almost 7% (Fiinpro, 2022) The output of apartments also decreased significantly, which resulted in a large decline in the sales-to-inventory ratio Last but not least, the government has lately tightened lending requirements for the real estate industry Cash flow was made harder by bank credit, Circular 16 of the SBV, recent developments in the corporate bond channel (Draft amending Decree 153), and changes to policy following the Thu Thiem land auction event The driving force behind the aforesaid macro factors is also the reason why the author carries a quantitative research to dig deep The report's primary goal is to examine how capital structure affects the value of 76 listed real estate businesses listed on the Vietnamese stock market from 2017 to 2021, generalizing the impact of capital structure on the stock price of listed real estate firms as a scientific foundation for wise and proper financial decisions 1.2 Research objectives and questions The thesis focuses on two main issues including: - Applying some theoretical foundations of capital structure - Research on the factors affecting the capital structure of real estate stocks To solve the problem of capital structure, this essay will focus on answering two main questions: - What are the main factors affecting the capital structure of real estate enterprises listed on the Vietnamese stock market? - What are recommendations for a corporation to deal with capital structure problems? 1.3 The research scales The paper serves to clarify the factors affecting capital structure of Vietnamese real estate stocks The author uses data of 76 real estate enterprises in Vietnam in the period 20172021 to examine the impact of capital structure on profitability and proposed hypotheses 1.4 Synopsis of Chapters The study uses both traditional methods such as statistical, descriptive and quantitative research methods