the determinant of capital structure does the ceo power matter evidence of the listed firms in vietnam hose undergraduate thesis of finance banking

VIETNAM GENERAL CONFEDERATION OF LABOUR TON DUC THANG UNIVERSITY

FACULTY OF FINANCE AND BANKING

SVTH : TRƯƠNG HOÀI NHIMSSV: B19H0064

SVTH : TRẦN THỊ NGỌC ÁNHMSSV: B19H0164

The determinant of capital structure: Does theCEO power matter?

(Evidence of the listed firms in VietNam HOSE) UNDERGRADUATE THESIS OF

FINANCE BANKING

Advised by

Dr Le Bao Thy

Thành phố Hồ Chí Minh, tháng 11/ 2024.

VIETNAM GENERAL CONFEDERATION OF LABOUR TON DUC THANG UNIVERSITY

FACULTY OF FINANCE AND BANKING

SVTH : TRƯƠNG HOÀI NHIMSSV: B19H0064

SVTH : TRẦN THỊ NGỌC ÁNHMSSV: B19H0164

The determinant of capital structure: Does theCEO power matter?

(Evidence of the listed firms in VietNamHOSE)

UNDERGRADUATE THESIS OFFINANCE BANKING

Advised by

Dr Le Bao Thy

Thành phố Hồ Chí Minh, tháng 11/ 2024.

To complete this report successfully, I would like to express my sincere gratitude to the lecturers and professors of Ton Duc Thang University, for their dedicated

teaching and guidance over the past four years.

I would like to express my sincere gratitude to my respected supervisor, Dr Le Bao Thy, for her enthusiastic support and guidance which helped me to complete my thesis today.

The internship period was short and I still lack a lot of experience and professional knowledge, so the choice of topic is inevitable Therefore, I hope to receive the understanding and comments of the lecturers so that my thesis can be completed as best as possible.

Finally, I would like to wish all the lecturers, especially Dr Le Bao Thy and the lecturers at the Faculty of Finance and Banking, good health I wish all the lecturers and Dr Le Bao Thy success in their teaching and life.

I hereby declare that this thesis is the result of my research, based on theoreticalfoundations and data collected from reputable sources, as well as data from thelibrary of Ton Duc Thang University, under the guidance of Dr Le Bao Thy -Lecturer at Ton Duc Thang University The data presented in this thesis iscompletely truthful.

TP Hồ Chí Minh, Day 03 Month 01 Year 2024

Trần Thị Ngọc Ánh

DECLARATION OF AUTHORSHIP

I hereby declare that this thesis was carried out by myself under the guidance andsupervision of ……… ; and that the work and theresults contained in it are original and have not been submitted anywhere for anyprevious purposes The data and figures presented in this thesis are for analysis,comments, and evaluations from various resources by my work and have been dulyacknowledged in the reference part

In addition, other comments, reviews, and data used by other authors, andorganizations have been acknowledged, and explicitly cited

I will take full responsibility for any fraud detected in my thesis Ton Duc ThangUniversity is unrelated to any copyright infringement caused by my work.

Ho Chi Minh City, day 03 month 01 year 2024Author

Trần Thị Ngọc Ánh

ABSTRACT

LIST OF FIGURES

LIST OF TABLES

ABBREVIATIONS

CHAPTER1: INTRODUCTION

Capital structure planning is one of the important issues that business managers paygreat attention to making informed decisions in planning the capital structure ofenterprises, managers need to properly identify factors affecting the capitalstructure.

Accordingly, the capital structure of an enterprise is one of the most importantdecisions of an enterprise, which is how an organization manages and allocates itscapital resources including various sources of capital such as equity, borrowedcapital, and other financial sources Therefore, the capital structure has a significantrole in facilitating business activities, helping enterprises have sufficient capital to

expand production, buy and sell assets, and also helping to build confidence frominvestors when the capital structure of the enterprise is at a good level it also helpsthe company to access loans with lower interest rates The influence of capitalstructure relates to the stability of the organization as well as the effect onprofitability (Frank & Goyal, 2009).

