Capital structure and corporate financial performance evidence from southeast asian construction firms

Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance FINANCE DISSERTATION ON Capital structure and corporate financial performance: Evidence from Southeast Asian construction firms DAO LE QUAN ID No: 21071796 Intake Supervisor: Dr Chu Khanh Lan September 2022 Tai ngay!!! Ban co the xoa dong chu nay!!! 17014125810681000000 Table of Contents Chapter 1: Introduction 1.1 Research background 1.1.1 Background knowledge 1.1.2 Significance of research 1.2 Research objective 1.3 Research subjects 1.4 Research scope 1.5 Research questions 1.6 Research structure 1.7 Contribution of the research 1.8 New findings of research Chapter 2: Literature review 10 2.1 Capital structure theories 10 2.1.1 The trade-off theory 12 2.1.2 Pecking order theory 13 2.1.3 The agency theory 14 2.1.4 The market timing theory 16 2.2 Corporate financial performance 18 2.3 Factors affecting Corporate financial performance 20 2.4 Leverage 21 2.5 Leverage and Corporate financial performance 22 2.6 Previous studies in South East - Asia 23 2.7 Proposed model 25 Chapter 3: Methodology 26 3.1 Research design 26 3.2 Research methodology 27 3.3 Research process 28 3.4 Data collection method 29 3.5 Variables 30 Chapter 4: Analysis and results 31 4.1 Impact on ROA 31 4.2 Impact on ROE 32 4.3 Research some specific countries 33 4.3.1 Thailand 33 4.3.2 Singapore 35 4.3.3 Malaysia 36 4.3.4 Viet Nam 38 Chapter 5: Conclusions and recommendations 40 5.1 Discussion 40 5.2 Conclusions 42 5.3 Recommendations 43 REFERENCES 45 Appendix 1: Descriptive statistic 51 Chapter 1: Introduction 1.1 Research background 1.1.1 Background knowledge This study was built and developed with the main objective to evaluate the relationship between capital structure and corporate financial performance of enterprises operating in Southeast Asia For the operation of many businesses, the use of financial leverage is an indispensable issue to ensure the operation process In recent years, Southeast Asian countries have increased their economic integration; increased multilateral and bilateral cooperation processes in the region (Kwok & Koh, 2017) To achieve growth, businesses need many resources, including financial resources when mobilizing more from loans or increasing calls for investment capital from shareholders and investors However, increasing the use of financial leverage or calling for more investment capital can bring many risks to the business Therefore, this study evaluates the influence of capital structure on corporate financial performance of enterprises in Southeast Asia Capital structure is the ratio between debt and equity in the capital source of the business to finance production and business activities (Anuar & Chin, 2016) A company's capital structure is the combination of debt and equity used to finance its operations In this sense, capital structure is the ratio between debt and equity; capital to finance business activities.; if the enterprise is considered as an asset for investment, the value of the enterprise is the benefit to investors at the present time as well as in the future Currently, there are many methods with different viewpoints to determine the value of enterprises such as: from the absolute valuation point of view, there is the discounted cash flow method or the asset method Capital structure is an important issue for any business, no matter how large or small A company's capital finance structures the growth and formation of capital that a company can use to purchase assets and business According to the equity relationship criterion, the capital structure component of a company usually consists of equity and debt capital Equity is the amount of capital owned by the business owner; can be one or more people This is a very important source of capital for an enterprise, not only limited to the legal issue of establishing a business, but also demonstrating the financial autonomy of a company (Ajanthan, 2013) Equity usually consists of own capital and retained earnings For many businesses, the owner's equity is often not an abundant resource Therefore, many businesses often borrow money to operate, leading to an increase in liabilities On the other hand, raising more capital to raise equity from investors for many businesses is not always easy (Weill, 2008) The capital structure of an enterprise includes the structure of internal and external funding sources that the enterprise uses in the course of its operations In general, the resource-based view of financial capital assumes that if a business is constrained by financial resources; then the balance of use of these resources has a great influence on output efficiency as well as financial efficiency to ensure business continuity Operating businesses are often limited in their ability to raise capital or use scale When a company increases its financial leverage; the company needs to develop a full scenario to pay its payables on time and if these obligations are not met, creditors can ask the company to go bankrupt Therefore, a factor considered that affects the development ability of the enterprise is the level of financial leverage; as well as the choice of debt structure or equity structure in the business capital structure When considering the cost of financial distress from using debt, the trade-off theory also suggests that many potentially financially distressed firms will use less debt in their capital structure to avoid the risks and benefits of using debt makes sense only when the company has to meet its tax obligations In the case of companies, the tax benefits of increased business efficiency are not the main consideration The positive impact of capital structure on a business is the financial flexibility to realize business opportunities as well as the certainty that there is less risk in the business owner's business as suggested by this theory Many researchers construct optimal capital structures and prove the existence of this model through actual control processes The optimal capital structure is considered the efficient capital structure; minimize the cost of operating capital and mobilize the resources of the enterprise, while maximizing the value of effective use Therefore, optimal capital structure decisions have a strong impact on