The CEO canhave a significant impact on the capital structure of the company by implementingstrategic financial decisions, determining between borrowed and owner capital whenmaking inves
INTRODUCTION
Capital structure planning is a crucial aspect that business managers carefully consider in making informed decisions To make informed decisions regarding capital structure, it is vital for managers to accurately identify the factors that influence it.
Thus, the capital structure of an organization is a critical decision that involves managing and allocating various sources of capital such as equity, borrowed funds, and other financial resources Hence, a company's capital structure plays a major part in enabling business operations, providing enough capital for production enlargement, asset purchases and sales, and investor fostering trust When an enterprise's capital structure is solid, it is simpler for the business to obtain loans with a lower rate of interest The impact of capital structure is associated with both profitability and organizational stability (Frank & Goyal, 2009a), risk (Zou & Xiao, 2006), and the value of a business (Tang & Chang, 2024)
In addition, a sustainable capital structure can improve the financial capacity and risk management of a company (Lemmon & Zender, 2010) During investigation and experimentation, researchers found that theoretical frameworks such as the pecking order theory and trade-off theory have provided valuable insights for managers in determining and planning the optimal capital structure There have been several studies conducted in Vietnam on capital structure and the elements that influence it (Nguyen et al., 2017; Phạm & Phạm, 2022; Thủy & Trang, 2021) but not many have examined the impact of CEO traits on capital structure.
The majority of research studies concentrate on a company's financial metrics,including sales, profit, debt-to-equity ratio, current ratio, beta, and volatility It assesses and quantifies a company's capital structure Previous studies have frequently relied on measures of financial leverage of the enterprise, such as debt ratio, short-term debt ratio (Llobet-Dalmases et al., 2023), long-term debt ratio, total assets (Rehan et al., 2023), revenue and profit (Frank & Goyal, 2009a), intangible assets and tangible assets (Lim et al., 2020).
In addition to those factors, many studies are focusing on the role of CEOs from various perspectives However, these factors are not yet fully understood and need further elaboration Therefore, we chose to conduct this research to supplement and expand on other aspects and factors of the CEO's role that previous articles have not addressed.
According to (Modigliani & Miller, 1958; and Bebchuk et al., 2011), a study notes that the CEO's significant position is a factor directly associated with specific strengths and weaknesses of the organization's governance The CEO's authority also influences the company's worth The Chief Executive Officer (CEO) has various responsibilities, among them are those related to strategic leadership Specifically, the CEO defines and implements organizational strategy, makes long-term strategic decisions, directs the company's growth, and takes into account product development, market, marketing, finance, and technology to achieve company growth and success Important responsibilities that the CEO undertakes involve determining whether to issue bonds, stocks, or bank loans to obtain capital and managing the company's financial risk regarding financing, investments, and asset acquisitions Furthermore, in meetings with the firm's legal agents, commercial partners, and shareholders, the CEO always represents the company
The CEO takes on several significant tasks in various facets of strategy and finance Accordingly, a great deal of research has always been done on the impact of the CEO on a variety of factors, the capital structure is not an exception The CEO can have a significant impact on the capital structure of the company by implementing strategic financial decisions, determining between borrowed and owner capital when making investment decisions, and growing the company's size Executives can manage risk, find new sources of capital, control how capital is spent, and cultivate connections with investors.
Our contributions to this study are as follows:
Firstly, throughout 12 years (2010–2022), we used a data sample of 356 non– financial organizations, which included all 3610 observations of businesses registered on the HOSE Additionally, we found dynamic regression models that investigate how each factor affects capital structure.
Second, as it offers helpful information to company managers, investors, and regulators, we acknowledge the significance of researching and better understanding the influence of CEO power on the capital structure of organizations The purpose of this study is to find tendencies influencing the CEO's characteristics and the financial indicators of the business concerning the capital structure across Vietnam's sectors and listed firms.
This thesis attempts to provide answers to the below questions:
1/ What factors influence non-financial enterprises' decisions on capital structure?
2/ Is there a connection between Vietnamese non-financial firms' capital structures and CEO characteristics such as gender, ownership holding, CEO income, and board characteristics such as board size and the frequency of board meetings?
The structure of our thesis is as follows:
Chapter 1: Introduction Chapter 2: Literature review and hypothesis development Chapter 3: Data and Research Methodology
Chapter 4: Empirical ResultsChapter 5: Conclusions
LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT
Theories of Corporate Capital Structure
This research focuses on the corporate capital structure, which encompasses how a company finances its activities and expansion through a combination of sources such as assets and debt It outlines how a company acquires the capital needed to invest in assets, equipment, and day-to-day operations Additionally, it plays a vital role in financial management by deciding the proportion of assets (assets) and borrowed funds (debt) in a company's overall financing strategy.
The Corporate capital structure decision involves determining the optimal mix of asset and debt financing to maximize the company's value while minimizing its cost of capital and financial risk The goal is to strike a balance between the benefits and costs associated with each type of financing.