, risk (Zou & Xiao, 2006), and value of a business (Tang & Chang, 2024)

Moreover, a good capital structure enhances financial capacity, and riskmanagement (trich bai) The researchers combined theoretical and empiricalanalysis and developed theories about the capital structure of enterprises in practicesuch as pecking order theory, and trade-off theory These theories have providedimportant insights for managers in planning capital structures In Vietnam, studieson capital structure and factors influencing capital structure have been doneextensively (trich bai), but few studies have looked at incorporating the influence ofCEO characteristics on capital structure

Most research studies focus on financial factors of companies such as profit,revenue, return on equity, debt-to-equity ratio, current ratio, beta, and volatility itsevaluate and measure the capital structure of a business, previous studies have oftenrelied on measures of financial leverage of the enterprise, including debt ratio,short-term debt ratio, long-term debt ratio, total assets, revenue, profit; intangibleassets, Tangible assets (Llobet-Dalmases et al., 2023), (Rehan et al., 2023), (Frank& Goyal, 2009), (Lim et al., 2020) In addition to the above factors, there areresearch papers that focus on aspects of the CEO's role such as and However, thefactors considered are still incomplete, so we conducted this research paper tosupplement other aspects and factors of the CEO that have not been covered inprevious studies (Carpenter et al., 2004), (Skarlicki et al., 2023)

The study mentions that the important role the of CEO is a factor directly related tocertain strengths and weaknesses of corporate governance, in addition to the powerof the CEO also affects the value of the company (Modigliani & Miller, 1958),(Bebchuk et al., 2011) The role of the CEO encompasses many aspects and some ofthe key important roles to mention are in terms of strategic leadership, the CEO isresponsible for defining and implementing organizational strategy, they are the oneswho make long-term strategic decisions and guide the growth of the company andconsider the development of product aspects, market, marketing, finance, and

technology to achieve company growth and success The decision to raise capitalthrough the issuance of stocks, bonds, or bank loans as well as being responsible forthe company's financial risk management decisions regarding investment, financing,or asset purchases are also important roles that the CEO assumes In addition, theCEO is always the representative of the company in meetings with shareholders,business partners, and legal representatives of the company

CEO assumes many important roles in many aspects of finance, and strategy Therefore, the influence of the CEO on various factors has always been the subjectof extensive research, and one of them is the influence of the CEO on the capitalstructure, the CEO can make an important contribution to influencing the capitalstructure of the company through financial strategic decisions, business and choosebetween owners of capital or borrowed capital to make investment decisions andexpand the size of the company Executives can determine how capital is used, seeknew sources of capital, manage risk, and build relationships with investors.

Along with the role of the CEO, we find that with the basic theories of managementpower, the power of the CEO is classified into 2 basic types of power as follows:Ownership includes the number of meetings of the Board of Directors and thenumber of shares held Reputation power, including tenure, age, and gender.(Huang et al., 2024) Diversity and different perspectives in power yield differentperspectives and leadership styles (Pollock et al., 2023)

Our contributions to this study are as follows:

First, we used a data sample of 356 non–financial firms over 12 years (2010-2022)including all 4272 observations of companies listed on the HOSE stock exchange.We also found dynamic regression models used to explore the influence of eachfactor on capital structure.

Second, we recognize the importance of researching and better understanding theimpact of CEO power on the capital structure of businesses as it provides usefulinformation for business managers, investors, and policymakers This is to identifytrends affecting the characteristics of the CEO and the company's financialindicators on the capital structure between sectors and listed companies in Vietnam.This thesis attempts to provide answers to the below questions:

1/ Which factors affect capital structure choices in non-financial firms?

2/ Does there exist a relationship between CEO characteristics such as CEO gender,Board of Directors, CEO holding, CEO income, frequency of board meetings… andthe capital structure of non-financial firms in Vietnam?

The remaining portions of the thesis are organized as follows

In Chapter 2, we provide our developed hypothesis and a survey of the relevant literature The data and study methods are covered in Chapter 3

In Chapter 4, we present our primary findings and conclusions The implications and limitations of this study are finally covered in Chapter 5, where we bring this study to a close.

Variable Variablename

Measurement ExpectedsignDependent variable

Leverage Debt toEquityRatio Independent

CEO birth CEO birth CEO birth measured by years

CEO income CEO

income CEO total current compensation(salary + bonus)CEO duality Duality The dummy variable takes the valueof 1 if the CEO and the Chair arethe same person and 0 otherwiseCEO ownership

ratio CEOpower The dummy variable that takes onthe value of 1 if the CEO ownsmore than 3% of the outstandingvoting shares, and 0 otherwiseNumber of

meetings that theCEO takes part inthere

Attend Number of meetings that the CEOtakes part in there

Long debt LDEBT The total amount of outstandingdebt that a business has that is duein 12 months or more

Equity EQUITY The sum of money that the owner ofa business has invested in or ownsNet income NI Sales minus cost of goods sold,

general expenses, taxes, and interestTangible fixed asset TFA Limited monetary worth that is

typically physicalIntangible fixed

asset IFA Identifiable and non-monetarySales SALES Gross sales less allowances,

refunds, and discounts yield thisoutcome.