the success of a business (Zafar, Zeeshan and Ahmed, 2016) However, the huge challenge of building an optimal capital structure is not an easy task; when the capital structure of the business often changes over time due to changes in cash flow or business strategy Exactly how companies choose the amount of debt and equity in their capital structure is a mystery Is the business mainly influenced by the traditional capital structure in their industry or are there other reasons behind their actions? The answers to these questions are important, because the actions managers take will affect the company's performance, as well as how investors perceive the company Many research models on capital structure have been carried out to find out how to support enterprises to operate effectively In particular, Vietnam's economy has many small and medium enterprises; even for many large enterprises, the main concern of business leaders is to make a profit; or focus on effective business However, the profit goal is not always the top priority of the business (Almajali and Shamsuddin, 2020) Especially for many large-scale enterprises, the operating structure is complicated with many different activities and many affiliated enterprises Therefore, determining an optimal capital structure model is an important issue In addition, an efficient capital structure often brings great competitive power to the business The Covid-19 pandemic has not only caused many impacts on human health and the social security situation of many countries around the world, but also left many heavy consequences for the world economy In practice, however, this outbreak can be viewed as a health check event for business enterprises (Zafar, Zeeshan and Ahmed, 2016) The volatility of macroeconomic indicators such as exchange rate, inflation, consumption output and other inputs This study was conducted to evaluate and analyze the impact of capital structure on the financial performance of construction companies listed on centralized stock exchanges in Southeast Asia; in which, this study selects countries including: Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam 1.1.2 Significance of research Many models have been built to measure and predict factors affecting corporate financial performance Includes micro and macro factors There are also many studies evaluating the role and impact of capital structure on financial performance with many different factors Like Pecking Order, the MM theory or Trade-off theory has demonstrated the influence of Capital structure on the successful performance of the business Many experts assert that increasing financial leverage also increases the value of the business, but also exposes the business to more financial risk From theoretical as well as empirical studies, this paper will provide empirical evidence that capital structure has an impact on firm value in Southeast Asia as a whole This study aims to examine the impact of capital structure and financial performance of active construction firms in Southeast Asia The selected companies are all listed with the database from 2015 to 2021 In a market economy, in addition to the goal of profit maximization, business managers also aim to maximize profits business value maximization (or owner value maximization) However, there are many factors that affect the value of a business, in which capital structure is an important factor with a large impact In this article, the author uses a linear regression model to determine the trend of impact of capital structure on financial performance of enterprises; and at the same time determine the optimal capital structure of enterprises operating in Southeast Asia 1.2 Research objective Many studies have shown a close relationship between the construction of an effective capital structure and the financial performance of the business A business that can raise cheap financing often has an advantage in operating costs, which in turn promotes better profit margins The effect of a company's capital structure on performance is well-documented A company with weak debt ratios and lack of financial flexibility may be sensitive to economic shocks Especially in the case that the company falls into the situation of using excessive financial leverage, it is also very difficult to borrow more money to cover costs The effect of capital structure on the business performance of companies is explained on the basis of the performance-based capital structure theory According to the traditional view of capital structure, firms using debt are more profitable than firms dependent on equity, since the cost of equity is considered to be higher than the cost of equity possess in debt This is true in practice when using the return on equity (ROE) performance scale However, the financial risk and cost of capital also increase with heavy use of debt Therefore, the optimal capital structure is proposed from this point of view with the goal of minimizing WACC and maximizing the value of the firm This study then provides specific estimates of the optimal capital structure for firms in each country studied From there, evaluate and consider whether there is a difference between the capital structure in each country 1.3 Research subjects The research object built and developed in this study is the listed construction companies on stock exchanges in different countries in Southeast Asia The information collection period spans from 2018 to 2021 All research companies obtained information from their annual reports and audited financial statements Factors to be considered include specialized financial accounting information and financial ratios; to serve the calculation of the research model In addition, the research subjects were omitted financial institutions; such as commercial banks, investment banks, insurance companies or finance companies due to their more specialized capital structure features than the rest of the market 1.4 Research scope Therefore, the main research object analyzed and evaluated is the capital structure of the enterprise and financial performance of construction companies In particular, the research sample includes construction companies listed on the stock exchanges of countries in Southeast Asia Basically, these stock markets are all major stock markets in the region and have a relatively long history