Debt ratio = (Total debt / Total asset) * 100%
2.1.2 Theories of Corporate Capital Structure 2.1.2.1 Capital Structure Theory of Modigliani and Miller
The first formal theory of capital structure was the Modigliani and Miller theory presented in their studies in 1958 and 1963.
In 1958, Modigliani & Miller (1958) claimed that without corporate income tax, the capital structure did not affect the company's value, or that the company had no way to increase its value by changing its capital structure In 1963, Modigliani
& Miller (1958) incorporated corporate income tax into a study model and the results showed that the value of a leveraged company is equal to the value that an unleveraged company plus the current value of the "tax shield" Modigliani & Miller(1958) suggested in their studies that companies should use as much debt as possible because interest payments are tax-deductible and the interest expenses are also tax- deductible Thus, higher interest expenses will help reduce taxable income and lead to lower taxes on profits (Modigliani & Miller, 1958).
Furthermore, M&M has conducted various studies on the impacts of taxes and bankruptcy costs They recognize that utilizing debt can enhance corporate value as interest expenses are not taxed, leading to increased income for investors The value of the tax shield also increases with higher levels of debt, providing an incentive for companies to borrow more.
Hence, while a capital structure consisting entirely of debt may theoretically maximize corporate value, in practice this is not feasible due to the additional costs associated with debt These costs outweigh the benefits of the tax shield, ultimately reducing the overall value of the business This concept forms the basis for the development of the Trade-Off Theory Of Capital Structure.
Overall, Modigliani & Miller (1958) demonstrate the connection between corporate value and capital structure., when considered in an environment with no taxes and no cost of debt, M&M theory suggests that capital structure does not affect value of business.
2.1.2.2 Trade-Off Theory Of Capital Structure.
The trade-off theory of capital structure was first proposed in 1984 by two economists, Stewart C Myers, and Nicholas S Majluf, in the article " Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have” It is a theory in corporate finance that explains how companies choose their capital structure This theory deals with the idea of how much debt and how much equity a company will choose to sponsor to balance costs and optimal benefits for the business (Myers & Majluf, 1984)
It is known that this theory indicates that the company has a moderate debt ratio as well as that the company will borrow up to a limit at which the value of the tax shield compensates for possible costs in the present by financial distress - This distress refers to costs such as bankruptcy costs, restructuring costs, and agency costs when the company's creditworthiness is problematic The trade-off theory in accounting can make it difficult to determine the amount of tax due because it does not allow for maintaining a default conservative rate to protect against the volatility of tax liability If a company is maximizing the value of its shares, it should not ignore calculating the amount of tax it must pay, because if it does not pay attention to tax payments, it can lead to financial distress
Managers think they can find the best capital structure to maximize the firm value by using this approach to govern the company A capital structure that is ideal strikes a balance between the advantages and disadvantages of borrowing money.
Using debt provides benefits from tax and interest shields However, taking on too much debt can increase the cost of financial distress Therefore, to achieve this equilibrium, businesses need to find the appropriate debt ratio to be able to offset financial costs with the tax advantages of additional debt.
However, there are many profitable companies with high credit ratings but low debt ratios such as Microsoft and large pharmaceutical companies, showing that high profits have low debt ratios and vice versa Simultaneously, the trade-offs theory cannot explain this The trade-off theory of optimal capital structure has a strong explanatory power for the usual cases where debt ratios are moderate This theory is also consistent with reality: companies with relatively safe tangible assets tend to borrow more than companies with intangible assets (high business risks increase the rate of financial distress and intangible assets are more likely to be lost when the company falls into financial distress)
There are two main schools of capital structure trade-off theory In the static Trade-Off Theory, the company searches for the optimal debt ratio to maximize corporate value and only a single optimal capital structure exists In contrast, the dynamic trade-off theory suggests that a company's optimal capital structure can change from period to period and must be continuously adjusted based on the impact of external factors such as operating costs and market fluctuations.
In the short term, a company's capital structure may fluctuate around its optimal level due to the influence of volatile factors However, in the long term, companies tend to move toward an optimal capital structure when volatile factors are controlled and forecast accurately.
In summary, the Trade-Off Theory Of Capital Structure is an important tool that helps companies understand how to choose the appropriate capital structure to optimize corporate value Applying this theory requires careful consideration and accurate analysis on the part of financial managers to ensure sustainability and efficiency in business operations
The Determinants Affect Capital Structure
Some key factors have a profound influence and strong impact on the choice of capital funding sources for companies listed on the HOSE stock exchange in the context of the Vietnamese economic and institutional environment receiving significant attention from businesses to increase value and effectively manage financial operations.
Salesgrowth: It plays an important role in forming a company's economic position sustainably, especially during growth periods This is key to ensuring a successful sale and must be achieved at a specific time In cases where sales are strong, the company can use a larger debt level to finance spending.
