Khóa luận tốt nghiệp Tài chính ngân hàng: The impacts of capital structure on the profitability of Construction and Real estate enterprise industry on the Vietnam stock market

Research on the impact of capital structure will helpthe board of directors find the right direction for their business in capital restructuring.Because this is an important issue in the

UNIVERSITY OF ECONOMICS AND BUSINESS (UEB)

FACULTY OF FINANCE AND BANKING

UNIVERSITY OF ECONOMICS AND BUSINESS (UEB)

FACULTY OF FINANCE AND BANKING

GRADUATION THESIS

THE IMPACTS OF CAPITAL STRUCTURE ON THE PROFITABILITY OFCONSTRUCTION AND REAL ESTATE ENTERPRISE INDUSTRY ON THE VIETNAM

STOCK MARKET

Supervisor: Assoc.Prof.Dr.Nguyen Van Hieu

Student name: Nguyen Pham Linh ChiStudent ID: 19050623

Class: QH2019E TCNH CLC 2

Ha Noi - 2023

I hereby declare that this graduation thesis is my work, with the support of oursupervisor, and has not copied the work of others This is my research work The data andsecondary information used in the thesis are sourced and clearly cited

This statement is entirely our responsibility

Students

Ab,Nguyén Pham Linh Chi

I would also like to express our sincere thanks to the teachers in the Faculty ofFinance - Banking in particular and all the teachers of the University of Economics - VNU

in general for creating learning conditions to help me improve our skills, self-study ability

to complete the research well

Due to limited knowledge and reasoning ability, I cannot avoid certainshortcomings I look forward to receiving the contributions of teachers to make thisgraduation thesis better

Thank you sincerely!

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LIST OF ABBREVIATIONS

Abbreviations Full name

HNX Hanoi Stock Exchange

HOSE Hochiminh Stock Exchange

ROA Return Of Asset

ROE Return Of Equity

EPS Earning Per Share

WACC Weighted Average Cost of CapitalREM Random Effects Model

FEM Fixed Effects Model

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LIST OF TABLE

Table 3.1 Description of variables in the research model - -« «excsxreerverxerrrereek 25Table 4.1 Descriptive statistics table of variables

Table 4.2 Correlation coefficient matrix tabÌe s cs++cxsererretretrirtrrkrirerrrrrrrrrke

Table 4.3 Test results for MulticOllinearity cs«creerieekirerirrriirrirriirrriiiiirrrrrerree 30Table 4.4 Summary table of regression model estimation resuÌtsS -«- 31Table 4.5 Table of results of F test Breusch - Pagan LM (1980) . -cec-es 35Table 4.6 Estimated results of influencing factors according to Robust Standard Errors

model (Robust Standard Errors) csseessssessecsessesssecseesesseecseensessecseeseesseeseeseeseeeseeaseateeseeseeaseeseeseeaseeseesees 36

iv

TABLE OF CONTENTS

M3P.9 0000)0017Ẻ i

ACKNOWLEDGEMENTTS «HH HH HH HH H11 g1 gi ii LIST OF ABBREVIATTIONS 5s cà Hy iii LIST OF TABLE 1n iv

TABLE OF CONTENTS w esssssssssssstessstecsssesssessnsecsseeesseecsueecsueecsuesesnessnseessnessasersueesneecaneeenueesnseeeseesaneesaeesaneeed 0y 0d051000)09:19)0)0/60(00)075 1

1.1 Research background ecsessessessecssesssesseesssesseessseessesssesseesseesseersseeseesssesseesseesseesetesseenseesseesseesseesess 1 1.2 Research ObDjeCtive ccsssecssssecssssessscseeseessecsecseestecseesesatessecueeaeesseeseessesecseeseesseeseeseeseeseeseentesneeneens 2 1.3 Research subjects and scope Of Study cessessesssecsecseesseesseesssecseesssssseesseeeneesateeseesteesseesseesneesees 3 1.4 Research QueStiOn eeccsssssecsssssecssssessscseeseessecsecsesasesseeseeatessecneeasesseeneesteseeseeaeesteeseesnssesseeseentesseeseens 3 1.5 Overview of data and research methods « -e++xse+kretrkttrrttrittirirrirrrie 3 1.6 Contribution Of research esseessecssecssesseesssesseesssesseesssecseesseesseesssesseesssesseesseeeseesasesseesseesseesseesaeesess 3 1.7 Structure Of the Stud ceccesesssessecssecssecseesstecsteeseecstecstecseesseecseecseecaeesseesseesseesneesateeneesseesueesneesseesees 4 CHAPTER 2: REVIEW OF LITERATURE AND THEORETICAL BASIS -«- 5

2.0 Chapter introduction 0 eeccesssscsecssesssesssecssecseecssecssecseecssecseesseesseesneesneesseesseesseesneesseesueeseenieeateesteensees 2.1 Overview of national and international research 2.1.1 PoSitive 1MPact ee eesseessessseesessseessessseesseessessseesseessecssesssessuecssecstecsecstecaecseecsteesteestesstecneesseesnesss 5 2.1.2 NegatÏV€ IMPAct cessssscsesseessesseeseesessesstsssesseestesseesessessesseeseessesseestsssssseeseesesseeseesteseeseeaeesseeseeaes 7 2.2 Theoretical Dasis ccssessssssecsssecssesssessessssecseesseesseesseesseesseesseeseesecsueeseeseesseecseecseeeseerseesneesneesaeesaeeses 10 2.2.1 Capital Structure eeseesseessessesssesstessseessecsseestessecstecssecsteeatecneecseesstscneesseesseesaeesseesieesueesseesseenies 10 V2 3ð 0Š ẻ ẻ 16

2.2.3 The relationship between capital structure and profitability 18

CHAPTER 3: RESEARCH METHODS essssssssessstsssssessstsesstecsseeesatessueeesaersusarsneessueessueessneessneessessnneesness 20 3.1 Research 6u ii hố ẻ.ẻ.ẻ 20

3.2 Co Tố 20

3.2.1 ya¿0u 1 20

3.2.2 0 ẻ 22 3.3 Data description and data SOUTC -csc- sccx+trvtEEkrEExetrttrkrtrkrtrrrrkirrirrrirkrrrrrrrrrrke 25

