Introduction
Background of the dissertation
The stock market is crucial to the Vietnamese economy, influencing the government, listed companies, and investors alike It plays a significant role in mobilizing and efficiently utilizing capital within the national economy.
In 2020, the government raised capital by selling bonds to fund state projects, while the stock market facilitated the equitization of state-owned enterprises Additionally, the stock market enabled the government to execute effective monetary policies by buying and selling bonds to regulate market interest rates Furthermore, listed companies gained the opportunity to sell shares internationally, attracting foreign investment into Vietnam.
The years 2020 to 2022 presented significant economic challenges due to the unprecedented Covid-19 pandemic, which disrupted global supply chains and stalled production and business activities The temporary decline in demand from China for goods and services further impacted global growth (Nguyen, 2013) Given Vietnam's extensive economic borders and proximity to China, the pandemic has profoundly affected various socio-economic sectors in Vietnam, including trade, tourism, and the overall psychology of its people.
7 affecting Vietnam's economic growth and indirectly affecting the state budget situation
The stability and survival of major public companies are vital for a healthy economy and post-pandemic growth Therefore, it is essential to assess factors influencing firms’ performance to identify areas that require close monitoring for sustained profitability This dissertation examines both internal and external factors affecting the profitability of public companies listed on the Vietnam Stock Exchange Analyzing over 370 public companies on the Ho Chi Minh City Stock Exchange (HOSE) from 2010 to 2020 allows for an investigation into the direction and extent of these factors' impact on profitability.
This dissertation analyzes the internal and external factors influencing firm performance, specifically through the lenses of Return-on-Assets (ROA) and Return-on-Equity (ROE), which are key indicators of profitability for public companies A higher ROA and ROE signify better firm performance Internal factors such as firm size, sales growth, financial leverage, tangibility, and liquidity are crucial and can vary based on a company's financial strategy Conversely, external factors include economic indicators like GDP and inflation, which also play a significant role in determining a firm's overall performance.
8 lending interest rate These are the popular indexes that affect the Vietnamese economy in which the listed companies operate.
Purpose of the dissertation
Maintaining a healthy business performance is vital for the overall wellbeing of the economy, making the evaluation of internal and external factors essential for stable operations This thesis investigates how these factors influence key profitability ratios, specifically Return on Assets (ROA) and Return on Equity (ROE).
This dissertation aims to explore the relationship and potential correlation between various factors and the performance of listed firms, focusing on the direction and extent of these effects The findings can assist firm management in reevaluating their financial strategies, identifying potential risks, and implementing improvements in areas that require enhancement.
Scope and Methodology
This thesis focuses on key internal factors influencing a firm's profitability, specifically examining revenue growth, financial leverage, tangibility, and liquidity ratios In contrast, it also acknowledges external macroeconomic factors that impact the overall market, including GDP growth rate, Consumer Price Index (CPI), and the central bank's discount rate.
Examples of other factors, that may have effect on performance but not included in the scope of the research, are political factors, social factors and technological advance.
Research Questions
Overall, this thesis aims at examining factors that may have effects on profitability of listed companies on Vietnam Stock Exchange The research questions are:
1 What are the main internal and external factors that have a significant impact on profitability of listed companies on Vietnam Stock Exchange?
2 What are these effects’ directions and to what extent do these variables affect these firms’ profitability?
3 What are implications concluded in order for firm’s management to consider based on the study’s result?
Thesis Structure
This chapter outlines the motivations behind the author's dissertation, detailing the background that inspired the research It also clearly states the dissertation's purpose, along with the scope and methodology employed in the study Following this introduction, the author transitions to the next section of the dissertation.
10 chapter, the author lists out the research questions and explains the structure of the thesis
This chapter provides a comprehensive review and summary of relevant research and studies related to the topics addressed in this thesis, drawing from both Vietnamese and international institutions that explore similar factors The initial section outlines the methodology for evaluating the performance of listed companies, focusing on key financial metrics such as return on equity (ROE) and return on assets (ROA).
The author highlights key internal factors influencing firms, including business size, revenue growth, financial leverage, asset tangibility, and liquidity, while also presenting relevant research to support these insights.