A study in China found a positive relationship between sales growth and debt, similar to other developing countries This study is based on data from 88 annual reports of publicly listed companies in China for the period 1995-2000 This data is called the Dow-China 88 Index, based on its structure China's stock market was created by Dow Jones in May 1996 The companies listed in this index are representative of the leading forces in the industry in China, which helps the data sample accurately reflect the global debt ratio in this country (J J Chen, 2004)
According to trade-off theory, companies that possess growth potential, a form of intangible asset, tend to borrow less than companies that hold tangible assets because growth potential is not easy to estimate In the signaling model, highly valued companies can use more leverage or, in other words, use more debt capital because debt can be a heavy burden on the business This also means that companies with less asset value have a higher risk of falling into bankruptcy (Ross, 1977) Signal models predict that well-developed and highly profitable firms will use more debt capital
According to (Lang et al., 1996) they show that debt ratio has a negative impact on growth potential only for companies for which growth opportunities are not adequately accessible The large market capitalization in China is an indication that the growth opportunities associated with listed companies have been noticed by the capital markets This encourages banks to give higher valuations to debt-laden companies and provide more long-term debt to those businesses to support their business expansion goals.
Size: The size of an enterprise plays an important role in shaping its capital structure Typically, compared to small companies, companies with a large scale of assets and operations can access more sources of funding These organizations can exploit a variety of funding from many different sources, including banks, raising capital from investment organizations, and the public market This diverse access to capital allows large companies the ability to borrow more and build more sophisticated and complex capital structures than small businesses.
In contrast, companies with smaller operating scales often have more limited access to capital These companies rely more on equity financing, resulting in a simpler capital structure with a low debt-to-equity ratio In contrast, larger companies have access to more capital thanks to their large scale of operations and more diverse revenues The operating efficiency and solid financial situation of large companies have given lending institutions and investors more confidence when lending or investing.
The logarithmic value of total assets is the formula for measuring company size According to trade-off theory, business size has a positive correlation with financial leverage because large businesses often limit risks more and optimize bankruptcy costs In addition, large enterprises have lower agency borrowing costs and monitoring costs as well as information gaps compared to small enterprises.
Furthermore, operating cash flow in and out also becomes more stable, making it convenient to access the credit market and use more debt to take advantage of tax shields Research in Nigeria by Salawu & Agboola (2008), Portugal by Serrasqueiro &
Nunes (2010), G7 developing countries by Rajan & Zingales (1995), Switzerland by Gaud et al (2005) and Vietnam by Nguyen et al (2017b) shows a positive relationship between firm size and financial leverage.
Tang: This factor is measured by tangible fixed assets over total assets.
According to studies by Gaud et al (2005) in Switzerland, Rajan & Zingales (1995) in the G-7 countries, and Serrasqueiro & Nunes (2010) in Portugal, the ratio of tangible fixed assets (Tang) has a positive relationship (+) with financial leverage in countries because creditors usually require collateral to secure loans Therefore, having tangible fixed assets will help the company narrow the gap in sourcing capital.
Additionally, tangible fixed assets also help increase the liquidation value of the company when necessary This means that with tangible fixed assets, the company will be better able to withstand bankruptcy.
Tangible fixed assets not only strengthen the financial leverage of the company but also protect the company from the risk of financial imbalance When a company owns many tangible fixed assets, it also can bolster its equity and reduce financial risk This helps the company maintain a good relationship with creditors and investors, stimulating sustainable growth in the future.
In today's economy, enhancing tangible fixed assets has become an important factor in helping businesses overcome difficulties and ensure stability in their operations This is why research on the relationship between tangible fixed assets and financial leverage is becoming increasingly popular and important in the business world today.
Profitability: Another study (Tobin, 1969) examined the factors affecting leverage ratio by collecting and analyzing data from 50 companies listed on theEgyptian Stock Exchange operating in the sector non-financial period from 2012 to2017 (Tobin, 1969) used ROA as an independent variable to examine factors affecting leverage ratios for Egyptian firms during the financial crisis period This study applied correlation and regression analysis methods to test the relationship between financial leverage and corporate financial performance The results show that both of these coefficients have a negative sign because profitable businesses tend not to want to increase equity to avoid diluting ownership.
Hypothesis Development
In today's economic era, the number of female CEOs tends to increase Many women are taking on leadership and senior management roles at large and multinational companies, from factories and manufacturing plants to technology and financial corporations This is clarified by many statistics as well as research articles on the financial performance of companies managed by female CEOs in recent times.
Therefore, is it the female CEO factor that has brought companies to new heights and operated more effectively? This is also an issue of concern to many researchers around the world.