3.3.1 D4ẲA HH HT TH HH HH KH HH HH KH TH HH HH HH HH HH HH TH HH1 tren 3.3.2 Data collection and processing

CHAPTER 4: EMPIRICAL RESULTS 55c-55e<SS+SExttEEketErkrtErirttrirtkiirtiirrirriiriiiie 27

4.1 Empirical results ccssesssesssessecssessesseesessessessessesssesseesteseeseeneeasesseeseeseeseeseeateasesneeatesteeseeneeatenneenes 27

4.1.1 Descriptive SfatÏSEÏCS cv HH HH 1g 111111Errrrrkrrkee 27

4.1.2 Correlation analysis in research mOdeÌL s«cxexxexxeexertetteerrerkerkerrrerkrre 29 4.1.3 Checking for multiCOlÏinearÏfW ‹e cssccxxrrkrtkkirtriirrriirtriirrriirriirrririrrrkrrri 30 4.1.4 Regression model analysis « -s++xerxerrrrrrrrrrtrtrrrtrrrtrrrrrrrrrrrrkrrrrrrrrrrrrriee 31 4.1.5 Testing the choice of research estimation model -c‹«c-cxexxvsezrxerres 34

4.1.6 The results of overcoming the research model and discussion - 36

4.2 DiSCUSS and COIDATG «-¡ « se HH HH HH Hà TH Hàn tà Hà Hàn hành phường nhiệt 38 CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS eeeeiiiiiiiree 40 5.1 Summary of research results essesssssessecsesssessessesseesseseeseessessesseesseseeseeseesseeseeseeseseeateaeeseeaes 40 5.2 RECOMMENAATIONS ssessssessssessseessstessseessssessseessseessseessseessseesssessaeesssessasensecesseeessetessseessaeerseessseesaneess 40 5.3 Limitations of the Study cscessssssssessssscssesesssessseessessesseeseeseesteesseessesseeesteeneeeseeeseeeseeeaeesaeesseenes 5.4 Further research directions š9335535)00500577 ÔỎ.Ỏ 43 References in Eng]iSH -s-cxxtsrrtrrthhthHH nh nh HH HH HHrtrrktrrrrrrrkrrrke 43 References in VietnaIm «xen Hà Hà Hà Hy HH HH1 HH1 tre Hrìy 44 ,\ad50006 077.7 46

Appendix 1 Variable descriptive statÏSfCS -c-cckrnHHHHHH gà 46 Appendix 2 Correlation amalySis essssssesssessssessssessssessseesssseesseessssessesesseesssessseessesssessaensaseesaees 46 Appendix 3 Multicollinearity test cecccesessesseecseesessnseseeseeseesseesesseeseeseeseeseeseeseeseenieenees 47 Appendix 4.1 Pool OLS Model with ROA representing profitability 47

Appendix 4.2 Pool OLS Model with ROE representing profitability 47

Appendix 5.1 Fixed-effects model FEM with ROA profitable profitability 48

Appendix 5.2 Fixed-effects model FEM with ROE profitable profitability 49

Appendix 6.1 REM with ROA profitable profitability -c cceeekiererirerre 49 Appendix 6.2 REM with ROE profitable profitability c-cceecereeeriirerirrrrriee Appendix 7 Hausman test with ROA profitable profitability Appendix 8 Test of variance of variable error with ROA profitable profitability 51

Appendix 9 Autocorrelation test with ROA profitable profitability 51

Appendix 10 Breusch-Pagan Lagrange multiplier with ROE profitable profitability 51 Appendix 11 Robust Standard Error Model - Robust -e-ccesersereereerrrrk 52

CHAPTER 1: INTRODUCTION

1.1 Research background

When it comes to financial management, an important and much-interestedresearch item can refer to capital structure Decisions related to capital structure arealways very important and crucial for businesses regardless of the industry Because itaffects the competitiveness, as well as the ability to negotiate in the market, thesatisfaction of shareholders and investors in the business when the board of directorsfocuses on the capital structure, towards the ultimate goal maximize value and profits.Vietnam is a growing market that is a stepping stone, an opportunity for businesses tochoose to use funds from different sources Deciding which fund to use, the capitalstructure of each business also changes accordingly So how will the change of capitalstructure affect the profitability of each individual enterprise? Therefore, there have beenresearch works both theoretically and experimentally around that question, but none ofthe results are absolute Each economy, a different field has its own characteristics, eveneach business has its own characteristics, so the impact of capital structure onprofitability is also different Construction - Real Estate Industry Real estate is closelyrelated to the socio-economic development of a country, is a "pull" for many otherindustries to grow together In addition, this is an industry with great prospects inVietnam, an attractive market for investors Partly because Construction - Real estate isincreasingly asserting its position thanks to high profits, thereby attracting newlyestablished businesses, old enterprises to expand their scale, enhance businessperformance business However, the negative side has formed a "virtual fever" and a

"bubble" phenomenon for this market Facing credit policies with interest rates whensaving at only 5-6% per year, it has stimulated a change in investment choices in realestate instead of just depositing money in banks as usual investors when the potential forprice appreciation can be more profitable than savings, and the ability to preserve valuebefore inflation of real estate

The Construction - Real Estate market in 2021 and 2022 has very positive signalsdespite the complicated development of the deflationary economy due to the complicateddevelopments of the Covid-19 global pandemic Real estate prices continued to increase, the average apartment price increased by about 5-7%; the type of individual housing inthe project has a price increase of 15-20%; for land plots has increased by 20-30%compared to the end of 2020 Although the price increases, it does not reduce theattractiveness of the real estate industry among investors, which is reflected in the

inventory in 2021 much less than in 2020, while in 2020 there will be about 9,000apartments remaining, by the end of 2021 there will be only 2,286 apartments, a decrease

of 74.6% Statistics of real estate interest in Hanoi in January 2022 increased 14% overthe same period in 2021, in contrast, in Ho Chi Minh City, interest decreased slightly by1% It is forecasted that construction activities will grow by 8% in 2022, thanks to thepromotion of "offsetting" spending for infrastructure and based on the loosening policy

of all levels with the development segment real estate Notably, as of January 20, 2022,the total foreign investment capital (FDI) registered in Vietnam increased by 4.2% over

the same period in 2021, reaching $2.1 billion In which, the real estate business ranked

second with a total investment of over 472 million USD, accounting for nearly 22.5% ofthe total registered investment capital, which has opened up positive signals for thisexciting market These talking numbers have shown the attractiveness of Construction -Real Estate and its position in economic growth Therefore, enterprises in the industrymust increasingly focus on improving operational efficiency, developing more, effectivelyusing financial resources to increase profitability, attracting domestic and foreigninvestment capital sources A large amount of capital is required - typical of Construction