Finally, GDP, CPI, Interest Rate are discussed at the end of the chapter with literatures that have examined the relationship between these factors and performance of firms
3 Chapter 3: Data and Research Methodology
This chapter outlines the research methodology, detailing both the dependent and independent variables It also discusses the data collection methods employed and introduces the regression model used for analysis.
11 used The characteristics of research data will be explained before presenting the data statistics
This chapter outlines the regression model derived from the collected data, showcasing both the Random Effects Model (REM) and the Fixed Effects Model (FEM) Additionally, a Hausman test is performed on the dependent variables to identify the most appropriate model for this dataset.
This chapter turns the result from the research into useful information for a firm’s stakeholder and management based on the findings from the data collected
Literature Review
The measurement of firm performance
Firm profitability indicates the relationship between business size and profitability over time, commonly assessed through metrics like return on assets (ROA), return on equity (ROE), and return on sales (ROS) It represents the effective use of a company's assets and capital, with high profitability facilitating smooth production and business operations Conversely, low profitability can hinder business activities and disrupt financial stability within the enterprise.
Numerous studies, including those by Bentivogli and Mirenda (2017), Tsouknidis (2019), Nhung et al (2021), Merhan (1995), Abor (2005), and Saeedi and Mahmoodi (2011), have evaluated the factors influencing business performance These studies typically use key financial metrics such as return on assets (ROA), return on equity (ROE), and Tobin's Q to assess company efficiency, all derived from publicly available financial statements.
Nieh et al (2008) analyzed the business performance factors of 143 companies in the electricity sector listed on the Taiwan Stock Exchange from 1999 to 2004, utilizing Return on Equity (ROE) and Earnings Per Share (EPS) as key metrics.
In their 2011 study, Saeedi and Mahmoodi analyzed panel data from 320 companies listed on the Tehran Stock Exchange using key financial metrics such as Return on Assets (ROA), Return on Equity (ROE), Earnings Per Share (EPS), and Tobin's Q Similarly, Nhung et al (2021) identified ROE and Return on Sales (ROS) as crucial indicators for assessing business performance, highlighting that total asset turnover and revenue growth significantly influence both ROE and ROS.
Humpe and Macmillan (2009) utilized Johansen's method within the vector error correction model (VECM) to analyze the US and Japanese stock markets from January 1965 to June 2005 Their findings indicated that the US stock market positively correlates with the industrial production index, long-term interest rates, and inflation, while the money supply has no significant effect In contrast, the Japanese stock market is negatively influenced by the money supply, although it benefits positively from the industrial production index.
Research in Vietnam has identified key factors influencing the business performance of firms, particularly in the seafood industry Vo (2017) found that asset growth, revenue size, total asset size, and fixed asset structure significantly impact enterprise performance However, the study noted that return on equity (ROE) was not influenced by the independent variables examined Similarly, Nguyen et al (2021) highlighted that internal factors, such as the ratio of short-term debt to total debt, total assets, and financial leverage, also affect the business performance of companies listed on the Hanoi Stock Exchange.
The growth of total assets positively influences a firm's Return on Assets (ROA) and Return on Equity (ROE), while an increase in financial leverage negatively impacts total revenue An empirical study by Nhung et al (2021) on 30 food industry enterprises in Vietnam from 2014 to 2019 highlights that total asset turnover and revenue growth enhance both ROE and Return on Sales (ROS) Additionally, performance varies significantly between public and private enterprises.
Empirical Reseach
2.2.1 Internal Factors that impact firm performance
Based on previous studies, internal factors of enterprises that can affect performance include business size, revenue growth rate, financial leverage, total asset turnover, ownership structure of the business, etc
The size of a business firm is defined by the scale of its operations, which significantly affects its productivity and profitability Understanding a company's size is essential for making informed entrepreneurial decisions, as it plays a critical role in shaping the effectiveness of commercial activities and overall business success.
Accordingly, the size of the business can affect the performance in many ways A large company may be more influenced by investors and shareholders as well as
Research indicates that the impact of firm size on financial performance is inconsistent, with some studies, such as those by Stierwald (2009), Ayele (2012), and Eramus (2013), reporting a positive effect, while others, including Ramasamy (2005) and Salman and Yazdanfar (2012), identify a negative effect on operational efficiency.
