Finance dissertation on determinants of firm’s profitability the case of construction companies listed on vietnamese stock market

Question 2: What are the relation between corporate profitability of the construction enterprises and financial variables such as liquidity, leverage and asset ratio; non-financial eleme

Dissertation submitted in partial fulfillment of the

Requirement for the MSc in Finance

FINANCE DISSERTATION ON DETERMINANTS OF FIRM’S PROFITABILITY: THE CASE OF CONSTRUCTION COMPANIES LISTED ON VIETNAMESE STOCK MARKET

PHAM TRUNG NGHIA

ID No: 22080943 Intake 6

Supervisor: Prof Dr Pham Thi Hoang Anh

September 2023

The University of the West of England

Pham Trung Nghia

22080943

DETERMINANTS OF FIRM’S PROFITABILITY: THE CASE OF CONSTRUCTION

COMPANIES LISTED ON VIETNAMESE STOCK MARKET

A Project presented in part requirement of the degree of Master Science in Finance and investment with honours

in Banking and Finance of the University of the West of England, Bristol

Academic year of presentation: 2022/2023

Student projects and dissertations

Student’s name: Pham Trung Nghia

Award: Master Science in Finance and investment

Project/dissertation title: Determinants of firm’s profitability: The case of construction

companies listed on Vietnamese stock market

I give permission for UWE Library Services to hold and make available an electronic copy of this project/dissertation

Signed:

Date: 10/09/2023

E-mail address: phamtrungnghia94@gmail.com

Phone number: 0971.50.99.59

my dissertation at the final year of my studies.

My appreciation also extends to teachers of the MSC in Finance and Investment program at Banking Academy of Vietanm for their great encouragement, insightful comments and academics questions Thanks also go to the authority of the University of the West of England for having provided me with a well-designed and academic curriculum, which by and large improves my knowledge and skills in doing this project

More particularly, I would like to thank my beloved family and friends for their unceasing encouragement and friendship during my university years Finally, I want to record

my sense of gratitude to one and all, who have directly or indirectly given me their helping hand in this venture

ABSTRACT

The profitability of businesses is shaped by a multitude of factors, encompassing elements like financial arrangement, leverage, company size, age, and unique business attributes As such, understanding the determinants that influence the trajectory of enterprise profitability stands as a pivotal and indispensable cornerstone for managers This comprehension equips them to furnish effective remedies aimed at enhancing performance evaluation This investigation centered around data gleaned from 30 publicly listed construction firms in Vietnam, spanning the years 2015 to 2022 With a dataset comprising 240 instances, the study harnessed quantitative techniques and leveraged the FEM regression model, corroborated by the Hausman test The resultant findings of the research are as follows: Company longevity (AGE) and debt-to-equity ratio (DER) exhibit an adverse correlation with profitability Both the rate of revenue growth (GRR) and the ratio of fixed assets to total assets (FSR) exert favorable influences on profitability Company size (SIZE) exerts a positive impact

on profitability Liquidity ratio (LIQ) and Gross Domestic Product (GDP) sustain a positive connection with profitability In contrast, the inflation rate (INF) bears a negative impact, albeit its effect remains somewhat ambiguous Derived from these research outcomes, the authors have formulated a range of specific recommendations and strategies to ameliorate the profitability of construction companies featured on the Vietnam Stock Exchange

3.4.2 Descriptive statistics of the variables in the model 24

LIST OF ABBREVIATIONS

FMCG Fast Moving Consumer Goods

FSR Fixed asset to total asset ratio

OESP Organization-environment structure-performance

LIST OF TABLES

CHAPTER 3: METHODOLOGY & DATA Error! Bookmark not defined Table 3.1: Descriptive analysis 249

Table 4.1: Regression result of ROA 3Error! Bookmark not defined.