Among them, a study by Frank & Goyal (2007) found that female CEOs show a tendency to be more conservative in financial management and that they often focus on risk management more carefully than male CEOs Frank and Goyal's research recorded a sample during the period between 1993 and 2004 Specifically, data was collected from many companies related to the financial and securities sectors, S&P500, and S&P MidCap400 companies as well as the S&P SmallCap 600 are listed in Standard and Poor's Execucomp database The sample had a total of 2,248 organizations and 3,898 CEOs The results of this survey showed that female CEOs tend to prioritize using equity financing over debt financing This makes their debt- to-equity ratio lower in their capital structure than male CEOs Additionally, these studies have shown that CEO gender has a positive relationship with capital structure.
Furthermore, Frank & Goyal (2007)’s results were verified by another study by Huang & Kisgen (2013) specifically, their research has shown that CEO gender affects debt financing behavior, especially for male CEOs According to the results of the research, they discovered that male CEOs tend to use more financial leverage than female CEOs In other words, male CEOs have a greater need to use debt financing than female CEOs This result is also supported in terms of accuracy by the study of Graham & Shelton (2013) This study found that companies run by female CEOs, who want the organization to reduce financial risk and increase stability, tend to have lower levels of debt in their capital structures than male CEOs.
Based on findings from various studies, a hypothesis has been put forward that the gender of the company's Chief Executive Officer (CEO) plays a significant role in determining the capital structure of the organization Specifically, businesses run by male CEOs tend to use debt financing, while businesses run by female CEOs often prioritize using equity financing Gender differences in the sponsorship behavior of male or female CEOs can have a strong impact on a company's capital structure and financial performance as well as risk management and social image Through the above findings, it can be seen that female CEOs often have more conservative financial strategies and they often focus on risk management more carefully For the most part, female CEOs tend to choose more sustainable and stable financial and investment strategies, minimizing potential risks in the business process compared to male CEOs by prioritizing the use of financial resources and equity financing or in other words, taking advantage of financial leverage.
The CEO's gender is an important factor to consider when analyzing a company's capital structure and financial decisions because it directly affects the business's development and operating strategy Considering the CEO's gender will help make a more comprehensive assessment of an organization's sustainable development path In addition, when understanding the influence of CEO gender on capital structure, investors and stakeholders will grasp and prepare financial strategies and have appropriate risk management plans fit
Hypothesis H 1: There is a negative relationship between the presence of female CEOs and the leverage of the company.
According to Niederle & Vesterlund (2007), the age of the CEO affects the capital structure of the business Studies have shown that younger CEOs tend to be more confident and have a passion for performance in a competitive business environment than older CEOs This age difference reflects not only each CEO's risk aversion but also their experience and perspective on the future.
Bertrand & Schoar (2003) also found that younger CEOs tend to be more progressive and risk-averse, while older CEOs tend to behave conservatively based on accumulated experience
They built a consistent data table between managers and companies that allowed them to track the same senior managers at different companies over time.
The data used were Forbes 800 files, from 1969 to 1999, and Execucomp data, from 1992 to 1999 Forbes data provides information on the CEOs of 800 of the largest U.S companies Execucomp allows us to track the names of the five highest-paid executives in the 1500 publicly traded companies in the United States
On the other hand, research by Serfling (2014) and Y Chen et al (2014)also show that CEO age influences decisions about debt financing, with younger CEOs looking more towards debt financing to face challenges and facilitate growth, while older CEOs generally avoid this risk.
Therefore, based on the above studies, it can be concluded that the capital structure of the enterprise often depends on the age and views of the CEO The combination of the confidence and future aspirations of younger CEOs and the conservatism and prudence of older CEOs has created diversity in decisions about capital structure and debt financing This opens up opportunities for studying and evaluating the influence of the CEO's gender and age on the capital structure and financial strategy of the business.
Hypothesis H 2 : CEO age has a negative relationship with the company's capital structure
CEO income levels were studied by 1381 publicly traded companies only onChina's two domestic exchanges between 2001 and 2005 based on company performance As the value of the company increases, the income of the executive increases Therefore, the CEO will proactively be aware of potential dangers in the process of making debt decisions, and they will be motivated to improve their performance Because of this, CEOs who receive respectably high compensation from their companies tend to stick with and advance in their existing roles and positions This also means that they are cautious when deciding how to handle debt so that the company can continue to pay the CEO what they want.
Recently, a new method of rewarding CEOs has been developed Previously, CEOs were paid entirely in cash, but this was seen as independent and contingent on the company's performance (Mehran et al., 1999) They may now be rewarded with company stock or options to buy and sell Conyon et al (2011) and Morck et al (1988) have found that the relationship between a CEO’s compensation and the leverage of a company is negative.
Hypothesis H 3 : CEO income is negatively correlated with the leverage of the business.
The role of the Chief Executive Officer (CEO) is extremely important for the success of businesses In addition to leadership abilities, judgment, and decision- making, the duality of the CEO also directly impacts the operational effectiveness and financial leverage of the company This issue has been analyzed by various studies worldwide.