- Real Estate, that is why most businesses in this industry have a relatively high ratio ofloans to total assets business results Research on the impact of capital structure will helpthe board of directors find the right direction for their business in capital restructuring.Because this is an important issue in the existence and development of an enterprise,there have been many studies on the influence of capital structure on the profitability ofthe enterprise, but students find that There has been no separate research on enterprises

in the Construction - Real Estate industry listed on HNX and HOSE in the period of

2018-2022 Stemming from the above needs and urgency, students chose to research the topic

“The impacts of capital structure on the profitability of construction and real estateenterprise industry on the vietnam stock market”

1.2 Research objectives

The general objective of the study is research the impacts of capital structure onthe profitability of Construction and Real estate enterprise industry on the vietnam stockmarket period 2018 - 2022.

Specifically, the article systematizes the concepts of capital structure, profitabilityand theoretical basis related to the impact of capital structure on profitability Moreover,the article analyze how the current state of capital structure affects the profitability ofconstruction and real estate enterprises listed on the stock market in 5 years from 2018

to 2022; Using the linear regression method by STATA 17 software to examine thedirection of impact of capital structure on profitability Finally, it proposes and developsrecommendations to contribute to improving the profitability of enterprises in theindustry.

1.3 Research subjects and scope of study

The object of the study is the effect of capital structure on the profitability ofenterprises in the construction industry - real estate, listed on the stock market in theperiod 2018 - 2022

Scope of space research: Enterprises in the construction industry - real estate,listed on the stock market

Research time scope: Synthesize data collected from financial statements ofenterprises for 5 years, from 2018 to 2022.

1.4 Research question

Based on the above purpose, this study aims to answer the following questions:

1 What is capital structure, profitability?

2 The previous theoretical and experimental works have determined the effect of

capital structure on profitability.

3 The direction of impact of capital structure on profitability of construction - real

estate enterprises listed on the Vietnam stock market in the period of 2018 - 2022?

4 How should enterprises in the construction - real estate industry listed on the

Vietnamese stock exchange structure their capital to improve profitability?

1.5 Overview of data and research methods

To complete the research, students use a combination of qualitative andquantitative research methods In particular, the data used in the research is compiledfrom the audited consolidated financial statements of enterprises in the constructionindustry - real estate listed on the Vietnamese stock exchange in the five-year period from

2018 to 2022 Then, process these secondary data to suit the research objectives Finally,thanks to the software to measure, test, and then analyze to produce research results

1.6 Contribution of research

The study contributes to many different fields First, the study analyzes the capitalstructure and profitability of enterprises in this industry, helping investors andstakeholders better understand the financial position of enterprises The study alsomakes conclusions about the impact of capital structure on the profitability of businesses,

helping investors to make smarter and more effective investment decisions Secondly, thestudy also provides suggestions and recommendations for businesses in the construction

- real estate industry, helping them to improve their profitability through capital structureand financial measures other main This can contribute to the development of theindustry and the whole economy of the country

1.7 Structure of the study

This research consists of five chapters In chapter 1, we introduce the researchtopics, research objectives, overview of data, research method and research questions.Next, we present the theoretical bases as well as a review of the related literature atchapter 2 In chapter 3, we present research methodology, data sources and how weprocess those data Chapter 4 is the research result of the article Finally, chapter 5includes our conclusions and recommendations on the research problem

CHAPTER 2: REVIEW OF LITERATURE AND THEORETICAL BASIS

2.0 Chapter introduction

Chapter 2 provides a literature review and theoretical basis for the impact ofcapital structure on profitability in the construction and real estate enterprise industry inthe Vietnam stock market The chapter will review the existing literature on this topic,including the theoretical background of capital structure and its impact on profitability Itwill also identify research gaps and propose research questions and hypotheses to beaddressed in this study

2.1 Overview of national and international research

Previous research results have formed many different views on the relationshipbetween capital structure and profitability, but not according to a unified view This studydivides into two groups of different views on the theory of capital structure andprofitability: the capital structure group has a positive impact and the capital structuregroup has a negative impact on the profitability of the business

2.1.1 Positive impact

El-Maude et al (2016) studied the impact of capital structure on the performance

of enterprises in the Cement industry in Nigeria, showing that there is a positive andsignificant relationship between the debt use with business performance Researchindicates that the performance of firms in the cement industry is not optimized becausefirms are not able to utilize debt in their capital structure Finally, the study providesincentives for companies in the Cement industry to use long-term debt in their capitalstructure because it has a positive impact on financial performance

Zeb and Rashid (2016) find a positive impact of capital structure on firm value.Accordingly, the higher the debt-to-equity ratio, the higher the value of the business.Firms should use more debt than equity because the cost of equity is higher than the cost

of debt The increase in debt will affect the average cost of capital (WACC) of the business.Research results “The Impact of Capital Structure on Firm Performance: Evidence fromEmerging Economies" by Ayub Mehar and Osama AI-Titi (2019) investigates therelationship between capital structure and firm performance in emerging economies Theauthors use panel data from 219 firms in Jordan and find that there is a significant positiverelationship between leverage and firm performance

Sudiyatno et al (2012) clearly show that financial leverage has a positive effect onfirm value with the representative variable being Tobin's Q But unlike Zeb and Rashid(2016), this study suggests that the use of Debt will increase the value of shareholders,

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however, the use of debt must be in a reasonable rate to increase the market price of thebusiness, conversely, using too much debt will lead to unexpected results for owners aswell as reduced opportunities for managers However, this study also found thatincreased use of debt reduces firm performance as measured by ROA The decrease inROA with the use of more debt is explained by the fact that the increased return on capitalwith the use of debt is lower than the cost of debt Therefore, the profit derived from theuse of debt cannot cover the cost of capital A study by Amarjit Gill et al (2011) also gavesimilar results when concluding that capital structure has a positive effect on theprofitability of firms in the service and manufacturing industries in Thailand America.Short-term debt, long-term debt and total debt to total assets have a positive impact onacompany's profits because debt acts as a tax shield However, although corporateprofitability is highly dependent on debt as a primary financing option, there are alsomany risks surrounding the use of debt and the risk of bankruptcy reasonable level oroptimal capital structure use, using debt but not at 100% A reasonable debt ratio willminimize the cost of capital, lower financial costs and reduce the risk of bankruptcy forthe business, according to Gill et al (2011).