Research by Stierwald (2009) on Australian firms from 1995 to 2005 indicates a positive correlation between business size and performance Stierwald suggests that larger companies benefit from economies of scale, allowing them to outperform smaller competitors Additionally, these firms can access financial capital at lower costs, leading to higher returns on equity (ROE) as they invest in more profitable projects rather than operational expenses This financial efficiency enhances their competitive edge in the market, aligning with findings from other studies like those of Hall and Weiss.
In their 1967 thesis "Firm Size and Profitability," Stierwald emphasizes the positive correlation between firm size and profitability, a notion further supported by Ayele (2012) Ayele argues that larger firms tend to be more established, benefiting from a longer tradition and history of market development These advantages enhance the likelihood of a firm's success, as a longer operational history typically translates into greater experience Consequently, a firm with an extensive background can leverage its existing market presence and brand equity to accelerate growth.
The launch of a new iPhone generation significantly boosts sales compared to lesser-known brands, primarily due to Apple's strong brand equity and professionalism in product releases Additionally, Prescott and Vischer (1980) highlight that enhanced differentiation and specialization techniques contribute to the positive relationship between business size and profitability, ultimately leading to greater efficiency.
Contrary to the positive relationship often observed, some studies highlight a negative correlation between firm size and operational efficiency Ramasamy (2005) suggests that larger companies may suffer from bureaucratic management systems that hinder swift decision-making Additionally, the complexity of managing a growing and diverse workforce can lead to agency issues due to increased management layers Another factor contributing to this negative relationship is diseconomies of scale, where operational costs exceed optimal levels, resulting in higher production costs and declining profit rates for larger businesses.
Various studies reveal inconsistent conclusions about the relationship between a company's size and its operational performance This thesis posits that there is a positive correlation between a firm's size and its performance, specifically for companies listed on the Vietnamese Stock Exchange.
Revenue is the primary driver of profitability, with profits typically rising alongside revenue growth A company can maximize earnings by boosting revenue while managing costs effectively This strategy enables the firm to enhance profits, reinvest in its operations, and explore new income opportunities Additionally, strong revenue growth increases the company's potential to acquire other businesses and enhances its overall valuation.
Revenue growth is proven to be one of the factors that positively affect the performance of enterprises (Zeitun and Tian (2007), Liu (2010) and Yazdanfar
Successful businesses often demonstrate an ability to expand their market share and achieve high turnover, which in turn attracts more investors According to Tian (2007), companies experiencing high growth rates tend to exhibit better performance ratios, benefiting from increased investment profits However, Tian also identified a negative correlation between a firm's growth rate and its size, suggesting that as a company expands, its capacity to maintain consistent growth diminishes over time.
Research by Liu highlights the significant relationship between revenue growth and firm performance, particularly in the food and beverage (F&B) industry The study establishes a model for evaluating financial performance, demonstrating that increased sales directly enhance the financial outcomes of manufacturing firms within this sector.
The food and beverage industry faces low profit margins per product unit, prompting business leaders to prioritize increasing sales as a key strategy Additionally, consumers tend to establish purchasing habits after trying a product, making it crucial for F&B manufacturers to maximize sales quickly This approach not only boosts immediate revenue but also reduces future marketing costs.
Numerous studies consistently demonstrate that revenue growth significantly impacts a firm's performance, suggesting a positive relationship between the two The author posits that companies capable of generating higher sales tend to operate more efficiently in their sales processes, with the exception of those that primarily rely on discount strategies to drive sales.
Financial leverage refers to the use of borrowed capital by a business to enhance its profit margins, as reflected in the company's balance sheet While a high level of leverage can create more opportunities for profit growth, excessive debt poses significant risks to the business Consequently, a lower equity-to-liability ratio indicates a higher degree of financial leverage.
Financial leverage, defined as the ratio of debt to total assets, plays a crucial role in determining a company's capital structure Numerous studies have explored the financial leverage ratio to assess its influence on business performance; however, the findings have shown inconsistencies Research conducted by Al-Jafari and Samman highlights these varying results.