The duality of the CEO is mentioned in the research of Mubeen et al (2020) that senior executives such as the CEO can use a debt escalation strategy to limit and curb equity capital while maximizing their voting rights by taking on both the CEO and Chairman of the Board positions When CEOs also serve as the Chairman of the Board, they have greater power in deciding business strategies and company governance This allows them to easily promote decisions such as increasing debt without needing as much control from other board members or departments The research emphasized the importance of analyzing and evaluating the influence of different corporate governance attributes on the capital structure of non-financial listed companies on the Karachi Stock Exchange in Pakistan between 2004 and 2008.
The authors collected data from annual reports and financial statements of companies including 775 observations from 155 companies during the period 2004 -2008.
Another study by Nazir et al (2012) also emphasized that senior executives such as the CEO can take on multiple leadership roles within an organization to optimize their benefits, typically as both the CEO and Chairman of the Board When the CEO also serves as the Chairman of the Board, they can more easily facilitate synchronization in the decision-making and strategy implementation process, better protect the interests and development orientation of the organization, and coordinate organizational departments to operate in a common direction as they directly lead both the most important positions This can help the CEO better fulfill their mission and vision for the organization Therefore, employees will feel led by the person with the highest authority, respect and trust the CEO's position, contributing to encouraging the CEO to take risks and work for the overall benefit of the organization.
DATA AND RESEARCH METHODOLOGY
Data
The study's data set refers to 356 businesses listed on the Ho Chi Minh City stock exchange from 2010 to 2022 with an expected number of observations of 3610 observations Firm-level data were obtained from the Ho Chi Minh City stock exchange and corporate balance sheets and income statements CEO-specific data is taken from the home page of each business.
Different panel regression models are estimated for the Leverage index in the study The influence of CEO characteristics (i.e., age, income, tenure, on capital structure is also studied with different estimation models Regarding the structure of industry groups, according to the classification of the City Stock Exchange Ho Chi Minh listed companies in the research sample are classified into the following industry groups:
Table 3.1: Industry Structure of Research Companies
STT Sector Number of firms
(Source: website https://cafef.vn/)
Variable Description Measurement Dependent variable
Ratio Total Debt / Total asset
CEOtenure CEO tenure The number of years working as a CEO in the current firm.
CEOgender CEO gender The dummy variable takes the value of 1 if the CEO is female and 0 otherwise CEOage CEO age Current year minus for CEO’s year of birth
CEOincome CEO income The total compensation of the CEO includes salary plus bonus plus honorarium
Duality CEO dual The dummy variable takes the value of 1 if the CEO and the Chair are the same person and 0 otherwise.
The dummy variable that takes on the value of 1 if the CEO owns more than 3% of the outstanding voting shares, and 0 otherwise
Number of board meetings in a year that the CEO attended / Total number of board meetings in the year
Firmage Firm’s age The company's current year minus the year the company was founded ROA Profitability Net Income / Total Asset
Tang Tangibility The ratio of net plant, property, and equipment to book value of total assets.
Size Firm’s size Log( Total asset)
Sales growth Sale in year (t) - Sale in year (t-1) / Sale in year (t-1)
Variable Obs Mean Std dev Min Max
According to the results above, there were 3610 observations for 356 businesses listed on the HOSE market between 2010 and 2022 (12 years).
Companies listed on the HOSE exchange have a comparatively high leverage ratio on the Vietnamese stock market With the lowest leverage ratio at 0.003 and the highest at 0.948 annually, the average financial leverage ratio is at 0.471.
Why is the average leverage ratio of companies listed on the HOSE exchange so high? This can be explained, in part, by the fact that these businesses frequently require funding to grow, engage in new endeavors, create and study new goods, enter new markets, or settle debt Leverage enables businesses to maximize investment efficiency and save capital Leverage, however, also carries risk if stock values decline and businesses are unable to pay back their obligations.
The CEO gender index is a converted index with 0 representing male CEOs and 1 representing female CEOs
CEO tenure ranges from one year to thirteen years, with an average of four terms for both male and female CEOs.
The average annual income and bonuses for CEOs as indicated in the result table are approximately 1.1 billion VND, which is considered reasonable This can be attributed to the competitive environment where companies strive to attract and retain skilled executives.
CEOs range in age from 20 to 80 years old, with 80 being the highest age.
Older CEOs are highly appreciated and frequently hold managerial positions since they can bring valuable vision and extensive expertise to the table that can help the firm succeed.
Leaders who possess the CEO title but not the chairman title are converted to 0, and those who hold both the CEO and chairman titles are converted to 1 This is to evaluate dummy variables.
A CEO is deemed to have power if they own over 3% of voting shares, in which case the value is assigned as 1; otherwise, it is recorded as 0.
With the average Tang of this variable being 0.194 This rate is quite low because the competitive business environment for listed companies requires them to focus on operational activities to compete effectively, leading to a low Tang rate.