Chowdhury (2010) researched firm value with the proxy variable being stockprice, suggesting that capital structure has a positive impact on firm value However,Chowdhury's study only measures capital structure with the proxy variable being long-term debt This study shows that the use of long-term debt can increase the value of thebusiness In addition, enterprise value is also affected by many other factors such as EPS,size, profit, growth, dividends, equity, liquidity and fixed asset turnover But the level ofimpact of capital structure is highest Research by Maxwell and Kehinde (2012) alsosuggests that firms should use more long-term debt than equity because of the positiveeffects of long-term debt on firm value more than equity This study was conducted by theauthors with 124 enterprises in Nigeria The results show that equity does not have apositive effect on the value of the business or in other words does not increase the value

of the business Antwi et al (2012) studied the impact of capital structure on firm valuewith two representative variables, equity and long-term debt, and also found a significantpositive effect of long-term debt to business value This research result is explained bythe authors as being consistent with pecking order theories, trade-off theory and classicaltheory Long-term debt is considered a major determinant of firm value because thereexist imperfect real-world markets where bankruptcy costs, agency costs, tax shields, andasymmetric information exists Therefore, the authors also advise firms to compare the

marginal return of using long-term debt with the marginal cost of long-term debt beforeusing it because long-term debt is actually benefit the business value.

In the country, there are also many studies related to this topic, "The Impact ofCapital Structure on Firm Performance: Evidence from Non-Financial Listed Firms inVietnam" by Nguyen Thi Minh Tuyen and Doan Ngoc Phi Anh (2021) This study examinesthe relationship between capital structure and firm performance for 191 non-financiallisted firms in Vietnam from 2010 to 2019 The results suggest that there is a negativeimpact of leverage on firm performance in the short term, while in the long term, there is

a positive relationship between leverage and firm performance, supporting the trade-offtheory of capital structure.

Research by Vo Minh Long (2017) with non-financial companies listed on Ho ChiMinh City Stock Exchange using secondary data collected from 2008 - 2015, enterprisevalue is measured by Tobin's Q index shows that when a business uses debt, it will benefitfrom the tax shield but will also bear the risk because the cost of financial distress can bethe cause of the bankruptcy of the business According to the results of this study, bothSDA and LDA increase firm value and the benefit from using debt to take advantage of taxshield is still higher than the cost of financial distress

2.1.2 Negative impact

"The Effect of Capital Structure on Firm Performance: Evidence from the EuropeanUnion" by Yalcin Sarica and Mohamed Ali Azouzi (2022) This research investigates therelationship between capital structure and firm performance for 338 European Unionfirms from 2010 to 2019 The study uses a panel data analysis to examine the impact ofcapital structure on firm performance for a sample of 338 European Union firms fromvarious industries over the period 2010-2019 The researchers measure firmperformance using three indicators: return on assets (ROA), return on equity (ROE), andTobin's Q They also use four proxies for capital structure: long-term debt to total assets,short-term debt to total assets, total debt to total assets, and debt to equity The resultsindicate that there is a positive relationship between leverage and firm performance,supporting the trade-off theory of capital structure

Research by Chechet and Olayiwola (2014) testing agency theory has foundnegative results when determining a statistically significant negative impact of debt ratio

on profitability of companies businesses in Nigeria The research results show thenegative impact of capital structure on profitability and that the existence of debt use willadversely affect the profitability of the business This means that the firms in this study

will not benefit from using debt Similar to the results of the above study, Movalia's study(2015) also found a significant impact of capital structure on the profitability ofcompanies in the tire industry in India This study does not measure capital structure bydebt-to-total assets ratio, but rather by debt-to-equity ratio The research results showthat the ideal debt-to-equity ratio will help increase the profitability of the business By

2017, Ukhriyawati and colleagues published research results on the relationship betweenasset structure, capital structure, risk management and good corporate governance interms of financial performance and the value of the company through earnings and freecash flow for banks listed on the Indonesian stock exchange Accordingly, this study showsthat there is a negative and statistically significant impact between capital structure onincome and free cash flow, but there is a positive but insignificant effect on firm value.However, because the characteristics of financial industries are often different from non-financial industries, there are many other studies that show a significant impact of capitalstructure on firm value

Research by Kausar et al (2014) in Pakistan further clarifies the impact of eachtype of debt with the variables representing capital structure as long-term debt, short-term debt, and total debt to total assets The negative impact of debt use on firm value ismeasured by Tobin's Q According to this study, the variables of total debt to total assetsand long-term debt to total assets both have a negative and significant effect significant

to the performance of the business as measured by Tobin's Q and P/E ratio However, thevariable of short-term debt to total assets, although having a negative impact onenterprise value, is not significant In addition, factors such as asset size, age of thebusiness also have an impact on the performance of the business This study also revealsthe fact that most of the firms listed on the Karachi Stock Exchange, Pakistan use afinancing structure financed by equity or a mix of equity capital shares and short-termdebt Research by Zeitun and Tian (2014) found evidence that there is a statisticallysignificant negative relationship between capital structure and firm performance.Accordingly, the ratio of total debt to total assets, long-term debt, short-term debt andtotal debt to total equity all have a negative impact on corporate performance with therepresentative variable ROA However, when measured by Tobin's Q, while otherindicators of capital structure still give negative results to corporate performance, theshort-term debt ratio has a positive effect The higher the short-term debt to total assets,the higher Tobin's Q This is explained by the author as because high short-term debtmeans high business growth, so Tobin's Q has a high value Different from the above

research results, the study of Tifow and Sayilir (2015) found the negative impact of theshort-term debt ratio on the performance of the business Accordingly, short-term debthas a negative relationship with the variables ROA, EPS, and Tobin's Q The use of debtwill lower the performance of the business Besides, long-term debt ratio also has anegative impact on ROE, EPS and Tobin's Q but has a positive effect on ROA.