Research from 2015 indicates that financial leverage negatively affects performance, while Humera et al (2011) suggest that higher levels of debt can facilitate increased investments, ultimately enhancing a company's financial performance.
Data and Research methodology
Variables description
This research evaluates the profitability of listed companies using Return on Assets (ROA) and Return on Equity (ROE) as key indicators These metrics are among the most prevalent measures of profitability utilized in empirical studies ROA and ROE are calculated based on the net profit after tax as reported in the company's financial statements for the given year A higher ROA and ROE indicate superior profitability for the business.
Previous studies on enterprise profitability have identified independent variables that are intrinsic to the organization While numerous internal variables have been examined, this article focuses on select variables that are relevant and supported by available data, specifically tailored for listed industries on the Ho Chi Minh Stock Exchange.
Ho Chi Minh The group of independent variables selected includes a group of internal factors and a group of external factors
In prior research, firm size has typically been assessed using the book value of total assets or market capitalization However, this study employs the natural logarithm of total assets to gauge firm scale While past findings on the influence of firm size on business performance have varied, the author anticipates a positive correlation between larger firm size and enhanced business performance.
Research has consistently shown a positive correlation between sales growth and Return on Assets (ROA) For instance, Pouraghajan and Malekian (2012) found this relationship among companies listed on the Tehran Stock Exchange from 2006 to 2010 Similarly, Nguyen (2013) identified a positive link between revenue growth and ROA in specific industries in Vietnam This study utilizes the annual sales growth rate to assess business performance, reinforcing the expectation of a positive relationship between revenue growth and overall enterprise performance.
The relationship between financial leverage and firm performance is inconsistent across various industries Numerous studies have yielded mixed results, and market-wide analyses encompassing diverse industry groups further illustrate the complex dynamics between financial leverage and firm performance.
Research indicates a negative correlation between financial leverage and firm performance (Muturi and Omondi, 2013; Tran Manh Dung et al., 2020) However, Akhtar et al (2012) suggest that certain industries can enhance operational efficiency by improving their capital structure and increasing financial leverage This study utilizes comprehensive market data, aiming to confirm the anticipated negative relationship between financial leverage and firm performance.
The relationship between tangibility, defined as the variable fixed asset structure relative to total assets, and business performance is crucial for understanding an enterprise's asset composition While research indicates a correlation between tangibility and corporate performance, the trend remains ambiguous Consequently, the author anticipates a connection between asset structure and the metrics used to assess business performance.
Liquidity, defined as the ratio of current assets to current liabilities, is a critical measure of a company's financial health High liquidity indicates strong solvency, enhancing credibility with suppliers and lenders when seeking loans However, excessive liquidity may suggest an imbalance, where short-term assets significantly exceed short-term liabilities, indicating an inefficient capital structure This can lead to increased capital costs and reduced flexibility, potentially resulting in suboptimal business performance.
31 expectation that there is a relationship between liquidity and the performance of the business
Real GDP, adjusted for inflation, serves as a reliable indicator of economic growth and development, with its growth rates often analyzed rather than absolute values Data on Vietnam's GDP growth from 2010 to 2020, sourced from the World Bank, indicates a positive correlation between GDP and corporate profits This relationship suggests that economic growth fosters an environment conducive to increased production and business activities, leading the author to anticipate a similar connection in this study.
Inflation: inflation is calculated through the percentage change of Consumer Price
In this study, CPI values, sourced from the World Bank statistical system, are analyzed alongside GDP figures In Vietnam, inflation targets are typically established at the start of the year and adjusted based on economic conditions The certified CPI exhibits a varied relationship with corporate profits, leading to no definitive expectations regarding the correlation between inflation levels and the profitability of listed companies.
Lending Interest rate: Previous studies often used central bank discount to include in the model study Accordingly, the discount is the central bank lending rate to
In the context of short-term payment shortfalls, 32 commercial banks will adjust their lending and borrowing rates based on the central bank's discounting capacity The author’s research incorporates loan interest rates into the model, anticipating that fluctuations in these rates will influence the cost of loans for enterprises, subsequently affecting their expenses and profits during the study period While the exact impact remains undetermined, a correlation between lending rates and corporate profitability is anticipated.