of development compared to other countries No finance company; such as banks, insurance companies and finance companies, are included in this analysis because the capital structure and business characteristics of these institutions are relatively different from the study population as a whole In addition, the construction companies that collected the information were all companies that ensured business continuity during the study period; i.e weeding out the companies that went bankrupt or closed on the centralized stock exchange As well as removing companies that have been delisted or converted from public companies to private companies Construction enterprises that not publish financial statements for two years or more are considered failures, as they are required by law to disclose reports 1.5 Research questions The main issues studied in this study are presented in an overview through the research questions Research questions are formulated and formulated according to a basic process: identifying relevant factors and issues to be researched, building an in-depth analysis and evaluation framework, making development judgments suitable to research situation There are four key questions in this study: - Practical application of Capital Structure and practical lessons from effective capital structure implementation - The Impact of Capital Structure and Financial Performance of companies listed on concentrated stock markets in some countries in Southeast Asia? - How to build an effective Capital Structure to promote the financial performance of enterprises? - Is there a difference in the effective capital structure between the countries studied? 1.6 Research structure This section describes the evolving structure of this study Content includes the list of chapters and the contents of the displayed chapters In detail, there are five main chapters in this study: CHAPTER 1: INTRODUCTION This section provides an overview of the research area and the important issues analyzed Specific factors include research overview, research scope and target analysis object and significance of the study; and then provide contributions and conclusions for the purpose of this study The research question is brief and focused on the research problem Research methods are approached to be used in the most effective way to solve research problems Finally, this section outlines the overall structure of the study and introduces the subsections that follow CHAPTER 2: LITERATURE REVIEW All theoretical and conceptual frameworks are provided in this chapter Specifically, the research model will be shown to indicate the hypothesis with a theoretical basis for each structure This section provides brief but comprehensive summaries of previous studies with a unified research theme The issues developed in this chapter include providing an overview of the theories of optimal capital structure and the role, significance, and practical application of capital structure management The contents of previous studies are evaluated and summarized in the most objective way; It also outlines the results and limitations of those studies Finally, the study offers perspectives for overcoming those limitations and building on the successes of previous studies Furthermore, this section presents an underlying theoretical framework to help shape the underlying issues that this study focuses on The literature review focuses on the years close to when this study was developed Finally, the study builds a theoretical basis and a standard framework for the model that this study develops CHAPTER 3: METHODOLOGY This chapter covers how this study was conducted In more detail, the author's method of forming the survey to collect data, selected samples and data analysis will be presented in this chapter This study was built to evaluate the interrelated factors as well as the interaction between these factors The main content of this chapter is the research methods used in the analysis of this study In which research methods are carried out are analytical techniques and other evaluation procedures This study uses both qualitative and quantitative research methods In which, the quantitative method uses an econometric model to evaluate the interaction between the research variables in the model In addition, this section develops the analytical database as well as the data collection process The collected data is then evaluated for data authenticity to eliminate inaccuracies or conflicts in the database Data analysis and evaluation is performed afterwards with the goal of confirming the accuracy of the model CHAPTER 4: DATA ANALYSIS AND RESULTS From the results of analysis and research in chapter 3, the author will give some results and discuss the results in this chapter First, the author will confirm the results with other studies in the past to point out differences or similarities between this study and previous research Then, all the research questions will be answered and given some impact on the businesses and countries studied Then, according to the research results, some recommended or suggested actions to make the companies perform better will be provided In addition, this study also provides assessments of capital structure differences between the countries studied CHAPTER 5: CONCLUSION The main purpose of this chapter is to summarize all the research processes, summarizing what has been archived by this research Besides, this chapter points out the main contributions of the study as well as points out some limitations that can be improved in future studies 1.7 Contribution of the research This study shows which capital structure factors have an impact on the financial performance of the research firms listed on centralized stock exchanges in Southeast Asia From there, this study provides assessments and solutions to build an effective capital structure for typical enterprises in each different country; including Vietnam, Singapore, Thailand and Indonesia 1.8 New findings of research This study does not stop at assessing how capital structure affects the financial performance of listed companies; but also goes further in studying the optimal capital structure according to the theories of efficient capital structure In addition, this study also provides an assessment of the capital structure differences of different countries