CHAPTER 2: LITERATURE REVIEW AND HYPOTHESISDEVELOPMENT

2.1 Theories of Corporate Capital Structure"2.1.1 Concept of Corporate Capital Structure

Capital structure is a financial term that describes the origin and formation methods of the capital that a company can use to purchase assets, and equipment, and

conduct business operations.

Currently, there is no official definition of capital structure, but in essence, it is understood as the relationship between debt and equity in a company's capital In this study, capital structure is defined as the ratio of total debt to total equity of a company.

Debt-to-equity ratio

Debt-to-equity ratio = (Total debt / Equity) * 100%

2.1.2 Theories of Corporate Capital Structurea Traditional Capital Structure Theory

This theory assumes that there is an optimal capital structure where the company's management can increase the value of the company by using the leverage ratio appropriately.

b Capital Structure Theory of Modigliani and Miller

The first formal theory of capital structure is the Modigliani and Miller (M&M) theory presented in their studies in 1958 and 1963 In 1958, assuming no corporate income tax, M&M showed that capital structure has no effect on the value of the firm, or that the firm has no way to increase value by changing its capital structure In 1963, M&M incorporated corporate income tax into the research model, showingthat the value of a leveraged firm is equal to the value of an unlevered firm plus the present value of the "tax shield." Modigliani and Miller recommended in their studies that companies should use as much debt as possible because interest payments are tax-deductible The interest expense is tax-deductible, so a larger interest expense will help reduce taxable income and result in lower taxes on profits Their other studies included the effects of taxes and bankruptcy costs.Overall, M&M showed that there is a relationship between capital structure and firm value.

However, the capital market is not perfect and there are always many uncontrollablecosts Therefore, some later studies have been proposed:

c Trade-off Theory

The Trade-off Theory of Capital Structure was first studied by Kraus and

Litzenberger (1973) and showed that the market value of a leveraged firm is equal to the value of the unlevered firm, plus the value of the tax shield minus the value equal to the corporate income tax rate times the present value of the bankruptcy cost This shows that the benefits of the tax shield are offset by the losses if

bankruptcy occurs All capital structure theory studies show that there is an optimal capital structure for a company, at which the benefits of the tax shield best offset thecosts of increasing debt, such as financial costs.

d Pecking Order Theory

The Pecking Order Theory was first proposed in 1984 by two economists, Stewart C Myers, and Nicholas S Majluf, in the paper "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 suggests that companies will prefer to use internal capital before using external capital If internal capital is not sufficient to finance investment opportunities, the company will use debt before issuing equity According to this theory, companies tend to prefer to use internal capital for the following reasons:

 Internal capital is free: Internal capital does not have to pay interest, so it

has a lower cost than external capital.

 Internal capital provides flexibility: Companies can use internal capital to

finance investment opportunities without having to negotiate with external investors.

This theory partly explains why some companies with high profits often have low debt ratios.

e Agency Cost Theory

This theory argues that the financial activities of a company involve different stakeholders The main ones are shareholders, managers, and creditors They have different interests and approaches to debt Therefore, conflicts may arise, and to resolve these conflicts, agency costs will arise Jensen and Meckling (1976) argue that an optimal structure can be achieved by balancing agency costs with the benefits of using debt.

2.1 Các lý thuyết về cấu trú vốn của doanh nghiệp2.1.1 Khái niệm cấu trúc vốn doanh nghiệp

Cấu trúc vốn là thuật ngữ tài chính nhằm mô tả nguồn gốc và phương pháp hình thành nên nguồn vốn để doanh nghiệp có thể sử dụng mua sắm tài sản, phươngtiện vật chất và hoạt động kinh doanh.

Hiện nay vẫn chưa có một khái niệm chính thức về cấu trúc vốn tuy nhiên vềbản chất cấu trúc vốn được hiểu là mối quan hệ giữa nợ và vốn chủ sở hữu trong nguồn vốn của doanh nghiệp Trong nghiên cứu này, cấu trúc vốn được hiểu là tỷ lệ tổng nợ trên tổng vốn chủ sở hữu của doanh nghiệp