Table 4.2: Regression result of ROE 37

CHAPTER 1: INTRODUCTION 1.1 Rationale

Economic growth has always been one of the prioritized goals of any nations However, due to different factors, the economic growth among countries sees an uneven trend In the context of the global economic downturn and the lingering impact of challenges on the recovery process, many international organizations continue to highlight Vietnam’s positive economic outlook in 2023 thanks to the government's concerted efforts in boosting socio-economic recovery The economic outlook from 2023 to 2026 is for rapid economic expansion, with GDP growth forecast to grow at a pace of around 6.5% in 2023, with sustained strong growth at a pace of around 6.7% per year over 2024-2026, thanks to the rebound of exports and easing domestic policies Inflation is expected to be controlled below the State Bank of Vietnam's 4.5% target

The expansion of Vietnam's economy is considerably aided by the building sector, which significantly boosts GDP On average, industry and construction provide roughly 40%

of the country's GDP, of which the construction sector alone contributes about 6-7% of GDP yearly Vietnam’s construction industry has been the best performing in the Asia Pacific region, having had the highest revenue growth rate in recent years As an important pillar of the Vietnamese economy, the construction sector accounted for an increasing contribution to the GDP while being one of the largest employers in Vietnam, also supporting the development of other industries At the same time, it has been among the industries that attracted the most foreign direct investment in the past years Therefore, to maintain economic growth, it is essential to comprehend the variables that determine the profitability of building firms

Profit is the driving force behind all company endeavours and has a significant impact

on productivity (Nimalathasan, 2009) It is essential for a company's long-term survival and development as well as for attaining the other financial goals of a business organization

Therefore, in order to stay in business and fend off competition from businesses operating in a similar industry, profit maximization is a crucial objective of any corporation (Gitman and Zutter, 2002) While profit can be considered as an absolute measure of the ability to earn income, profitability is a relative measure of earning capacity, is considered as one of the basic indicators to evaluate the production and business efficiency of an enterprise It demonstrates the company's capacity and ability to earn return after deducting all the costs in a period of time

by using working capital, asset level (Alarussi and Alhaderi, 2018; Margaretha and Supartika, 2016) The profitability of organizations and how to enhance it is one of the major concerns of researchers in the field of economics, finance, accounting and management It is one of the most essential aspects that signals management’s achievement, shareholders’ fulfilment, appeal for investors and the company’s sustainability (Bekmezci, 2015) Profitable organizations not only generate economic benefits by contributing to national budget revenues, but also create job opportunities, invest in research and development, stimulate innovation, enhance production methods, expand commercial activities and improve the quality of products and services, are socially responsible, thereby contributing to promoting overall socio-economic growth Research has demonstrated that business performance greatly influences revenue creation and the overall growth of the economy (Lazăr, 2016; Olutunla and Obamuyi, 2008) Therefore, academics have sought to combine new theoretical techniques and models

to elucidate the determinants of profitability both at the business and industry level

Despite the impact of the COVID-19 pandemic, the Vietnamese economy continued to demonstrate significant growth patterns, making the country a favorable investment destination not only for local people but also for foreign investors Vietnam construction market was valued at $87.7 billion in 2022 The market is projected to grow at an AAGR of more than 6% during the period 2024-2027 Investment under Vietnam’s draft Power Development Plan Eight (PDP VIII) for the period of 2021–30, with a vision towards 2045, will support

construction output over the forecast period Until 2023, the supply of industrial land in the North is expected to increase by an average of 7.4% per annum, while the supply of warehouse and ready-built factories is also expected to increase by 46% and 10% per annum, respectively

In the residential construction market, high-end condos in the city remained in demand despite the pandemic, and there were no signs of a fall in prices

The real estate and construction sector has experienced remarkable growth, attracting a wave of new investors This surge in interest has seen a diverse range of players enter the market, both from domestic and international domains Prominent among the domestic developers are industry giants like Vinhomes and Thanh Cong Group, who have strategically positioned themselves to leverage the burgeoning opportunities within this dynamic sector Meanwhile, foreign developers, including renowned names such as JD.com, Fraser and ESR, have also recognized the potential for substantial returns in the market, driving them to establish a presence and invest in various projects These foreign entities bring with them a wealth of expertise and global perspectives that can further elevate the real estate and construction landscape in the region In addition to these developers, investment funds have played a pivotal role in fueling growth by channeling their resources into promising ventures

A recent example is Actis, an investment fund that has publicly announced its commitment to invest in a local industrial park operator, signaling its confidence in the sector's future potential Overall, this influx of diverse investors, both domestic and international, as well as the active involvement of investment funds, is reshaping the real estate and construction landscape, promising a vibrant and prosperous future for the industry in the post-pandemic era

In addition, Vietnam's stock market witnessed a strong boom in the number of investors participating in the market Currently, the stock market recorded more than 7.03 million securities accounts, including nearly 7 million accounts of domestic investors, equivalent to about 7% of the population of Vietnam With the increasing number of investors taking part in

the stock market boom, it becomes vital for them to appropriately appraise a company's prospects for profitability Making informed decisions about investing in a particular firm needs a thorough study of its financial performance, growth potential, and overall profitability

