Factors affecting the capital structure of companies in the raw materials industry

Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance FINANCE DISSERTATION ON Factors affecting the capital structure of companies in the raw materials industry NAME OF STUDENT: Le Thi Hong Diep ID No: 21071828 Intake Supervisor: Dr Nguyen Thi Hong Hai September 2022 Tai ngay!!! Ban co the xoa dong chu nay!!! 17014126220841000000 ACKNOWLEDGEMENTS I have received many supports and guidance from lecturers inside and outside of Banking Academy of Vietnam I feel so grateful for that That means a lot for me to complete my thesis I would like to express my thankfulness to Banking Academy have given me opportunity to gain many knowledges in financial and economic field, which will be useful for my career or higher education I also have learned a lot from my friends who have chances to study with in Banking Academy of Vietnam Lecturers of Banking Academy of Vietnam have supported me significantly, especially my mentor, Dr Nguyen Thi Hong Hai I would like to express my gratefulness for kind supports of all lecturer of Banking Academy of Vietnam and especially Dr Nguyen Thi Hong Hai in helping me to complete the thesis Dr Nguyen Thi Hong Hai has inspired me a lot during the time he guides me to implement the thesis TABLE OF CONTENTS: ABBREVIATIONS TABLE OF TABLES CHAPTER 1: INTRODUCTION: CHAPTER 2: THEORETICAL FRAMEWORK AND LITERATURE REVIEW 2.1 Theoretical Framework 2.1.1 Definition of company capital structure 2.1.2 Measurement of company capital structure 2.2 Basic theories of company capital structure 2.2.1 The capital structure theory of Modigliani and Miller 2.2.2 The trade-off theory of capital structure 2.2.3 Pecking Order Theory 10 2.2.4 Agency Cost Theory 11 2.3 Factors affecting company capital structure 11 2.4 Empirical research related to the factors affecting company capital structure 14 2.4.1.Research projects in the world 14 2.4.2.Works in Vietnam 15 2.5 Research gap 16 Summary of Chapter 2: 17 CHAPTER 3: DATA AND METHODOLOGY 18 3.1 Research data 18 3.2 Research models 18 3.3 Research Methods 20 Summary of Chapter 3: 21 CHAPTER 4: RESULTS AND DISCUSSION OF EMPIRICAL TESTING OF FACTORS AFFECTING CAPITAL STRUCTURE IN RAW MATERIALS INDUSTRY LISTED IN VIETNAM 22 4.1 Overview of raw materials industry listed companies in Vietnam 22 4.1.1 Introduction of raw materials industry businesses 22 4.1.2 Actual situation of operational efficiency of raw materials enterprises in the period 2012-2019 26 4.2 Estimated results 27 Summary of Chapter 30 CHAPTER 5: CONCLUSION AND RECOMMENDATIONS FOR LISTED COMPANIES IN THE RAW MATERIALS INDUSTRY IN VIETNAM 31 5.1 Raw Materials industry development strategy in Vietnam 31 5.1.1 The current situation of the raw materials industry and the strategy to promote the development of listed companies of the raw materials industry in Vietnam 31 5.1.2 Strategies to promote the development of listed companies Raw Materials industry in Vietnam 34 5.1.3 Objectives to improve the dividend payment policy of raw materials companies listed on the Vietnamese stock market 35 5.2 Some recommendations to improve capital structure for companies listed in the raw materials industry in Vietnam 36 5.2.1 Recommendations for companies listed in the raw materials industry in Vietnam 36 CONCLUSION: 41 References 43 ABBREVIATIONS CPTPP Comprehensive and Progressive Agreement for Trans-Pacific Partnership MM Modigliani & Miller SIZE Business size ROA Return on Asset Cash_hs Cash holding ratio Growth Revenue growth rate HOSE Ho Chi Minh City Stock Exchange OLS Ordinary Least Square FEM Fixed Effects Model REM Regression Estimation Model Lev Leverage NPV Net Present Value LBOs Leveraged Buyout FE Fixed factor RE Random factor ECB European central bank BOE Bank of England CRA Corporate Credit Rating Agency M&A Mergers and Acquisitions SMEs Small and Medium Enterprise EPS Earnings per share TABLE OF TABLES Table 2.1: Synthesize predictions of theories about factors affecting capital structure…13 Table 3.1: Definition of research variable……………………………………………………19 Table 4.1: Statistics of mean values of variables over time……………………………… 26 Table 4.2: Descriptive statistical results of the research variable…………………………27 Table 4.3: Research variable correlation coefficient matrix……………………………….28 Table 4.4: Regression results of factors affecting company capital structure……………28 CHAPTER 1: INTRODUCTION: The reason for choosing the topic: Businesses need capital to operate, which can be retained earnings, debt, or equity Capital from debt can boost the company's production and business situation, but if the company uses too much debt to finance investments, it may face financial risks, leading to bankruptcy Furthermore, the ideal combination of capital structures, including the ratio between equity and debt capital, can also minimize the cost of capital and enhance the value of the business Therefore, deciding on the capital structure is an important policy of the company in order to effectively solve and promote the company's production and business activities In fact, due to the influence of the macroeconomic situation, industry developments, or cultural or religious activities, each organization will be suitable for each different capital structure As a result, financial researchers are currently focusing on studying the impact of factors affecting capital structure or the ability to use financial leverage on organizations Based on the relationship between these factors and the capital structure, organizations can decide to choose between using borrowed capital or the enterprise's own capital to rationalize production and business activities Propose measures to ensure effective use of financial leverage and maximize asset value for companies In recent years, modern capital structure theory has only been studied in developed countries but has not received much attention in developing countries, or only at a general level for companies many separate studies for each specific industry, especially the raw materials industry Each industry has its own characteristics and capital structure characteristics Therefore, it is necessary to conduct a separate capital structure study for each industry However, in the economic context and the institutional environment of Vietnam, this has had an impact on the choice of capital structure at companies In the context of a very complicated world situation, the world economy recovered more slowly