Phan Thanh Hiep (2016) studies the effect of capital structure on business results

of industrial manufacturing enterprises in Vietnam, concluding that the negative impact

of capital structure on business results or profitability The profit of the business is verycertain and has high statistical significance The study uses the pair of variables ROA, ROE

to represent the measure of the profitability of the business Previously, the study of DoanNgoc Phuc (2014) showed a positive impact of long-term debt on ROA and ROE while totaldebt and short-term debt had a statistically significant negative impact on efficiency.business performance measured by ROA and ROE Vo Minh Long (2016) studies theimpact of capital structure on the value of non-financial companies in Vietnam with theobserved variables ROA and EPS, the result is that the debt ratio of the enterprise has anegative impact The short-term debt ratio also has a negative impact on the value of theenterprise, while the long-term debt ratio has a positive effect on the value of theenterprise Another evidence that there is an impact of capital structure and firm value is

"Capital Structure and Firm Performance: Evidence from Manufacturing Firms inVietnam" by Nguyen Van Trung and Le Thi Thu Huong (2021) This research investigatesthe relationship between capital structure and firm performance for 98 Vietnamesemanufacturing firms over the period 2010-2019 The results show that there is asignificant negative relationship between leverage and firm performance, which impliesthat Vietnamese manufacturing firms should consider a low level of debt in their capital

structure.

These studies are evidence that capital structure has an impact on profitability.However, there are indicators that are positive but there are indicators that are negativeand it is based on each specific independent and dependent variable as well as differentresearch environments In Vietnam, although there are many studies on the influence ofcapital structure on profitability, most of these studies are conducted in general for manybusiness sectors without studying in a specific industry Besides, profitability is measured

by many different indicators, most of which are calculated by ROA, ROE or gross profitmargin Therefore, from theoretical as well as experimental studies, students haveproposed a research direction that capital structure affects the profitability of

construction and real estate enterprises listed on HNX and HOSE period 2018 - 2022 withvariables representing profitability as ROE, ROA to test whether capital structure affectsprofitability in this industry as well as how it affects profitability profits, from which tofind out whether these businesses should use debt or not?

2.2 Theoretical basis

2.2.1 Capital structure

Capital is a prerequisite for a business to be born and operate Each type of capitalsource has a specific cost and purpose Therefore, to be able to mobilize, manage and usecapital effectively, enterprises must study each of their capital sources to determine areasonable structure suitable for each specific condition each stage of businessdevelopment From there, the concept of capital structure was born There are manyconcepts of corporate capital structure, but in summary, capital structure is theproportion of capital sources or reflects the combined relationship between differentsources of funding in the total capital that the enterprise has mobilized, used in businessactivities of the enterprise, often emphasizing the relationship between debt and equityfinancing all assets invested, thereby knowing the management of the company how thefunding decision is made, and will there be positive or negative impacts on the objectivesset forth by the funding decision.

Along with the above orientation, Ahmad et al (2012) have defined “Capitalstructure is the ratio between debt and equity in the capital of the enterprise to financeproduction and business activities’ Sharing the same point of view as Ahmad,Pouraghajan & Malekian (2012), Addae et al (2013) also argue that capital structure isthe mixed financial source of the enterprise made up of debt and equity that make up theassets of the enterprise enterprise Nguyen Thanh Cuong (2014) also stated that thecapital structure of a business is considered as a mixture of debt and equity that thebusiness uses to operate Hasan et al (2014) argue that: “The capital structure of a firm is

a combination of long-term debt, short-term debt, common equity, preferred equity andother sources of capital used to finance for operations and development” In other words,capital structure is a combination of different types of capital that a business uses for itsbusiness Thus, most experts believe that capital structure is the ratio of debt and equity

to capital to finance production and business activities

2.2.1.1 Classify

In the process of production and business, in order to manage and use capitaleffectively, enterprises all classify capital depending on the purpose and type of each

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enterprise, but each enterprise classifies capital according to the following criteriadifferent The most common types of capital structures are debt, equity, and hybrid A debtcapital structure involves using borrowed funds to finance operations and growth, whichmust be repaid over time with interest This can include bank loans, bonds, and otherforms of debt An equity capital structure involves raising funds from investors by sellingownership shares of the company This can include issuing common or preferred stock,which provides investors with a share of the company's profits and voting rights A hybridcapital structure combines elements of debt and equity financing, such as convertiblebonds or preferred stock These securities can be converted into common stock at a laterdate, providing investors with both debt and equity features Companies must carefullyconsider the advantages and disadvantages of each capital structure type and select themost appropriate mix of debt and equity to meet their financial objectives.

2.2.1.2 The criteria for determining the capital structure

To evaluate and measure the financial structure of the enterprise, previous studiesare often based on measures of financial leverage of the enterprise, including: Debt ratio,Debt to Equity Ratio, Self-financing capacity

e Debt ratio

Debt ratio shows how much of a business's use of borrowed funds shows howmuch of its assets are invested by borrowed capital This ratio helps to assess the financialposition, including the ability to guarantee debt repayment, and the risk of the enterprise.The higher the debt ratio, the greater the dependence of the enterprise on creditors, thelower the autonomy of the enterprise The debt ratio can be measured as follows:

D total liabilities

Overall debt ratio (=) =—————— (2.1)

C total assets

_ (SD Short — term debt

Short — term debt ratio (=) = (2.2)

C total assets

SD Long — term debt

L —t debt rati )- TS 2.3 ong erm Gene Parte C total assets (2.3)

In principle, the smaller this ratio, the less difficult the business will face financialdifficulties because the enterprise is less dependent on debt to finance its businessoperations The debt ratio depends on the business line and the field in which the businessoperates Usually, creditors want the business to have a low debt ratio, because the lowdebt ratio means that the loan of the goods is guaranteed, in the worst case the businessgoes bankrupt, the equity of the business is large enough to bear a loss in asset value upon

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liquidation Therefore, enterprises with low debt ratio will easily borrow money andborrowing interest rates are also lower than enterprises with high debt ratio.

e Debt to Equity Ratio

The debt-to-equity ratio indicates the ratio between the two primary sources ofcapital (debt and equity) that a business uses to finance its operations These two sources

of capital have distinct characteristics and the relationship between them is widely used

to evaluate the financial structure of enterprises This ratio is calculated as follows:

Total liabilitiesDebt to Equity Ratio =ebt to Equity Ratio Equity (2.4)

The higher this ratio, the more important the source of debt (liabilities) plays inthe operation of the business Usually, this ratio is greater than 1, which means that debt

is larger than equity, and vice versa

e Self-financing capacity

The self-financing capacity reflects the proportion of equity in the total capital ofthe business The higher this ratio, the higher the level of financial autonomy by equity ofthe enterprise, so the lower the risk of the business This ratio is calculated according tothe following formula:

EquitySelf — financing capacity = (2.5)

Total capital

The higher the self-financing ratio, the higher the degree of financial autonomy andthe ability to cover losses with equity, so the lower the business risk of the business

2.2.1.3 Theoretical foundations of capital structure

e The traditional point of view

If the operation of an enterprise is likened to the use of all assets put intoproduction and business to create value for the business, capital structure is considered

as a combination of financial sources used to create those assets, including financialsources that come from outside or from internal sources within the business If thebusiness only uses its own capital, all profits are distributed to shareholders andaccumulated (in the form of dividends and retained earnings) If the business uses part ofthe debt, the business must set aside a portion of the profits to repay the debt later.