By precisely predicting a company's profitability potential, investors can make better educated investment choices and avoid any risks associated with their investments Moreover, policymakers can more successfully create plans to enhance the financial performance of construction enterprises by understanding these drivers

For the mentioned reasons, the title topic for this study is:

“Determinants of firm’s profitability: The case of construction companies listed on Vietnamese stock market”

1.2 Objectives

Profitability plays an important role in the production and business activities of each enterprise, whether or not an enterprise exists and develops, the decisive thing is the profitability of the business Therefore, profitability is considered as one of the basic indicators

to evaluate the production and business efficiency of an enterprise This study will focus on clarifying the factors that can affect the profitability of construction enterprises listed on the Vietnam stock market in order to guide construction enterprises to be proactive and active in decisions to improve profitability and competitiveness

1.3 Research questions

For the proposed topic, there would be three research questions to be answered as listed below:

Question 1: What is the factors that can affect the profitability of construction

enterprises listed on the Vietnamese stock market?

Question 2: What are the relation between corporate profitability of the construction

enterprises and financial variables (such as liquidity, leverage and asset ratio); non-financial elements (such as company size, corporate governance and market rivalry)?

Question 3: What are the implications for policymakers to boost the growth of the

construction enterprises? Providing suggestions and insights to investors, legislators and construction enterprises in order to improve profitability and competitiveness

1.4 Scope of research

This research would be carried out solely in Vietnam Vietnam has risen to prominence

as the most recent East Asian growth engine, attracting the attention of international investors

It is in the midst of a transformation The government's economic reforms transformed the country into one of the world's fastest-growing economies The construction market in Vietnam

is fiercely competitive, with big domestic and international businesses The building business

in Vietnam has grown significantly in recent decades Furthermore, Vietnam's construction capability has advanced significantly, allowing it to handle the building needs of large-scale projects It is predicted that the production value of construction industry will reach US$ 460.61 billion in 2032 The increasingly fast and strong development of the construction industry in Vietnam requires the government to have appropriate macroeconomic policies and economic conditions to stabilize the economic development, so it is necessary to conduct research to better identify the possible impacts on industry profitability

The time period studied in this research is 8 years from 2015 to 2022, which is long enough to represent the changes in Vietnam’s construction industry

1.5 Research structure

The research paper is organized into five parts

Chapter 1: Research introduction This chapter gives general information on the

research’s rationale, research questions, scope and scale and briefly introduces the research

structure

Chapter 2: Literature review A general summary of previous studies is given in this

chapter to present how past researches have examined such issue

Chapter 3: Methodology and Data This chapter aims to describe the research

methodology and the regression model is presented to test the connection between different

financial factors, non-financial factors and profitability of the construction enterprises

Chapter 4: Research results and discussions In this chapter, the regression model is

presented to test the connection between different factors and profitability of the construction

companies A conclusion can be drawn from this chapter

Chapter 5: Conclusions and suggestions In this final chapter, possible implications

for investors, legislators and construction enterprises are suggested and provide an insight

views in order to improve profitability and competitiveness of the construction companies

CHAPTER 2: LITERATURE REVIEW 2.1 Theoretical background

Theoretically, the elements likely to explain a firm's profitability are combines of three groups: individual business features, industry variables and market-related variables (Yazdanfar, 2013) Much effort has been made to clarify the impact of these aspects in influencing a company's profitability Several overarching theoretical perspectives on corporate profitability exist, including market-based view (MBV), organization-environment structure-performance (OESP), structure-conduct-performance (SCP), strategy-structure-performance (SSP), and resource-based view (RBV) While classic methods such as the SCP and MBV views highlight the role of industry features in predicting company profitability, the RBV views emphasize the importance of internal variables at the corporate level companies (Amit and Schoemaker, 1993; Peteraf, 1993; Mahoney and Pandian, 1992; Barney, 1991; Wernerfelt, 1984)

Due to the availability of existing data, current research focuses on RBV and individual business features Unlike other methods, this perspective indicates that a firm's profitability is predominantly controlled by internal characteristics rather than external forces (Barney, 1991)

