A study of the factors affecting the capital structure of the companies listed on vietnam stock market

The objective is not to see whether the firm’s existing capital structure is optimal or not, but to analyze the factors affecting the Vietnamese companies’ capital structure, thereby hel

INTRODUCTION

1 Relevance of the study

The issue of determination of optimal capital structure at a

certain point of time has been a challenge for any company In fact,

hardly anyone can solve the optimal capital structure problem

Companies often determine a certain level (or a range) of target

capital structure before making the capital structure decision In

order to estimate this target capital structure, the financial managers

should specify the determinants of firm’s capital structure, based on

that the company’s target capital structure for each particular period

is estimated

During the last decades, there have been many studies on the

firm’s capital structure Most of the studies use modern theory

models to explain the capital structure choice and provide empirical

evidence on the explainability of the models in practice The object

of study is the listed companies in developed countries that have

much similarity in institutional condition, particularly the US,

Europe, Japan etc Previous studies not only analyze the effect of

firm-specific factors, but also explore the impacts of the economic

environment and industry factors on the firm’s capital structure

The negative impacts of the global financial crisis starting

from 2008 have been the cause of the economic slowdown in

Vietnam ever since Up to the now, the situation hasn’t completely

got over, evidenced by high inventories and difficulties in raising

funds of the companies This situation leads to the fact that firm’s

production is contracted and sunk, a number of companies have to

cease the operation or even collapse This is the time that companies

should have a comprehensive evaluation of their financial policy,

including the financing policy

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For the above metioned meaning, there should be am overall assessment of the Vietnamese companies’ capital structure in order

to understand the fundamental features of the firm’s financing policy The objective is not to see whether the firm’s existing capital structure is optimal or not, but to analyze the factors affecting the Vietnamese companies’ capital structure, thereby helping the firm making capital structure policy effectively in the coming time In spite of a number of studies on the firm’s financing policy undertaken in developing countries such as China, India, Pakistan, Thailand, the Central East European countries etc., few studies have been carried out to investigate the factors affecting the firm’s capital structure in Vietnam

The topic “A study of the factors affecting the capital

structure of the companies listed on Vietnam stock market” was

chosen for this PhD thesis and is expected to fill the gaps in the previous studies.

2 Research objectives and questions

2.1 Research objectives

The overall objective of the thesis is to determine the factors affecting the capital structure of the companies listed on HoChiMinh Stock Exchange and Hanoi Stock Exchane

The specific objectives of the thesis include: (i) Analyse the current status, characteristics, trend of changes in Vietnamese listed companies’ capital structure, (ii) Identify the company specific factors affecting the capital structure of listed companies; (iii) Evaluate the impact of the state ownership factor on the firm’s capital structure; (iv) Assess the impact of the listing of shares on capital structure policy; (v) Demonstrate the significant differences

in capital structure between manufactoring and non-manufactoring

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industries; (vi) Analyse the impact of managerial factors of the

Vietnamese companies on the capital structure; (vii) Propose the

solutions for the companies and recommendations to the government

and regulatory bodies to improve the capital structure of listed

companies in Vietnam

2.2 Research questions

In order to achieve the seven research objectives mentioned

above, the thesis focuses on answering the following five research

questions: (i) What are the main features of capital structure of

Vietnam listed companies?; (ii) Can the Vietnamese companies’

capital structure be explained by the capital structure theories?; (iii)

How does the state ownership affect the capital structure policy?;

(iv) How does the share listing affect the firm’s capital structure?; (v)

Does the companies in manufactoring industries use more debt and

others? (vi) How does companies adjust their capital structure policy

since the global financial crisis; (vii) Beside the factors indentified

by the theories, how does the managerial factors affect the firm’s

capital structure?