The traditional view cited by Vo Minh Long (2017) holds that the debate about theimportance of choosing a firm's capital structure continues even though it has been going

on for decades and considering the importance of capital structure choices In essence, it

is the process of debating the impact of capital structure on firm value “Financial experts

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follow the classical view that increasing a firm's financial leverage, such as increasing theproportion of debt in a firm's capital structure up to a certain point, will increase the value

of the firm, but beyond that point where further leverage increases the firm's cost ofcapital and results in a decrease in firm value.” In other words, the use of debt increasesthe value of the business because when the business starts to borrow, the low cost of debtcombined with the tax advantage will cause WACC to decrease, profit margin to increase.However, when debt is high, WACC will increase because the cost of equity increases plusthe cost of debt also increases due to increased bankruptcy risk, reduced profitability,lower business value The problem with the traditional view is that there is no theoreticalbasis for what the cost of equity should be and what the cost of debt should be for theWACC to be optimal

e M&M Theory 1958

Contrary to the traditional view, Modigliani & Miller (1958) investigated whetherthe cost of capital increased or decreased as a firm increased or decreased borrowing Toprove a workable theory, Modigliani and Miller (M&M) made some oversimplifiedassumptions that are very common in the theory of finance: the scholar assumes thatcapital markets are perfect, and therefore will there are no transaction costs and theborrowing rate is the same as the loan rate and is equal to the loan free rate; The taxation

is ignored and the risk is calculated purely by the volatility of the cash flows

If capital markets are perfect, M&M argues that then firms with the same businessopportunities and the same expected annual returns should have the same total valueregardless of capital structure because the value of a business must depend on the presentvalue of its operations, not on how it is financed From this, it can be inferred that if allsuch firms had the same expected returns and the same value, they would also have thesame WACC at all levels of the debt-to-equity ratio

Although the assumptions of perfect capital markets are unrealistic, there is oneassumption that should be emphasized and which has a significant impact on the mainresult, which is the assumption of no taxation: this is An important issue and one of thekey advantages of debt is the tax relief on interest expenditures M&M's theoretical risk iscalculated entirely by the variability of cash flows They ignore the possibility that cashflows may stop because of default This is a significantly different problem from thistheory if debt is high

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Making these assumptions means that the only advantage of borrowing money isthat debt is cheaper and less risky for investors and a disadvantage that the cost of equityincreases with debt because of the ratio of borrowed capital to debt Total capital.

Modigliani and Miller show that these effects balance out precisely Using debtgives owners a higher rate of return, but this higher return is exactly what they offset theincreased risk from the debt-to-capital ratio With the above hypotheses, the equation forthe theory of M&M is:

Vg= Vu (2.6)The total value of debt-using firms (Vg) is equal to the total value of non-debt firms(Vu)

Vg=Vu+T.D (2.7)The value of the debt-using firm is equal to the value of the non-debt firm plus thegain from the use of debt D is the total amount of debt used, T is the corporate income taxrate, T.D is the profit from the use of debt Thus, according to the M&M tax model (1963),capital structure is related to the value of the firm The higher the use of debt, the greaterthe profit from using debt, the more the value of the business increases and increases tothe maximum when the business is financed with 100% debt Since Modigliani et alpublished this, much debate has focused on the practicality of the "assumptions", whichinclude the absence of taxes, bankruptcy costs, and some lack compared to the real world.Thus, the objection is that because of market imperfections, a firm's choice of capitalstructure can affect its value; and from there emerge additional theories and empiricalstudies to support this argument

e Trade-off theory

One of the theories that capital structure can affect firm value is the trade-offtheory This is also a theory in the field of corporate finance and economics The trade-offtheory of capital structure developed by Kraus & Litzenberger (1973) argues that thereexists an "optimal" capital structure where the balance between the benefits of the taxshield and the costs of financial distress exists business, thereby maximizing the value of

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the business This theory explains why businesses use capital from both debt and equity.The use of debt has a positive effect on profitability, but businesses cannot fully use debtbecause using debt will increase pressure due to the high cost of debt Although the use ofdebt provides the benefit of tax shields, it also entails many additional costs, typically thecost of financial distress, including both direct and indirect costs of bankruptcy caused by

in debt

The increase in the debt ratio that provides the benefits of the tax shield increases,

at the same time, the costs of financial distress also increase Up to a certain limit,increasing debt will no longer increase the benefits of the tax shield, but the cost of usingdebt will increase In other words, the value of the benefit from the tax shield will be lowerthan the cost of using debt and push the business to a state of increased risk due to theincreased pressure of the cost of distress from debt At this point, increasing the debt ratiocan no longer increase the benefits for the business Therefore, companies are alwayslooking for ways to determine an optimal capital structure at which the debt-equity ratiowill bring the greatest benefit to the business based on the principle of balance betweenleaves tax shield and financial distress costs The point where the optimal capitalstructure is determined is where, for each additional amount of debt, the value of the taxshield equals the cost of financial distress.

e The pecking order theory

The pecking order theory proposed by Myers and Majluf (1984) followed byDonaldson's (1961) finding by Abeywardena D.K.Y (2017) suggested that informationasymmetry between managers and investors creates a priority in a business's financialpolicy, usually starting with internal funds, followed by debt and then equity, with anincreasing cost of capital It is assumed that management knows better than outsideinvestors about the future operations and financial decisions and cash flows of theenterprise Thus, when the Board of Directors thinks that their shares are appreciated,they can issue securities to raise capital from outside This activity requires the company'sstock to be overvalued rather than undervalued, thus conveying unfavorable information

to outside investors Conversely, when the Board of Directors thinks that their shares areundervalued rather than overvalued, they will incur more debt instead of raising capitalfrom external capital markets and generating equity

Thus, raising capital from equity will bring more unfavorable information thanraising capital from debt This makes managers more interested in borrowed money thanequity from the sale of shares And so, capital structure decisions are not based on the

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debt-to-asset ratio, but are made by managers based on prioritization from the marketclassification Internal financing sources will be selected first, then debt and finally equity.The focus of this theory does not focus on the optimal capital structure because Myers andMajluf argue that there will not be an optimal capital structure for firms but focuses onthe firm's upcoming financial decisions.