Their financial strategy often does not invest heavily in tangible assets, focusing on core business operations, and reducing the Tang/Total Asset ratio.
About the Size variable, the average size of the 356 companies listed on the Hose exchange is 28.1 trillion VND The largest company has a scale of 34 trillion VND, highlighting the financial advantages of investing in research and development and managing resources effectively On the other hand, the smallest company has a scale of 22.6 trillion VND, indicating that smaller companies, while agile and adaptable to changing business conditions, may struggle to compete with larger firms in terms of financial capacity and production scale.
Companies operate for an average of 23 years; the longest-running business is133 years (BHN - Hanoi Beer - Alcohol - Beverage Corporation was founded in 1890 as a predecessor to the Hommel Beer Factory built by the French)
The average revenue growth rate for companies is 0.147, with the highest opportunity for growth being 192.5 and the lowest at -346.5 Companies experiencing high revenue growth typically focus on expanding their market,introducing new products and services, attracting new customers, and improving their competitive edge Conversely, companies with low growth rates may encounter challenges such as strong competitive forces, fluctuating cash flow, and constraints in expanding their business, resulting in declining revenue and rising costs.
The degree of correlation between the dependent and independent variables used in the analysis The regression analysis is given in the appendix The estimated correlation matrix shows that there is generally a weak correlation between the independent variables.
(Source: Author's calculation) support software
Research Model
In chapter 2 about the theoretical basis and empirical studies, we hypothesized the factors affecting capital structure after analyzing the factors affecting the business operations of enterprises and their characteristics of the chief executive officer (CEO) Therefore, we propose the following regression model:
LEVit= β0 + β1ROAit + β2Tangit+ β3Sizeit + β4Salesgrowthit + β5CEOtenureit + β6CEOgenderit + β7CEOincomeit + β8Dualityit + β9Powerit + β10Attendit + β11CEOageit+ β12Firmageit + εit
ROA: Return on Asset of firm i at year t Tang: Tangible Asset of firm i at year t Size: Size of Enterprise of firm i at year t Salesgrowth: The growth rate of sale of firm i at year t CEOtenure: Tenure of CEO of firm i at year t
CEOgender: Gender of CEO of firm i at year t CEOincome: Income of the CEO of firm i at year t Duality: Duality of the CEO of firm i at year t Power: CEO holding the percentage of outstanding shares of firm i at year t CEOattend: CEO board meeting attendance rate of firm i at year t
CEOage: Age of the CEO of firm i at year tFirmage: Number of years of operation of firm i at year tFurthermore, to minimize the impact of uncollected and unobserved firm- specific variables, we also estimate regressions with firm fixed effects of ε as a random error term The role determines the influence of independent variables on the dependent variable in the model.
Research Methodology
This study uses statistical methods such as comparison, analysis, and synthesis to present and evaluate the results Quantitative methods have been applied to economic models to measure the impact of independent variables on dependent variables Throughout the process, from data collection to analysis and finding conclusions, all steps are carried out in specific and logical steps as follows:
First, data collection was carried out from the financial statements, annual reports, and management reports of 356 companies from 10 main industries (excluding the financial sector) listed on the Ho Chi Minh Stock Exchange through the official websites of securities companies as well as the website of the State Securities Commission The data was calculated based on determining independent and dependent variables and then arranged and extracted for analysis
Second, based on the data we searched and collected, then put it all into Stata 2017 software for analysis and evaluation.
Third, we use three selected quantitative research methods including the Fixed Effects Model (FEM), Random Effects Model (REM), and Generalized Least Squares (GLS) model, and use Stata 17.0 software to estimate regression parameters.
The research method can be selectively applied by two indispensable and useful models for evaluating panel data are FEM (Fixed Effects Model) and REM (Random Effects Model) During research, the choice between FEM and REM depends on the specific nature of each case For factors that are stable over time or geography, FEM is appropriate to use On the other hand, REM is preferred when adjusting for random factors that influence the differences between observed units in panel data.
However, besides FEM and REM, Pooled OLS is also a common method for analyzing panel data The choice of approach depends on the research objective and the nature of the data To select the most appropriate method, we often use tests such as F-test, Hausman test, and Wald test to make the final decision.
The Hausman test is an important tool for comparing FEM and REM It helps identify the correlation between the error term εi and the independent variables to determine the most suitable estimation method for the model Additionally, the
Wald test should also be conducted to check for heteroscedasticity, which can be addressed using Generalized Least Squares (GLS) if necessary.
In conclusion, choosing between FEM, REM, and other analysis methods depends on various factors and requires careful consideration to ensure accurate and reliable research results.
We conducted the research steps below:
Step 1: Regression analysis using the Pool OLS model Step2: Regression analysis using the Fixed Effect Model (FEM) Step 3: Using the Random Effect Model (REM) to conduct regression Step 4: Using the Hausman test and F-test, respectively, compare and select between Pool OLS, FEM, and REM.