In other words, RBV reflects a company's profitability potential in terms of numerous aspects such as specific traits, capabilities, and resources at the firm level According to RBV, organizations follow diverse historical trajectories, leading to the establishment of distinctive attributes that effect their capacities in different ways (Wernerfelt, 1984; Jovanovic, 1982)

Successful firms in an industry acquire their success through accessing a wide array of resources, so establishing a competitive edge In this sense, "resources" comprise tangible and intangible assets like cash, loans, firm qualities, capabilities, organizational procedures, information and knowledge (Wernerfelt, 1984) Therefore, the strategic purpose of every

organization is to organize a certain mix of resources in order to boost its competitiveness, resulting to higher profitability (Barney, 1991)

2.2 Empirical research

Although the construction industry has made positive contributions to the country's economic growth, in recent times has experienced many difficulties and challenges, especially the ability to access bank credit With the complicated evolution of the Covid-19 pandemic, domestic and international financial resources are narrowed, greatly affecting the business activities of construction enterprises Therefore, the consideration and identification of factors affecting the profitability of construction enterprises play an important role

In the world, there have been many studies examining the impact of factors on the profitability of enterprises in general and enterprises in the construction industry in particular According to empirical studies, there are two primary categories of the variables impacting profitability Intrinsic elements in the first group include financial leverage, solvency, sufficiency, independence, liquidity, corporate size, growth, capital structure, and age of the company business and other managerial choices (Blažková and Dvouletý, 2018) The second category focuses on external determinants that can be divided into sector-level and macro-level indexes, which are two different types of indicators: Industrial-level indicators include things like import growth and industry growth, whereas macro-level indicators include things like the growth rate of the gross domestic product, inflation, interest rates, and financial market returns (Grau and Reig, 2018) The research findings vary depending on the unique traits of every nation, each industry, and different stage of economic development The impact of various variables on return on assets (ROA) and return on equity (ROE) has been the subject of numerous empirical research, although the direction of this relationship has not been consistent among researches

The study by Lazaridis and Tryfonidis (2006) focused on 131 companies listed on the Athens Stock Exchange between 2001 and 2004 Their goal was to ascertain how capital structure and profitability were related to make money The cash conversion cycle, the fixed asset to total asset ratio, the debt ratio, and the size of the business are independent variables that were taken into account in the study The findings of the study indicate that the debt ratio and cash conversion cycle have a detrimental impact on an enterprise's profitability Debt ratios also have a detrimental effect on profitability at the same time In contrast, profitability is positively impacted by firm size and the proportion of fixed assets to total assets

Hifza Malik's 2011 study in Pakistan's insurance sector analyzed how firm-specific factors (company age, size, capital volume, leverage ratio and loss ratio) affect profitability, measured by Return on Assets Results showed no significant relationship between company age and profitability However, a significantly positive link was found between company size and profitability, emphasizing the advantages of scale in the industry Additionally, higher capital volumes were associated with greater profitability Conversely, loss and leverage ratios displayed negative but significant correlations with profitability, highlighting the importance

of risk management and debt control for insurance companies In essence, Hifaz Malik's research underscores the crucial factors shaping profitability in Pakistan's insurance sector, offering valuable insights for industry professionals and policymakers

In 2012, Tan and Floros undertook a research project aimed at examining the variables that exerted an impact on the financial performance of 101 banks in China While adjusting for variables relevant to the banking sector, the researchers examined the effect of inflation on bank profitability using variables specific to banks The study employed a dataset comprising

197 observations derived from bank-specific panel data spanning from 2003 to 2009 To conduct the analysis, the authors utilized Generalized Method of Moments estimators The study's findings revealed a strong correlation between bank profitability, the growth of the

banking sector, inflation, cost effectiveness and the expansion of the Chinese stock market This demonstrates that bank profitability rises as the banking business develops but profitability is also positively impacted by inflation The authors also provided an explanation

of how high tax rates and unusual banking practices have an impact on low profitability

In a study conducted by Yazdanfar (2013) in Sweden, the factors that affect a company's profitability were identified using a sizable sample of 12,530 micro-firms separated into 4 categories and 87,000 observations made between 2006 and 2007 The resource base method was applied to investigate the collection of variables The findings of an unrelated regression technique test revealed that company age and industry linkages have a negative impact on profitability whereas productivity and lagged profitability have a positive relationship with profitability