2.2.2 Profitability

2.2.2.1 ConceptBusiness is an activity carried out for profit, that is, for the purpose of making aprofit On the basis of their available material and technical conditions, businesses alwaysfind all appropriate measures to obtain maximum profits Profitability or profitabilityrepresents the strength of the business in generating profits, improving efficiency andoperational efficiency, increasing cash flow, and using resources efficiently Profit is anindicator reflecting the profit that an enterprise can earn per unit of cost or input or perunit of output reflecting business results The level of profit that the enterprise earns perunit of cost or input or an output unit reflects the higher the business results, the higherthe profitability, and vice versa; The smaller the profit earned per unit, the lower theprofitability

Profitability is closely related to business performance A business cannot havehigh business efficiency if its profitability is low and vice versa It can be affirmed thatprofitability is the highest expression of business efficiency The business efficiency of theenterprise can only be obtained when the enterprise creates high profitability This canonly be achieved once enterprises use resources effectively, improving efficiency andperformance

Profitability of a business reflects the ability to use the available resources of thebusiness to achieve the highest results in the business In essence, profitability is theexpression of combining according to a definite relation both quantitatively andqualitatively of the elements constituting the business process: labor, labor materials and

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labor objects Therefore, it can be said that an enterprise can only achieve highprofitability when and only when the basic elements of the business process are usedrationally and effectively Realizing this is important in analyzing the factors that reflectbusiness conditions affecting profitability.

2.2.2.2 Evaluation criteriaThe group of indicators for analyzing the profitability of enterprises includes thefollowing specific criteria:

e Return on Sales (ROS)

Return on sales (ROS) ratio is determined by the ratio of profit to net sales in thebusiness period of the enterprise Recipe:

Earnings before interest and taxes

ROS = Earnings before interest and taxes x 100% (2.9)

Net revenuesThis ratio reflects the relationship between profit after tax and revenue achieved

in the period of the business, it shows how much profit after tax is generated in a dollar ofrevenue achieved in the period Obviously, if other factors remain unchanged, the higherthe net profit ratio, the greater the business performance The higher this number, thebetter

e Return on Assets (ROA)

Return on assets (ROA) is calculated as the ratio of profit after tax to the averagetotal assets for the period of the business Recipe:

ROA = Net income 100% 2.10 ~ Average Total Assets * ° (2.10)

(Average total assets for the period is calculated as the average of total assets atthe beginning and at the end of the period In the absence of sufficient data, the analystcan use total assets at a point in time for example, at the end of the period, instead ofaverage total assets) This ratio indicates the size of the after-tax profit generated from each dollar invested in the total assets of the business In other words, it shows how muchprofit for each dollar of assets used in the period The higher this indicator, the better.Thereby reflecting the profitability of the assets of the business

e Return on Equity (ROE)

Return on equity (ROE) is determined by the ratio of profit after tax to the averageequity during the period of the business Recipe:

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Net incomeROE = ———————_——— x 1009 2.11Average Total Equity * 7 ( J

(Average equity for the period is calculated as the average of the enterprise'sbeginning and ending equity In the absence of sufficient data, the analyst may use equity

at at a certain point in time, for example at the end of the period, instead of average equity)This indicator is considered the ultimate measure of an enterprise's performance Thisratio indicates the size of the after-tax profit generated from each dollar invested by theowners In other words, it shows how much profit after tax for each dollar of equity used

in the period The higher the value of the indicator, the higher the return on equity, thehigher the business efficiency and vice versa; The smaller the value of the indicator, thelower the return on equity, the lower the business performance From there, it reflects theefficiency of the enterprise's use of equity and the relative return that shareholders enjoywhen investing in the enterprise Therefore, ROE is an indicator of special interest toinvestors, often used as a basis for assessing the profitability of an enterprise, helpingpotential investors make decisions in investment activities invest in corporate shares.

2.2.3 The relationship between capital structure and profitability

The relationship between capital structure and profitability has been a populartopic in recent decades Determining an optimal capital structure is the goal of manyresearchers worldwide However, an optimal capital structure is difficult to find because

of the differences between different companies and industries As a result, many scholarslimit their research to only one industry or one region at a time in order to increase model

accuracy.

Gill and colleagues (2011) state that the relationship between capital structure andthe profitability of a business cannot be ignored because improving the profitability of abusiness is necessary for its long-term survival In other words, profitability is the main objective of a business if it wants to operate and develop in the long term Any businesscannot exist without profits over a long period of time Therefore, it is essential todetermine the current profitability of a business and forecast this ability in the future Thereturn on investment ratio is considered a very important indicator in businessmanagement Managers today are always concerned with the efficient use of assets toimprove the profitability of the business because pressure from shareholders forcescompanies to find ways to increase the efficiency of assets, thereby helping the companymaintain its competitiveness There are many forms of profitability ratios such as return

on assets, return on equity, and profit margins that are reflected in the financial ratios

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published by almost all businesses Hamid and colleagues (2015) affirm that profitability,also called financial performance, is closely related to the capital structure of the business.