than forecast In the country, the macro-economy is basically stable, inflation is under control, economic growth has recovered, but the business environment and the productivity and efficiency of the economy are still low With the characteristic that construction is an industry that requires a large amount of investment capital and the debt ratio has a great influence on the operation of the business, the concern of corporate financial managers is to build how to structure capital to maximize profitability as well as create value for the business In recent years, Vietnam's economy has been assessed as having a positive outlook, especially when the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) was signed However, in the conditions of the CPTPP, it is also clearly stated that joining the CPTPP means that domestic companies are only allowed to use domestic materials or import from CPTPP countries to enjoy preferential tax rates Meanwhile, Vietnamese companies currently have a small scale and little capital, so the investment in the supply of raw materials is currently not interesting Therefore, in the near future, the raw materials industry is a potential industry that needs to be invested in and developed In the context of deepening international integration, companies developing the Raw Materials industry play an important role in solving the country's economic, political, and social problems Therefore, one of the most important things is to research, create a good environment, and help these businesses grow For those reasons, I chose to research the topic "Factors affecting the capital structure of companies in the raw materials industry" so that it can serve as a basis for deciding on a reasonable capital structure for listed companies in the raw materials industry Topic objective The purpose of conducting the study is to measure the impact of capital structure on the stock price volatility of some companies in the materials industry on the Vietnamese stock market from 2012 to 2019 The relationship between capital structure and stock price volatility will assist in building stock valuation models The study only focused on a specific industry in Vietnam Therefore, the main purpose of this study is to find the answer to the research question: “What are the factors affecting the capital structure of enterprises in the Materials industry?” Overall objective Examine the factors that play an important role in the capital structure of companies As a result, specific capital structure orientations and conclusions are provided for Vietnamese companies in the Raw Materials industry a Detailed objective Summarize the theoretical system of capital structure and the factors affecting capital structure Analyze the current state of the relationship between the capital structure and the financial factors that show how the capital structure is affected by the way the business is run Evaluate and analyze the impact of factors on the capital structure of raw materials industry companies listed on the Vietnamese stock market using econometric models Subject and scope of the study a Research subject: Factors affecting the capital structure of a business b Research scope: + Research space: Companies operating in the field of raw materials listed on Vietnam's stock market + Research period: During the period from 2012 to 2019 Theme layout In addition to the introduction and conclusion, the thesis includes the following main contents: - Chapter 1: Introduction - Chapter 2: Theoretical Framework and literature review - Chapter 3: Data and Methodology - Chapter 4: Results and Discussion of empirical testing of factors affecting capital structure in Raw Materials industry companies in Vietnam - Chapter 5: Conclusion and Recommendations for listed Raw Materials industry companies in Vietnam CHAPTER 2: THEORETICAL FRAMEWORK AND LITERATURE REVIEW 2.1 Theoretical Framework 2.1.1 Definition of company capital structure The definition of capital structure is not only presented in famous books on economics and finance but also in scientific articles by authors around the world: "The combination of debt and a firm's equity financing is referred to as its capital structure" (Brealey, Myers, and Allen, 2010); while Ross, Westerfield, and Jordan (2013) argue that "a firm's capital structure (or financial structure) includes specifically the long-term debt and equity that the firm uses to finance its operations." From these two definitions, we can say that "capital structure" is a financial term for the source and method of a business's capital development, with a focus on how the ratio of debt to equity affects the business Furthermore, capital structure is defined as a company's ability to finance itself using a combination of equity and debt in order to maximize its value It is up to managers to determine the best mix of equity and debt to attract investors and creditors A suitable capital structure (equity-debt mix) can lower the cost of capital, and companies strive to lower the cost of capital in order to increase shareholder value As a result, the appropriate capital structure must ensure a balance of equity and loan capital, low cost, and acceptable risk in accordance with the business conditions It is critical for every company because, when compared to the cost of capital, the profit of a company affects its ability to compete in a competitive environment 2.1.2 Measurement of company capital structure The basic components of a capital structure consist of two main parts: liabilities and equity Liabilities: Brigham and Houston (2008) state that "liabilities mean money that companies owe each other." According to Ross et al (2013), "Liabilities are divided based on payment terms, including short-term debt and long-term debt." Current liabilities are liabilities with a maturity of one year or less, including shortterm bank loans, payables to suppliers or government employees, and short-term bonds For short-term debt, the process is usually straightforward and straightforward However, the debt repayment period is short, so it is difficult for businesses to repay the debt if it is not used effectively Long-term liabilities are a type of credit with a term of more than years, meeting long-term investment needs such as basic construction, infrastructure construction, improvement, and expansion of large-scale production It includes mediumand long-term liabilities from external credit institutions such as banks, finance leasing