Step 5: Heteroskedasticity Testing Step 6: Using Generalized Least Squares to adjust for heteroskedasticity (GLS)
F-Test is a common method to choose the suitable regression between Pooled OLS and FEM The null hypothesis (H0) is Fixed effect = 0
From the test result, the p-value = 0.000 < α=0.05 Reject H0 FEM is more suitable than OLS.
Hausman test is to choose a suitable model between FEM and REM The null hypothesis (H0) is rẹjected that the preferred model is fixed effects
The Wald test is used to verify heteroskedasticity in the model The null hypothesis (H0) is rejected that preferred this model is heteroskedasticity.
Lastly, evaluating regression using multiple regression models: The author estimated regression coefficients using Stata 2017 software The findings of multiple regression make it easier to see how and to what extent the independent variable influences the dependent variable, as well as which element has the most bearing on capital structure.
EMPIRICAL RESULTS
Empirical Results
To measure the factors affecting the capital structure of listed companies on the HOSE, the author will conduct regression analysis using three models: GLS (Generalized Least Squares), FEM (Fixed Effects Model), and REM (Random Effects Model) Subsequently, the author will use statistical tests to select the most appropriate model To obtain unbiased and efficient estimation results, the authors use feasible GLS estimation (FGLS).
The regression results from the GLS model in Table 4.1 shows that the CEOgender, CEOtenure, CEOincome, CEOage, Tang, Firmage, and ROA factors have a negative impact on the capital structure of the firm, while the Duality, Power, Attend, Size, Salesgrowth factors have a positive impact on the leverage ratio of the company The specific regression model is rewritten as:
LEV= β0 - 0.078ROA - 0.055Tang + 0.058Size + 0.0005Salesgrowth -0.005CEOtenure - 0.047CEOgender - 0.007CEOincome + 0.033Duality + 0.030Power +0.019Attend - 0.001CEOage - 0.0001Firmage + εit
Discussion on Research Results
There is a negative and significant relationship between CEO’s gender and leverage Increases in the CEO’s gender lead to a decrease in (TD/TA) support for this result This is consistent with research by Frank & Goyal (2007) and Huang & Kisgen (2013) as women are more likely than men to be risk-averse, deliberate, and evaluate information thoroughly before making decisions They also frequently set long-term goals and have a financial management plan to help them reach those goals Rather than using funds from debt financing, they typically lower debt to enhance capital from other sources such as capital mobilization, growing sales, or leveraging existing resources Therefore, the impact of female CEOs on financial leverage is generally smaller.
The correlation between CEO tenure and the debt/assets ratio is inverse A longer CEO tenure is associated with a lower debt-to-asset ratio.
This is because CEOs with extended tenures have the opportunity to develop and implement strategies that reduce debt and improve the company's financial health, ultimately benefiting shareholders Additionally, stable leadership fosters trust among shareholders and banks, granting the company easier access to capital for debt repayment and business expansion.
Furthermore, CEOs with longer tenures tend to feel a stronger sense of ownership and responsibility toward the company's long-term success.
Consequently, they are more cautious in making borrowing decisions, recognizing the potential risks to the company's sustainability This result same as the research of G Chen & Hambrick (2012).
The correlation coefficient between the CEO's total salary and the debt- to-total is a negative correlation in each other's relationship This result is compatible with many studies showing that when businesses agree to pay a high salary to the CEO, the CEO will proactively be alert to potential risks in the process of making debt decisions Accordingly, CEOs often tend to maintain and develop their current roles and positions when they are paid a fairly high salary by the company for their abilities, which also leads to being careful in making decisions about debt in the best way for the business to maintain the CEO’s desired salary This means that maintaining financial stability and protecting the capital structure of the business is the responsibility of CEOs when they wish to maintain high levels of income.
In addition, a CEO with a good income not only brings high benefits in reducing the frequency of debt decisions of the company but also increases the ability to focus on operating at full efficiency in the role and position that the CEO holds Thanks to this, cases of using too much debt for business activities at enterprises are significantly reduced Same as the research of Mehran et al (1999), Conyon et al (2011), and Morck et al (1988)
There is an inverse correlation in the relationship between the CEO’s age and leverage Many years ago, this was reflected in the studies of (Serfling, 2014) and (Y Chen et al., 2014) The most reasonable explanation for this negative correlation coefficient is that when businesses hire young CEOs to operate the company, they often aim for short-term goals and expect quick results They make decisions without deep vision because they do not have much experience in operations and administration, so they always want to make the most of using financial leverage to optimize operations for the enterprise effectively.
In contrast, older CEOs who have been in the profession for many years, often accept lower risks and devise strategies in a state of mind with calm, ready to bring profits with lower risks for businesses Experience can be seen through the decisions of older CEOs because they always accumulate knowledge during the period that they hold their position At the same time, the vision of these CEOs is always expanded, and can easily propose to help businesses develop in the future Therefore, they do not need to use excessive financial leverage to achieve business performance and often receive trust and support from shareholders and banks.