Based on previous studies, the author hypothesizes related to the variables as shown in Table 1
Table 1 Expectation of research results
Hypothesis Variables Previous studies results Expected impact
Characteristics of research data
This study aims to evaluate how internal factors influence the profitability of companies listed on the Ho Chi Minh Stock Exchange, specifically excluding Vietnamese commercial banks due to their distinct industry characteristics.
As of the end of 2020, over 400 businesses, including banks, are listed on the Ho Chi Minh City Stock Exchange This includes several newly listed companies from 2019 to 2020, as well as closed-end fund certificates and ETFs from investment funds within the Vietnamese stock market.
The author selects enterprises for the research based on specific criteria to ensure the reliability of the results First, the chosen companies must be listed on the Ho Chi Minh Stock Exchange for at least three years, from 2020 or earlier Second, these companies should belong to various sectors, excluding banking and investment funds This requirement for a minimum listing duration guarantees that the data is comprehensive over the 11 years of the study After filtering out non-compliant businesses, the remaining securities codes represent the eligible listed companies on the Ho Chi Minh City Stock Exchange.
The financial data for an enterprise, encompassing its operating performance and internal financial indicators, is sourced from the audited and publicly disclosed financial statements available through the Finpro system Over 11 years, data from 370 enterprises has resulted in a total of 3,808 observations.
Description of data statistics
Variable N Mean Median Standard deviation Min Max roa 3801 0.06 0.05 0.06 -0.09 0.22 roe 3801 0.13 0.11 0.13 -0.26 0.56 size 3808 27.98 27.88 1.32 20.72 30.67 growth 3370 0.09 0.08 0.44 -1.28 1.91 lev 3799 0.49 0.51 0.21 0.00 1.29 tangi 3794 0.24 0.18 0.23 0.00 1.00 liq 3805 2.13 1.53 1.59 0.40 7.03 gdp 4069 6.20 6.42 1.17 2.94 7.20 cpi 4069 5.82 3.54 4.81 0.63 18.68
The mean values for Return on Assets (ROA) and Return on Equity (ROE) are 0.06 and 0.13, respectively, with ROA ranging from -0.09 to 0.22 and ROE from -0.26 to 0.56 Firm size shows the highest mean value at 27.98, with a significant range between its minimum and maximum values The growth variable has similar mean and median values, around 0.09 Both leverage and tangible assets have a minimum value of 0, indicating that most companies possess assets Liquidity ability has a mean value of 2.13, with a maximum of 7.03, highlighting a sevenfold difference from its lowest point GDP data reveals a low of 2.94 and a high of 7.2 during the observed period, while the Consumer Price Index (CPI) ranges from 0.63 to 18.68 Finally, the average lending interest rate is 7, nearly half of its maximum value.
Table 3 Correlation Matrix t statistics in parentheses
The table illustrates the relationship among variables within the regression model, aiming to identify the presence of multicollinearity It is important to note that issues arise when the correlation coefficient exceeds 0.8.
In this case, the correlation between CPI and L-IRATE shared the highest number, embarked at 0.95
ROA ROE SIZE GROWTH LEV TANGI LIQ GDP CPI L_IRATE
Figure 3.1 Mean value of ROA and ROE
Return on Assets (ROA) is determined by dividing a company's net income by its total assets, while Return on Equity (ROE) is calculated by dividing net income by the firm's equity As illustrated in Figure 3.1, ROA is consistently lower than ROE due to the accounting equation, where total assets equal equity plus liabilities, resulting in equity being less than total assets The line charts indicate that both ROA and ROE exhibit similar trends over a ten-year period, serving as key metrics for assessing a company's performance.
Figure 3.3 Mean value of SIZE
The size of companies is determined by the total number of assets they possess Over a decade, the average size of listed companies has shown a steady increase, although the growth rate slowed between 2018 and 2020, largely attributed to the impact of the Covid-19 pandemic.