Mohamed Tailab (2014) examined how capital structure affected the financial performance of 30 US energy companies using information from corporate filings from 2005

to 2013 Research results show that total debt has a negative impact on return on asset and return on equity, company size and short-term debt only affect ROE, in which size and short-term debt has a negative impact on ROE, the remaining factors have negligible impact

Master & Yong (2014) conducted a study to explore the relationship between capital structure and financial performance by looking at 1,130 non-financial firms listed on the Shanghai Stock Exchange In this study, the author has built a regression model with the dependent variable ROE and the independent variables include debt to equity ratio, speed growth rate of total assets and business size They found that financial performance is significantly affected by debt-to-equity ratio and firm size, which means that high debt ratio and large scale can negatively affect the financial performance of enterprises However, the growth rate of total assets does not have a significant impact on financial performance or the growth of total assets does not improve financial performance

Doan & Dinh (2014) examined the capital structure and revenue of companies that are listed on the Vietnamese stock market The sample consists of 235 businesses that were listed

on the Ho Chi Minh City Stock Exchange between 2011 and 2013 The findings demonstrate that the debt to equity and long-term debt to equity ratios have opposing effects on profitability while capital structure has a detrimental impact on profitability, whilst the opposite is true The size of the company and the total assets' depreciation are unrelated to the return on equity and earnings per share Furthermore, profitability is not much impacted by growth

Georgeta Vintila et al (2015) looked at the factors that might have affected the financial performance of 46 Romanian companies listed on the Bucharest Stock Exchange between 2009 and 2013 To ascertain the link between profitability (as assessed by ROA, ROE, and stock price) and independent factors (such as debt ratio, size, liquidity, revenue growth, company age, and asset turnover), the authors used unbalanced panel data using a multivariable regression model According to the research, the debt ratio and revenue growth have a detrimental effect on the profitability of the enterprises under examination This suggests that businesses with high debt levels and erratic revenue growth typically have subpar financial results On the other side, it has been discovered that business size and profitability have a positive association This implies that larger businesses have greater potential for profit Asset turnover, liquidity and profitability were also not found to have a statistically significant link

in the study, demonstrating that these factors had no bearing on the financial performance of the research paper's organizations

Zeeshan Fareed and his colleagues (2016) conducted a study to look at how 16 companies in the Pakistani energy and electricity sector fared financially from 2001 to 2012 They looked at factors like company size, age, growth rate, productivity, financial leverage, and power crisis The collection of variables that best estimate the impact of independent factors on dependent variables (ROA is a proxy for profitability) were highlighted using the

Radom effect model The study's findings show that firm size, firm growth, and power crisis have positive effects on a company's profitability whereas firm age, financial leverage, and productivity have negative consequences Additionally, organizations with faster growth rates will also be able to achieve higher profitability because firm size is the most significant empirical indicator of profitability in Pakistan's energy and electrical sector

Adebayo Sayedoyin Ifeduni and Onyeiwu Charles (2018) looked at the elements influencing Nigerian manufacturing businesses' profitability Twelve firms that were listed on the Nigerian Stock Exchange made up the sample for this study The dependent variables are ROA and ROE, which serve as proxies for the company's profitability, whereas the independent factors are Size, Debt Ratio, and Asset Growth Panel data regression analysis and the Fixed Effects Model are both used in this study According to empirical data, asset expansion has no discernible link to business profitability, although size and debt ratio do

In 2018, Alarussi and Alhaderi conducted a thorough analysis of data from 120 companies listed on Bursa Malaysia, spanning a three-year period (2012-2014) Their study focused on examining these companies' annual reports and assessing profitability using Return

on Equity and Earnings per Share as key indicators The results of their research unveiled several intriguing relationships between financial metrics and profitability Notably, a strong positive correlation emerged between firm size, as measured by total sales, efficient management of working capital, and overall company efficiency assessed through the assets turnover ratio Larger companies with effective working capital management and higher asset turnover ratios appeared to be more profitable Conversely, the study also revealed a negative relationship between profitability and both the debt equity ratio and leverage ratio This suggests that as these ratios increased, profitability tended to decrease, indicating that higher levels of debt or leverage might hinder a company's financial performance The study found no significant link between liquidity, as measured by the current ratio, and profitability This

suggests that a company's current assets and liabilities did not directly impact its overall profitability, underscoring the multifaceted nature of financial performance drivers