3 Object and scope of the research

3.1 Object of the research

Object of the thesis is the firm’s capital structure and factors

affecting capital structure of the companies listed on the Vietnam

stock market The listed companies are chosen as object of the study

because they represent the companies across different industries,

sectors in the economy and have the best environment to implement

the financial policy

3.2 Scope of the research

3.2.1 From the geographical aspect

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The thesis focuses on investigating factors affecting the capital structure of the companies listed on HoChiMinh Stock Exchange and Hanoi Stock Exchange

3.2.2 From the timeline aspect

The thesis analyses the impact of factors on the listed companies’ capital structure over the last 6 years The secondary data was collected for the period from 2007 to 2012 Besides, the thesis also uses primary data collected from a survey of financial policy of Vietnamse companies conducted in 2013

4 Structure of the thesis

In addition to the introduction, conclusion, table of content, list of acronyms, list of tables, list of figures, list of references and appendix, the thesis is structured into 4 chapters as follows:

Chapter 1: Theoretical framework and literature review of factors affecting company’s capital structure

Chapter 2: Research methodology Chapter 3: Overview of listed companies and status of capital structure of listed companies in Vietnam

Chapter 4: Analysis of factors affecting capital structure of listed companies in Vietnam

Chapter 5: Solutions and recommendations to improve capital structure of listed companies in Vietnam

5 New contribution of the thesis

The thesis has new contribution to the literature of the factors affecting the capital structure of listed companies from both theoretical and practical perspectives, specifically:

From the theoretical perspective:

Previous studies mostly focus on the financing policy of companies in developed countries Recently, researchers tend to

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expand the topic to the companies in developing countries, ussually

in big economies such as China, India, Thailand or transitional

countries in Central East Europe In general, the research results are

inconsitent Due to the limitation in data collection, there still few

studies on firm’s capital structure policy are undertaken in Vietnam,

Most of these studies uses the financial data of listed companies over

a short time period This thesis expect to provide an addtional

empirical evidence on the capital structure policy of Vietnamese

companies, using both financial and non-financial data collected

from the listed company database and primary source of data

collected through company survey In addition, the research model

also supplements dummy variables that allow to evaluate the capital

structure of companies with different ownership structures, stock

trading exchanges, business sectors, evaluate changes in the

companies’ capital structure before and after the financial crisis The

thesis also analyses the impact of the managerial factors, including

management strategy, psychology, human resources and relationship

network, which few earlier studies in developing countries account

for

From the practical perspective:

This thesis provides an overall assessment on the financing

policy of the listed companies in Vietnam, thereby allowing the

policy maker to indentify the type of companies that need to be

supported by the government, seeking for the solutions to help

companies undertaking their financing policy more effectively

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CHAPTER 1 THEORETICAL FRAMEWORK AND LITERATURE REVIEW OF FACTORS AFFECTING COMPANY’S

CAPITAL STRUCTURE 1.1 Basic concept of capital structure 1.1.1 Company’s source of capital 1.1.1.1 Borrowings

1.1.1.2 Owner’s equities 1.1.2 Company’s capital structure

1.1.2.1 Definition

Stephen A Ross, Randolph W Westerfield and Bradford D

Jordan (2003) in “Fundamental of Corporate Finance” states that the

firm’s capital structure or financial leverage is the specific mixture

of debt and equity that the firm uses to finance its business operation

1.1.2.2 Capital structure measurement

a Company’s capital structure measures

b The book value based and market based capital structure 1.1.2.3 Optimal capital structure

The optimal capital structure is the mix of debt and equity that minimize the firm’s cost of capital, thereby maximizing its value

The company’s capital structure, however, is affected by a number of factors which are not easy to indentify Therefore, determination of optimal capital structure at a specific point of time

is still a challenge for companies as well as researchers In fact it is difficult to estimate a specific optimal capital structure and companies ussually estimate a range of optimal capital structure called target capital structure, based on that they make the capital

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struture policy At a certain point of time, a company has its own

target capital structure level and the target level may change from

time to time

1.1.2.4 Factors affecting the company’s capital structure

a Company specific factors

b Industry factors

c Economic environment factors

1.2 Capital structure theories

1.2.1 Modigliani and Miller’s Capital Theory (M&M)

1.2.2 Trade-off Theory

1.2.3 Agency Costs Theory

1.2.4 Signalling Theory

1.2.5 Pecking Order Theory

1.2.5 Market-timing Theory

1.3 Literature review of factors affecting capital structure

1.3.1 Review of empirical studies around the world

1.3.2 Review of empirical studies in Vietnam

CHAPTER 2 RESEARCH METHODOLOGY 2.1 Research design

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Diagram 2.1: Analytical framework

Source: Author

2.2 Empirical testing of impact of firm-specific factors on

capital structure 2.2.1 Hypothesis development

(1) Factors relating to M&M Theory (1963) and Trade-off Theory

(2) Factors relating to Agency Cost (3) Influences of other factors

2.2.2 Data and sample

To test for the impact of the aboved mentioned factors on the the capital structure of listed companies, the thesis uses balanced panel data of companies listed on HoChiMinh Stock Exchange and Hanoi Stock Exchange during the period from 2007 to 2012 These companies are at different asset size, operating in different businesses, and therefore are able to represent the whole companies