Figure 3.4 Mean value of GROWTH
The growth of listed companies is measured by the year-over-year increase in sales, as depicted in the line chart Over the past decade, the average growth rate has experienced significant fluctuations Notably, from 2012 to 2014, companies saw a substantial rise in growth However, in 2019 and 2020, the growth turned negative, indicating a decline in total revenue due to the impact of the Covid-19 pandemic.
Figure 3.5 Mean value of LEV
Leverage, defined as total debt divided by total assets, has shown a downward trend from 2012 to 2019, indicating that, on average, firms have increasingly relied less on debt during this period, as illustrated by the mean leverage value in the accompanying chart.
Figure 3.6 Mean value of TANGI
Tangibility is assessed by calculating the ratio of fixed assets to total assets for each company The data indicates that, on average, the tangibility levels of firms have remained consistently stable over the past decade.
Figure 3.7 Mean value of LIQ
Liquidity is determined by dividing current liabilities by current assets for each firm The data indicates that average liquidity levels peaked in 2016, followed by a gradual decline until 2019, with a slight increase observed again in 2020.
GDP is the Gross Domestic Product of Vietnam collected throughout the year From
2010 to 2019, GDP has been relatively stable but dramatically decreased by 50% in
2020, the same year where the Covid situation happened
The Consumer Price Index witnessed a dramatic increase from 2010 to 2015 thanks to the government effort in controlling inflation However, since 2015, the CPI has been gradually increased until 2020
Figure 3.10 Value of Lending Interest Rate
Lending interest rate has reached its peak in 2011 before significantly dropping by about 50% from 2011 to 2015 From 2015 to 2020, the value of lending interest rate in Vietnam has remained relatively stable.
Methodology
In analyzing array data, I employ both fixed effect and random effect models for array data regression, which are widely recognized methodologies in the study of such data The research model utilized is outlined as follows:
PERit serves as a dependent variable that encompasses various performance measurement metrics, including Return on Assets (ROA), Return on Equity (ROE), and Return on Sales (ROS), reflecting the performance of company i in year t Additionally, it incorporates a set of internal variables specific to the firm.
SIZEit is the size of company i at year t, calculated by the natural logarithm of Total Assets
GROWTHit is the revenue growth rate of company i year t GROWTH is calculated as the natural logarithm of year t net sales minus the natural logarithm of year net sales (t-1)
LEVit is a variable of the company's financial leverage ratio i year t, calculated as total debt to total assets
TANGIit is a variable that measures the tangible level of company assets i year t, which is calculated as the ratio of fixed assets to total assets
LIQit variable measures company's liquidity i year t, LIQit is calculated as current liabilities over current assets
External variables influencing the enterprise include GDP, which reflects the annual growth in gross national income percentage, the CPI representing the annual consumer price index, and L_IRATE, indicating the annual borrowing rate in VND.
To carry out the impact assessment research, the author will conduct the research according to the following steps:
Step 1: Learn about research variables and collect data and descriptive statistics
Data processing involves the application of the Winsor method to eliminate outliers in variables Utilizing descriptive statistics allows for a better understanding of the dataset, offering concise summaries that reveal key characteristics By measuring trends in the data, important values such as mean, median, standard deviation, maximum, and minimum are highlighted, providing valuable insights into the data's overall behavior.
Step 2: Check the phenomenon of multicollinearity by two methods of correlation coefficient matrix and variance magnification factor VIF
To assess the inclusion of selected variables and identify potential multicollinearity, the author employs two methods: the correlation coefficient matrix and the Variance Inflation Factor (VIF) test A correlation coefficient exceeding 0.7 indicates a likely correlation between variables, which can lead to multicollinearity and reduce the reliability of research findings Additionally, the VIF test suggests that if the VIF value surpasses 10, it confirms the presence of multicollinearity within the model.
Multicollinearity can be identified using Variance Inflation Factor (VIF) coefficients; values ranging from 2 to 10 indicate the presence of multicollinearity, while a VIF of less than 2 suggests that the model is free from multicollinearity issues.
Step 3: Run REM and FEM regression models
The author employs two common regression methods, Random Effects Model (REM) and Fixed Effects Model (FEM), to analyze array data by sequentially including groups of variables To address issues of variable variance and residual autocorrelation, the author applies the Cluster standard errors method as outlined by Petersen (2009) This approach effectively mitigates the drawbacks associated with variable variance and residual autocorrelation in the model results.