G Thenmozhi and Vijaykumar (2019) examined the variables influencing the profitability of FMCG firms from 2005 to 2017 in India Panel data estimates for 82 businesses serve as the basis for the multiple regression model employed in this study Additionally, he utilized Return on Capital as the dependent variable, whereas size, debt, liquidity, inventory turnover ratio, asset turnover ratio, prior profitability, growth, GDP, and interest rates were employed as independent factors The data demonstrate that business size and asset turnover have the greatest effects on a company's capacity to increase profitability

Homaidi and his colleges (2021) delved into the dynamics impacting the profitability

of 1,308 publicly traded companies on the Bombay Stock Exchange in India spanning the years from 2011 to 2018 This investigation employed a range of statistical models, including pooled, fixed, and random effects models The central focus of the study was profitability, gauged through three key indicators: return on equity and earnings per share The independent variables under scrutiny encompassed liquidity, leverage, company efficiency, firm size, and working capital The study's findings unveiled compelling insights into the relationships between these variables and profitability Notably, leverage, company efficiency, and firm size exhibited robust correlations with profitability, as measured by ROE Furthermore, the results illuminated that both company efficiency and firm size were positively linked to firms' profitability, as assessed by both return on equity and earnings per share

Ahmeti and Iseni (2022) conducted a comprehensive analysis using a dataset encompassing the financial performance of 11 insurance companies spanning the years from

2015 to 2020 Their research sought to investigate the impact of specific company-related factors, including but not limited to liquidity, company size, company age, tangible assets, leverage, company capital, and the growth trajectory of the company These factors were

examined in relation to two key indicators of profitability: return on assets and net profit margin, which served as the dependent variables in their study The regression analysis employed in their study yielded noteworthy findings In the case of ROA, the results demonstrated that company size, leverage, and the age of the company exerted significant and discernible influences on this profitability metric within the insurance industry On the other hand, when scrutinizing the NPM of insurance companies in Kosovo, the research highlighted that the size of the company and the growth trajectory of the firm were the pivotal factors exhibiting significant effects on this particular aspect of profitability

2.3 Research gap

It is clear from the review of researches mentioned above that a wide range of factors affect an organization's financial performance There are numerous consistent outcomes, but there are also various and occasionally incompatible results Additionally, these studies mostly look at the variables influencing the effectiveness of listed firms, whereas few studies discuss the variables influencing the effectiveness of listed companies in a specific industry, especially

in Vietnam The factors impacting the performance of businesses must be specifically investigated in order to better understand their effects on the performance of businesses in a certain industry because every business sector has unique characteristics

Businesses in the specific field of the construction industry have unique traits, such as the manufacturing of single items, the value of major works and a variety of activities Additionally, changing scale and goods in the construction industry takes time, necessitating the utilization of huge company resources Therefore, the factors affecting the success of building firms must be the subject of independent investigations This will offer empirical proof and serve as a helpful resource for better understanding of how these factors affect the success

of companies across various business lines The findings of this study will also be helpful

information for stakeholders in the Vietnamese construction industry, including investors, business managers, state management agencies and others

CHAPTER 3: METHODOLOGY & DATA 3.1 Conceptual Framework

This study focuses on supporting the following relationships according to the literature review and empirical research:

The investigation involves the following 8 hypotheses:

H1: Firm size (SIZE) has a positive impact on the profitability of construction companies listed

on Vietnam’s stock marrket

An organization's market share and reputation are significantly affected by its size, which has

an impact on its profitability (Shepherd, 1971) In addition, the size of a firm affects its resource capacity, its prospects for cooperation with other firms, and its ability to diversify easily (Frank

& Goyal, 2003) According to the trade-off hypothesis, large firms are more favorable when borrowing money In addition, when taking out large loans, they will be eligible for tax benefits that allow them to pay less corporate tax as interest expenses are deductible One of the most important requirements for a construction company to bid and win important projects is that the size of the company must be large enough, which is reflected in the total assets

H2: Firm age (AGE) has a positive impact on the profitability of construction companies listed

on Vietnam’s stock market

REVENUE GROWTH RATE (H6)

GDP GROWTH RATE

(H8)

FIRM’S PROFITABILI

TY (ROA, ROE)

The age of the company was determined by counting the years from the initial listing until the start of the study According to Stinchcombe (2000), businesses with a long history of operation are more seasoned in business activities and thus can avoid certain risks in the course of operations and receive incentives when taking out a loan Therefore, the age of the company will have a favorable impact on the business performance