While ROA is not a perfect measure, it is the most effective and available financialmeasure to gauge a company's performance It essentially measures businessperformance perfectly, showing both income statement performance and the assetsneeded to run a business According to David Lindo quoted by Siminica & Stefan (2011),

"Return on Assets (ROA) is a general-purpose financial metric that is used to measure therelationship of returns earned to required investment assets." necessary to earn thatreturn [ ] The ROA percentage is a baseline that can be used to measure the requiredreturn on investments from new investments." Research by Tailab (2014) also believesthat ROA is a good proxy for profitability as it relates to the firm's return on underlyingassets Phan Thanh Hiep (2016) also supports that the profitability of enterprises ismeasured by ROA In addition, studying the relationship between capital structure andprofitability, to measure profitability Tailab (2014), Phan Thanh Hiep (2016) also usesreturn on equity (ROE) as a proxy ROE was also chosen by Gill et al (2011) and Addae

et al (2013) as a representative of firm's profitability in studies on the impact of capitalstructure on corporate profitability

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CHAPTER 3: RESEARCH METHODS

3.1 Research methods

In order to conduct a comprehensive analysis on the relationship between capitalstructure and profitability, students utilize a variety of qualitative analysis methods.These include data synthesis, data description, statistics, comparison, and the use ofvarious indicators attached with graphing and tables These qualitative methods help toprovide a detailed and holistic understanding of the factors that may influence theprofitability of construction and real estate enterprises listed on HNX and HOSE

To complement the qualitative analysis, students also make use of variousquantitative research tools These tools include the application of Pooled OLS model,Fixed Effects Model - FEM, and Random Effects Model - REM to regression panel datausing STATA 14 software The quantitative analysis methods allow for the identification

of significant relationships between different variables, such as the impact of capitalstructure on profitability

When collecting data for qualitative analysis, students obtain information fromvarious credible sources, including the World Bank, Financial Magazine, Industrial andCommercial Magazine, etc This ensures that the collected data is reliable and accurateand it also helping to clarify the research hypotheses

In addition to conducting regression analysis, students also use the Hausman test

to select a suitable model for the research This test helps to ensure that the modelselected is appropriate for the research question being addressed, and that the resultsobtained are valid and reliable

Finally, students compare the quantitative results obtained from their analysiswith previous studies and real-world situations to evaluate the influence of capitalstructure on the profitability of construction and real estate enterprises listed on HNX andHOSE By taking into account the results obtained from both qualitative and quantitativeanalysis methods, students are able to arrive at a more complete understanding of therelationship between capital structure and profitability in the construction and real estateindustries

3.2 Research models

3.2.1 Hypotheses

Capital structure with the proxy variable is the short-term debt ratio (SDA):because the short-term ratio is also a part of the debt ratio, it is also with M&M theory andpecking order theory combined with empirical studies such as: Ahmad et al (2012), Addea

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A A et al (2013), Tailab (2014), Vo Minh Long (2016) The results of these studies showthat the impact of short-term ratios on profitability is more negative than positive This isalso consistent with the author's assessment because the characteristics of theConstruction - Real estate industry in the recovery of capital is quite long, the number oflong-term assets is large A lot of short-term debt will increase risks and pressure on theliquidity of enterprises, increase the difference between short-term assets and short-termliabilities, the possibility of financial imbalance Hypothesis H1 is as follows:

H1: Short-term debt ratio (SDA) will have a negative impact (-) on profitability

Capital structure with the proxy variable is the long-term debt ratio (LDA): withthe characteristic that the long-term debt ratio is also part of the debt ratio, when used,long-term debt is much more stable than long-term debt short-term debt, so also withDurand's (1952) and trade-off theory, and combined with the studies of authors such as:Tailab (2014), Vo Minh Long (2017), the results all show LDA has a positive relationshipwith profitability Other empirical studies show that although research results may differ

on LDA's impact on profitability, most of them are in a positive direction Hypothesis H2

is as follows:

H2: Long-term debt ratio (LDA) will have a positive (+) impact on profitability

Enterprise scale: Large enterprise scale easily attracts the attention and largeinvestment of many domestic and foreign partners so that enterprises can increase thescale of assets, finance and technology thanks to the ability to access higher capital due

to favorable conditions in terms of prestige, brand, even market share and financialstrength This is an advantage to improve operational efficiency and positively impactprofitability Research by Phan Thanh Hiep (2016), Vo Minh Long (2016, 2017) all showthe research results that firm size has a positive impact on profitability Accordingly, largeenterprises have many benefits and change shields to be able to resist fluctuations in badcash flows, supporting the use of more financial leverage Firm size is an inverse proxy forbankruptcy probability and reduces the cost of financial distress which is also consistentwith the trade-off theory Therefore, the students hypothesized 3:

H3: Firm size (SIZE) has a positive (+) effect on profitability

GROWTH and INF: GDP growth and inflation rate are two important macro factorsthat can affect many economic sectors, including the real estate construction industry.However, assessing their impact on the profitability of this industry is complex anddepends on many different factors First of all, GDP growth is seen as a positive factor forthe profitability of the real estate construction industry This is because GDP growth often

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goes hand-in-hand with economic development and increased demand for real estate Asthe economy develops, people tend to consume more, businesses have the need to expand,invest in real estate to serve purposes such as production, business, living Therefore,GDP growth can lead to an increase in demand for real estate, helping to increase salesand profits of businesses in the real estate construction industry The inflation rate is also

a macro factor that can affect the profitability of the real estate construction industry Ifthe level of inflation is high, the prices of raw materials, labor and other factors ofproduction will also increase This will increase the production costs of enterprises in thereal estate construction industry and reduce profits In addition, a high level of inflationcan also lead to an increase in interest rates, reduce the ability of businesses to borrowcapital and reduce the ability of customers to buy houses and real estate, affecting theperformance of businesses in the industry

H4: GROWTH will have a positive (+) impact on profitability and INF will have anegative (-) impact on profitability

Short-term solvency: For businesses, the role of short-term solvency is veryimportant in assessing the health of the business However, if the business continues toimprove its short-term solvency, it may have too many short-term assets, which mayindicate that the business is not using assets effectively And it may not be able to improveprofitability; or even a decrease in profit will reduce profitability and this is shown by thestudy of Vo Minh Long (2016) Thus, hypothesis 6 in this research period is:

H5: Short-term solvency (CR) will have a negative (-) impact on profitabilityTangible fixed assets: For non-financial businesses, the role of tangible fixed assetsoccupies a very important position in creating business value The larger the turnover oftangible fixed assets, the lower the value of the business A particularity of the real estateindustry is that the turnover of tangible fixed assets is often very large In addition, wheninvesting in many tangible fixed assets, it requires businesses to manage and use themeffectively, but in the research period when the market is still changing, the investment intoo many assets will increase pressures and risks for businesses Accordingly, the studymakes the fourth hypothesis:

H6: Tangible fixed assets (TANG) will have a negative (-) impact on profitability3.2.2 Models

The capital structure variable in finance refers to the way a company finances itsoperations and growth by using different sources of funding such as debt and equity Intheory, the capital structure can be decomposed into three components: short-term debt,

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