Step 4 Use Hausman Test to find suitable research model
Hausman test with two hypotheses:
H0: Selection of REM model and no correlation between independent variable and random components
H1: Select FEM model and have correlation between independent variables and random components
If Prob test value < 5% Reject H0 and accept H1
If test value Prob>5% Accept H0
The selected model will be the most suitable model and has overcome the phenomena of multicollinearity, variables variance and residual autocorrelation
Result and discussion
Checking for multicollinearity
- The results of the model regression have enough variables
Table 4 Results of full-variable model regression by FEM and REM methods
REM FEM roa roe roa roe
FIRMS FE NO NO YES YES
YEARS FE YES YES YES YES
Perform the variance inflation factor VIF test
Table 5 Results of test of variance magnification factor VIF
Variable VIF SQRT VIF Tolerance R- Squared
The test results indicate that the Consumer Price Index (CPI) and the Long-term Interest Rate (L_IRATE) have Variance Inflation Factor (VIF) values of 14.17 and 14.24, respectively, suggesting a significant multicollinearity between these two variables Consequently, it is necessary to remove one variable and retest the model to ensure accurate results.
Impact of financial factor on firm performance
Table 6 Model regression results by REM method
FIRMS FE NO NO NO NO
YEARS FE YES YES YES YES
Table 7 Model regression results by FEM method
FIRMS FE YES YES YES YES
YEARS FE YES YES YES YES
Based on the above table, we have the following regression model:
The regression model that demonstrates the relationship between each independent variable on ROA is:
The regression model that demonstrates the relationship between each independent variable on ROE is:
Research indicates a positive correlation between firm size and performance metrics, with a 1-unit increase in firm size resulting in a 0.007 rise in Return on Assets (ROA) and a 0.012 increase in Return on Equity (ROE) This finding aligns with the conclusions of notable studies by John Rand and Finn Tar (2002), Baard, V.C and Van den Berg, A (2004), and Zeitun and Tian (2007), all of which support the notion that larger firms tend to perform better in their business activities.
The growth variable shows a positive correlation with both Return on Assets (ROA) and Return on Equity (ROE), indicating that a 1-unit increase in growth leads to a rise of 0.022 in ROA and 0.048 in ROE This highlights that growth is essential for businesses to meet their objectives during their operational lifespan It enables companies to accumulate capital and resources for production expansion while also enhancing their credibility with customers, suppliers, and investors.
54 research by Zeitun and Tian (2007), growth rate has a positive impact on business performance of enterprises
According to stakeholder theory, a higher debt-to-equity ratio increases conflicts of interest among creditors, shareholders, and managers, necessitating greater transparency to satisfy stakeholders However, companies with elevated debt levels often encounter financial challenges and solvency issues Research by Marian Siminica, Daniel Circiumaru, and Dalia Simion (2011) indicates that effective management of customer receivables positively impacts business performance Notably, this study reveals an inverse relationship between leverage and financial performance metrics; specifically, a 1-unit increase in leverage correlates with decreases of 0.135 in Return on Assets (ROA) and 0.089 in Return on Equity (ROE).
Tangible assets are essential labor materials for enterprises, significantly contributing to various production and business cycles Research by Zeitun and Tian (2007), Onaolapo and Kajola (2010), and others indicates that a higher proportion of fixed assets negatively impacts business performance Specifically, tangible assets exhibit a negative relationship with key performance indicators such as Return on Assets (ROA) and Return on Equity (ROE).
The regression model indicates a negative relationship between liquidity and firm performance, suggesting that firms with higher solvency can leverage more debt due to their enhanced repayment capacity.
55 the business has a positive relationship (+) with debt Liquidity management issues for managers to decide appropriate balance between risk and return
An increase in growth by 1 unit leads to a rise in Return on Assets (ROA) by 0.002 and Return on Equity (ROE) by 0.003 Research indicates that stock prices move in tandem with GDP growth, money supply, and financial depth A study by Al-Qenae et al (2002) on the Kuwait stock market found that Earnings Per Share (EPS) and Gross Domestic Product (GDP) positively influence stock price volatility.