H3: Debt to equity ratio (DER) has a negative impact on the profitability of construction companies listed on Vietnam’s stock market

Business leaders prefer to use internal sources of cash rather than loans because, according to the pecking order theory, they always have more knowledge of the firm's value than outside investors However, in difficult times, businesses may not have enough internal capital, forcing them to take out loans, which reduces their ability to operate efficiently Thus, the pecking order theory states that as the amount of loans increases, the profits of the firm decrease

H4: Liquidity ratio (LIQ) has a positive impact on profitability in construction companies listed

on Vietnam’s stock market

Smooth project execution, positive supplier connections, and the capacity to respond to emergencies are all made possible by sufficient money The company's reputation, upcoming business, and total profitability all benefit from this operational steadiness However, it's best

to avoid having too much liquidity because it might result in lost investment opportunities and poor profitability

H5: Fixed assets to total asset ratio (FSR) has a positive impact on profitability in construction companies listed on Vietnam’s stock market

Office buildings, equipment and vehicles are the main fixed assets of the construction industry

In construction businesses, these resources are essential to the production process Enterprises investing in machinery of all kinds will be proactive in the construction process and can complete the work on time or earlier than schedule In addition, fixed assets can become

collateral when businesses need a bank loan due to lack of cash According to Akintoye (2008), businesses with many fixed assets will receive preferential interest rates from banks when borrowing money, which will increase the efficiency of the business

H6: Revenue growth rate (GRR) has a positive impact on the profitability of construction companies listed on Vietnam’s stock market

The steady growth rate of net sales is used to calculate the growth rate of sales Firm growth and earnings will increase as net sales increase (Zeitun & Titan, 2007) Accordingly, revenue growth is an important indicator of how well organizations are doing Net revenue of the most recent years is one of the most important indicators for construction businesses when participating in bidding If the revenue growth rate slows down, it is likely that the business is having problems, negatively affecting the productivity and reputation of the business

H7: Annual inflation rate (INF) has a negative impact on the profitability of construction companies listed on Vietnam’s stock market

The profitability of construction companies listed on the stock exchange can be adversely affected by high annual inflation rates Inflation drives up costs of materials and labor, strains fixed-price contracts, disrupts project timelines, raises borrowing expenses due to increased interest rates, reduces demand for projects, and can lead to currency devaluation Companies with strong cost management and adaptability strategies are better positioned to mitigate the negative impacts of inflation on profitability

H8: GDP growth rate (GDP) has a positive impact on the profitability of construction companies listed on Vietnam’s stock market

Construction companies with stock exchange listings often see higher profitability as GDP growth rates rise Demand for a variety of projects, including infrastructure, residential, and commercial buildings, is stimulated by economic growth This increased demand might result

in more contracts, more revenue sources, and better profit margins During economic

expansions, government expenditures on public infrastructure also boost the income of construction companies A rise in real estate values during successful times also improves real estate development opportunities, increasing prospective earnings Despite these advantages, competition, changes in material costs, and regulatory changes can have an impact on the ability of construction enterprises to convert economic expansion into higher profitability

Variables Abbreviations Hypothesis Sources

Abor (2005); Kajüter (2006); Zeitun & Tian (2007); Ebaid (2009); Onaolapo & Kajola (2010); Khan (2012); Salim & Yadaw (2012); Pervan & Visic (2012); Bambang et.al (2013); Sheikh & Wang (2013); Dawar (2014)

Neil Nagy (2009); Onaolapo & Kajola (2010); Muritala (2012); Pouraghajan et al (2012); Yazdanfar (2013); Dawar (2014)

Debt to equity

Abor (2005); Ebaid (2009); Onaolapo & Kajola (2010); Gill et al (2011); Sheikh & Wang (2013); Berzkalne (2014)

Gurbuz et al (2010); Saleem, Q., & Rehman, R U (2011); Ehiedu, V C (2014); Madushanka, K H I., & Jathurika,

Vatavu (2014); Egbunike and Okerekeoti (2018); Soedarsa, H G., & Arika, P R (2015)

GDP growth

Egbunike and Okerekeoti (2018); Hassan and Muniyat (2019); Rezina et al (2020)