Secondary analysis

of firm-level data

In-depth interview

Company survey

Verification of existing findings

Development of survey instrument

Factors affecting capital structure as predicted by financial theories

Empirical testing

of the impact of managerial factors

on capital structure

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in the economy The total research sample is 193 non-financial

companies (including 90 listed on the Hanoi Stock Exchange and

103 listed on the HoChiMinh Stock Exchange) from 2007 to 2012

2.2.3 Research model

Regression model: Based on the research questions, the

thesis use a multiple linear regression model described as follows:

yit = αi + βjXjit + γ1GOV + δ1FLOOR + λ1MANU +

∆1YEARDUM + ɛit

Model variables

Dependent variable is financial leverage measured by three

debt ratios: total debt ratio, long-term debt ratio and short-term debt

ratio Explanatory variables include effective tax rate, non-debt tax

shield, bankrupcy risk, business scale, profitability, asset tangibility,

business growth, liquidity, state ownership dummy, stock exchange

dummy, industry dummy and year of observation dummy

Estimation method

Pooled Ordinary Least Square- Pooled OLS

Fixed Effects Model-FEM

Random Effects Model-REM

2.2.4 Descriptive statistics and correlation matrix

2.3 Empirical testing of the impact of the managerial factors

on capital structure

2.3.1 Research hypothesis

(1) Factors relating to management strategy

(2) Factors relating to psychology

(3) Factors relating to human resources

(4) Factors relating to relationship network

2.3.2 Data and sample

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Data are collected through online survey questionare Of the

500 email sent, 112 are responded, however 52 of the responded results are excluded as the respondents are in unlisted companies, the remaining 60 responses are valid

2.3.3 Research model and variables

The analytical method used is the ordinary least square (OLS) for cross sectional data, the estimation function is as follows:

yi = αi + βjXi + ɛit The explained variables are also measured by: total debt, long-term debt ration and short-term debt ratio; explanatory variables include the management variables and controlling variables

2.3.4 Descriptive statistics

CHAPTER 3 OVERVIEW OF LISTED COMPANIES AND STATUS OF CAPITAL STRUCTURE OF LISTED COMPANIES IN

VIETNAM 3.1 Overview of listed companies in Vietnam 3.1.1 Company reform and stock market development in

Vietnam 3.1.1.1 Company reform in Vietnam

The process of state-owned company reform has experienced the phases of history and achieved a lot of positive outcomes of which the most noted one is the synchoronous formation of regulation system creating legal framework for renovating, rearranging and restructuring of state-owned companies as well as renovating of the government’s controlling mechanism at state-owned companies

3.1.1.2 Stock market development in Vietnam

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a Equity market

After 13 years of establishment and development, Vietnam’s

stock market has achieved significant growth rate The stock market

growth has created a channel for medium and long-term fund

mobilization in addition to the traditional form such as bank credit

and commercial credit

b Bond market

The Vietnam’s bond market is still immature and small in

size, with total market capitalization account for 15% GDP The

liquidity is low and the secondary market is inactive

3.1.2 Features of listing companies

Listing the shares on stock exchanges allows the companies

to be able to raise long-term fund at lower cost, however the listed

companies must satisfy the information disclosure obligation to

ensure that the investors are provided with sufficient, precise and

updated information relating to the business operation of the

companies as well as the changes that may affect the share price

Besides, the corporate governance requirements and standards for

listed companies are more stringent than that for non-listed

companies, the issue of internal control and external supervision of

listed companies is also highly regulated

3.1.3 Overview of listed companies in Vietnam

a The number and scale of listed companies

At the end of 2013, the number of listed companies in

Vietnam’s stock market is 678, operating in different areas of

business, with total market capitalization of 946 trillions dong,

equivalent to 31% of GDP

b Ownership structure

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Local institutional and individual investors are the major shareholders of the listed companies, holding approximately 78.19%

of total number of shares outstanding The government’s ownership

is quite significant (14.05%); foreign investors hold nearly 7.78% of the total number of listed companies’ shares

c Operating results

The operating results in recent years indicate a positive signal of the economic recovery leading to the improved business performance of the listed companies