The correlation result between the duality of the person holding both the positions of CEO and chairman of the board of directors with the debt to total assets ratio is a positive correlation The result for the positive above is the explanation for using financial leverage to expand business activities and invest in high-profit projects, or buy stocks to create value for stocks by a person who concurrently holds the position of CEO and chairman of the board of directors to achieve certain purposes Normally, people who hold two positions above often have good financial control and make wise decisions to reduce risks In addition, to enhance the competitiveness of the business, the CEO often minimizes costs by giving the right to decide on the use of tax shields from increasing debt as well as debt management , limit unnecessary expenses.
Thanks to the proposed methods of using tax shields, businesses always comply with the law, helping to limit legal and tax-related risks This is proven in the research of Mubeen et al (2020) and Nazir et al (2012)
The correlation coefficient shows a significant positive between the CEO’s attendance and debt to total assets ratio of the enterprise The result explaining the positive relationship between the above two factors is the CEO's dedication to the company, which is expressed through the rate of attendance at full board meetings enough to make banks and some other investors more confident when making decisions to increase debt capacity for businesses with CEO‘s high attendance variables.
Besides, maintaining trust from partners and customers is also a very important part of helping CEO increase their ability to borrow to develop their businesses However, to gain the trust of partners or shareholders, there must always be assurance that the information communicated is accurate, clear, and official by the CEO when they attend meetings board of directors At the same time, when the CEO attends a full meeting, he can regularly propose opinions on effective strategies for risk management purposes to help the board of directors specifically grasp important problem situations about risks and provide preventive solutions This helps build trust from all parties and increases borrowing capacity.
The impact of the power of the CEO on leverage is positive and is significant at the level of 0.03 showing that a CEO with a high level of power will lead to using a high level of financial leverage Studies by Mubeen et al
( 2020) and Nazir et al (2012) have come to the following conclusions that through the implementation of financial strategies, spending, investment, and financing decisions are likely to be influenced highly by the CEO because they often use their maximum power to use financial leverage for their business.
This is to help businesses achieve increased efficiency in the business sector and create strengths to maximize competitiveness against other competitors.
At the same time maximize profits for the business and CEO People with high power often focus on profitable projects to make profitable investments and improve capital structure.
In general, the stronger the CEO's influence power will create a positive relationship with greater financial leverage, thereby not only helping to promote the reputation and maintain the position of CEO in the company but also creating value for shareholders and employees, helping the enterprise grow and develop in the best direction.
There is a positive and significant relationship between firm size (SIZE) and leverage ratio Because of economies of scale, businesses can raise their profitability and acquire a debt advantage This finding is consistent with the agency cost theory and trade-off theory of capital structure, as well as with research by Nguyen et al (2017a) and Salawu & Agboola (2008) When it comes to loan capital, larger businesses usually have easier access than smaller ones Bigger businesses typically outperform smaller ones in terms of company operations, debt repayment capacity, and trustworthiness with suppliers and lenders Furthermore, compared to smaller businesses, larger corporations typically have access to more market data.
There is a significant negative relationship in the correlation coefficient between firm age and leverage Accordingly, it is known that the company's age data has the smallest influence on the company's debt-to-total assets ratio, estimated to be about 0.0001 A reasonable explanation for the above negative correlation is shown when the age of the company increases, meaning that the business has existed for a long time in the market and has a stable customer base and revenue, so the business's financial leverage ratio is also reduced significantly Enterprises with many years of operation often focus on fostering and accumulating experience in operating and management activities at the enterprise for the aim of reducing the debt ratio and focusing on risk management operations the best.
CONCLUSION
Businesses in the market always face risks of debt, so to efficiently use leverage debt, businesses must investigate the factors affecting this leverage The purpose of this study is to examine the impact of CEO characteristics on financial leverage (TD/TA) of non-financial companies listed on the HOSE stock exchange during the period 2010-2022.
Based on financial reports data for 12 years (2010-2022) from 356 companies listed on the HOSE stock exchange, this study identified CEO factors that influence the capital structure of companies through multiple regression model analysis.
Specifically, the study found 12 factors that strongly influence the capital structure of companies Factors that positively affect the structure of capital include the CEO's dual role as chairman, CEO board meeting attendance rate, CEO shareholding rate, and revenue growth rate, whereas factors that negatively affect the structure of capital are: CEO age, CEO tenure, CEO income, CEO gender, company size, company age, tangible assets owned by the company and company profit This discovery will be a significant contribution and provide additional evidence to explain the presence of theories about capital structure in companies
Furthermore, the study has outlined the characteristics needed in a CEO suitable for managing leverage in companies We suggest that companies should hireCEOs with extensive experience, and long tenure at the company, and pay relatively high salaries to their CEOs Companies that accept high salaries for their CEOs and choose female CEOs tend to have lower debt ratios.
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