3.2 Model specification

The decision to look at the factors influencing profitability that were discovered through the literature research mentioned above and using RBV approach In this study, the profitability dependent variable is represented by a proxy variable called return on assets (ROA) and return

on equity (ROE) ROA and ROE are two of the most crucial metrics for assessing how well a business is executing its job of generating profit ROA measures a firm's efficiency, calculated

by dividing its net income by total assets A higher ROA signifies superior asset utilization and profitability However, to gain a meaningful perspective, it's vital to compare ROA with industry competitors This contextual analysis reveals whether a company excels or lags in asset efficiency Furthermore, assessing ROA within the industry landscape offers a broader outlook, aiding informed investment and strategic decisions In summary, while a strong ROA

is favorable, its true value emerges when seen alongside industry standards and competitive performance benchmarks (Birken & Curry, 2021) ROE stands as a crucial financial metric for evaluating a company's overall financial well-being This metric is derived by dividing a company's annual returns by its shareholders' equity, serving as a gauge of the firm's proficiency in generating profits through equity financing Much like Return on Assets (ROA), ROE gains significance when employed for comparisons within the same industry ROE, in essence, reveals how effectively a company utilizes the funds invested by its shareholders to generate profits, making it a pivotal tool for investors, analysts, and stakeholders when assessing a company's financial performance and competitiveness within its specific sector (Gitman, 2015) Eight variables have been chosen for the study and they are as follows:

Variables Abbreviations Measured by

Dependent variables

Return on assets ROA = Net income/Total assets

Return on equity ROE = Net income/ Shareholder’s equity

Independent variables

Firm size SIZE = Logarithm of Total Assets

Firm age AGE = The number of years since operation

Debt to equity ratio DER = Total debts / Shareholder’s equity

Liquidity ratio LIQ = Current Assets / Current Liabilities

Fixed asset to total

asset ratio FSR = Fixed assets/Total assets

Revenue growth

rate GRR = Percentage changes of revenue over the year Inflation rate INF = Annual inflation rate (%)

GDP growth rate GDP = Annual GDP rate (%)

The following regression functions will be created and processed as part of the research

to test all the hypotheses:

ROAi,t = β0 + β1*SIZEt + β2*AGEt + β3*DERt + β4*LIQt + β5*FSRt + β6*GRRt + β7*INFt +

β8*GDPt

ROEi,t = β0 + β1*SIZEt + β2*AGEt + β3*DERt + β4*LIQt + β5*FSRt + β6*GRRt + β7*INFt +

β8*GDPt

3.3 Research methodology

The author utilized a quantitative technique, a style of research that use measurements

to transform event observations into numerical representations that may be used to describe and analyze those events, as only secondary data were taken into consideration Panel data analysis may be done in one of three ways: "Pooled Ordinary Least Squares"; "Fixed Effect Model" or "Random Effect Model" The three techniques' applications, benefits and drawbacks will be briefly discussed below

3.3.1 Pooled Ordinary Least Squares (OLS)

A stable and balanced dataset is a fundamental need for the implementation of the pooled Ordinary Least Squares (OLS) technique in the field of econometric analysis This method is praised for its ability to reveal meaningful correlations between dependent and independent variables (Gil-Garcia & Puron-Cid, 2015) It also boasts robust slope and intercept coefficients that are immune to temporal and individual differences Data collection and analysis followed strict guidelines, using the traditional least squares approach However, according to Wooldridge (2010), using pooled OLS should only be done when discrete samples have been carefully chosen for each temporal slice of the dataset The technique, however, suffers from a critical flaw in that it fails to account for individual effects embedded in error terms, potentially leading to serial correlation and heterogeneity and therefore biasing estimates (Podesta, 2000) The Fixed Effects Model and the Random Effects Model stand out as sensible options in this context because they are skilled at traversing the complexities of homogenous samples and capturing the subtle heterogeneity across entities

3.3.2 Fixed effect model (FEM)

The Fixed Effects Model (FEM), which systematically accounts for fluctuations across people over time, offers a revised approach that addresses the drawbacks of the Pooled Ordinary Least Squares (OLS) methodology The analysis of complex interactions between result and explanatory factors inside various entities, such as nations or businesses, is particularly well suited for this paradigm The FEM effectively separates the impacts of time-varying variables, allowing for a more detailed investigation of their influences by incorporating entity-specific fixed effects It's important to note that time-invariant factors, such as gender, are disregarded because of the possibility of collinearity (M.Wooldridge, 2010) Researchers are able to study the true influence of independent variables on the dependent ones because to this careful evaluation, which fosters a greater knowledge of underlying dynamics