A high GDP and robust growth rate in an economy indicate increased revenue and revenue growth for businesses, while the opposite is true for economies with low GDP and sluggish growth.
The Consumer Price Index (CPI) exhibits a negative correlation with Return on Assets (ROA) and Return on Equity (ROE), as highlighted by Al-Tamimi et al (2007), who noted that CPI adversely affects stock market prices This relationship underscores the broader economic implications of inflation; as inflation rises, investor confidence wanes, raising fears of potential economic instability and crises Consequently, the stock market becomes less appealing, leading to a sell-off of shares that increases supply over demand and results in poor liquidity Additionally, rising inflation escalates production costs, which in turn raises product prices and significantly dampens consumer spending.
4.2.3 Hausman test with dependent variables
Table 8 Results of Hausman test
Dependent Variables ROA ROE Decision
CPI Prob>chi2 0.04 0.1 Select FEM model
L_IRATE Prob>chi2 0.04 0.1 Select FEM model
After performing the tests and correcting the model's defects, the suitable models are the models from 1-4 in the table
Recommendation
Conclusion
A study conducted on 370 companies listed on the Ho Chi Minh Stock Exchange from 2010 to 2020 aimed to determine the impact of various factors on business performance Utilizing regression methods with fixed and random models for panel data, the research found that both internal and external factors significantly influence business performance Internal factors, such as business size and revenue growth, were positively correlated with performance, while financial leverage and asset structure had a negative impact Interestingly, liquidity showed no correlation with business performance For external factors, the study examined economic growth, inflation, and interest rates, ultimately removing one variable due to the high correlation between inflation and interest rates.
2 variables when performing the regression The research results show that economic growth, CPI and lending rates all have a positive impact on business performance.
Recommendation
Analyzing a company's financial indicators and macroeconomic data can help predict stock price movements, enabling proactive measures to address potential issues.
58 such as buying shares to acquire from competitors, proactively disclosing information on buying and selling treasury shares of the company
Investors when choosing this group of stocks need to closely monitor and analyze the fluctuations of the economy and the performance of enterprises in the industry
To minimize risks, investors should compare their investment indexes with those of other companies in the same industry and the overall industry average Diversifying the portfolio of investment stocks is crucial, and investors must remain vigilant, steering clear of trends and rumors that carry high risks Maintaining a strong knowledge base is essential for making informed investment decisions.
Macro indicators like annual GDP and CPI serve as essential tools for investors to forecast stock price movements, both for the market as a whole and for individual companies Positive macroeconomic data typically correlates with rising stock prices For novice investors, starting with investment funds can provide valuable experience and insights into the stock market.
To enhance the competitiveness and quality of stock market intermediary institutions, it is essential to actively implement restructuring efforts This includes a focus on improving the professional ethics and service quality of various market intermediaries, such as securities firms, auditing organizations, valuation firms, fund management companies, and credit rating agencies Regular reviews of these entities will ensure that they meet high standards of ethics and service excellence.
To ensure compliance and maintain market integrity, service providers will be classified, with licenses revoked in case of violations Additionally, there is a push for service providers in the stock market to adopt fintech applications that align with investor needs and market growth Concurrently, efforts will be made to enhance credit rating services, promote service provision, and strengthen the capabilities of these organizations.
The government is responsible for ongoing capital restructuring aimed at enhancing quality, refining the transaction system, and improving the legal framework and market development policies Additionally, it is essential to stabilize macroeconomic factors to effectively attract foreign and institutional investors.
To enhance the quality of listed companies and ensure the transparency of their financial statements, it is essential to elevate existing standards Recently, the exchange has progressively tightened these standards, and it is crucial to further refine equity standards and return on equity (ROE) for listed companies in the future This ongoing improvement will help safeguard the overall reputation of the market.
Limitation
Data sourced from audited financial statements of businesses may not always be entirely accurate, potentially causing discrepancies in the development and evaluation of regression models that analyze the factors influencing enterprise performance Additionally, this study builds upon insights gained from prior research in the field.
60 methods and influencing factors However, due to limited experience, in-depth knowledge and data collection conditions, errors cannot be avoided
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