3.2 The capital structure of Vietnamese listed companies 3.2.1 The status of fundraising structure of listed companies

Statistics show that, compared to listed companies around the world, Vietnamese listed companies use relatively high debt ratio with total liabilities account for 55% of the firm’s total assets, of which debt account from 34-36% It should be noted that most of the debt used by non-financial companies are short-term debt

Statistics on capital structure by sectors show different fundraising structure across different areas of business Companies in the fields of industrials, basic material, comsumer goods, real estate have highest debt ratio, whereas health care, comsummer service companies have the lowest level of financial leverage For all the industries, short-term debt dorminates in total debt

3.2.2 Evaluation of fundraising structure of listed companies 3.2.2.1 Advantages

First, listed companies are able to diversify their sources of

fundraising and have more flexibility in raising funds Second, listed

companies can raise funds at lower cost than that of the non-listed companies

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3.2.2.2 Drawbacks and reasons

Firstly, compared to other companies around the world,

Vietnamese listed companies currently have high debt ratio;

Secondly,most of company’s borrowings are bank loans, which are

short-term and unstable, affecting the company’s long-term

investment plan Thirdly,fundraising activities are basically

irrational, not completely based on the company’s fund uses demand

The above mentioned drawbacks are caused by the following

reasons: First, our economy heavily relies on the banking system

which is estimated to account for 80% of total assets of the whole

financial system, the remainder are shared by the securities market,

insurance companies etc Second, the bond market is still immature

and unattractive to the investors, therefore, doesn’t play the

significant role in medium and long-term fundraising for the the

listed companies through debt instrument issuance Third, though

stock market has experienced impressive development, the market is

still highly volatile and of low liquidity, especially after the big drop

since the global financial crisis Fourth, due to the rapid increase in

the number of listed companies and the rapid growth of the stock

market attracted attention, the market contains certain problems

when it faces difficulties such as the listed company’s corporate

governance, information disclosure and risk management

CHAPTER 4 ANALYSIS OF FACTORS AFFECTING CAPITAL

STRUCTURE OF LISTED COMPANIES IN VIETNAM

4.1 Testing of factors affecting capital structure

4.1.1 Testing of impact of company specific factors on capital

structure

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4.1.1.1 Choosing the estimated models: OLS, FEM and REM

The Breusch and Pagan Lagrangian multiplier (LM test) shows that the Pooled OLS model is unsuitable The Hausman test indicates that, for all the regression models of the three dependent variables, the Fixed Effect Model (FEM) is more efficient than the Random Effect Model (REM)

4.1.1.2 Tests for model specification

Multicollinearity check Results of this test show that VIF associated with all the variables are less than 5 Therefore, there is little evidence of multicollinearity between variables

Serial correlation check Using the Lagram- Multiplier test to check the serial correlation for panel data, the results indicate the existence of serial correlation in all the three models

Cross-sectional dependence check The Pasaran CD test is employed to check whether the residuals are correlated in the FEM The testing results do recognize the cross-sectional dependence problem in all the three models

Hetroskedasticity check The Modifed Wald test is implemented to check the hetroskedasticity problem on the FEM and it is evidenced that there exists the hetroskedasticity problem in all the three models

4.1.1.3 Regression results

This section presents the robust standard error estimates (by fixing the model mispecification problems) for the fixed effect models with depedent variables of total leverage (LEV), long-term leverage (LLEV) and short-term leverage (SLEV) using STATA 11 software

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4.1.1.4 Robustness check of the results

Regression without the non-debt tax shield variable (ndts)

Regression without the bankrupcy risk variable (zscore)

Regression with interactive variables

Basically, the estimation results support the findings from

the initial model although the magnitude of the coefficients is

slightly different

4.1.2 Testing of impact of managerial factors on capital

structure

This section presents the estimation results of the OLS

regression model with dependent varibales of total leverage (LEV),

long-term leverage (LLEV) and short-term leverage (SLEV)

4.2 Anslysis of the factors affecting capital structure

Table 4.12: Summary of analysis results

impact

Notes

Sign of impact agrees with proposed hypothesis

Bankrupcy risk (-) For long-term debt only

The value of collateral (+) For short-term debt only

The manager’s profit

maximization objective

(+) For short-term debt only The manager’s risk prospensity (+)

Management experience (+)

Network tie with banks (+) For long-term debt only

Network tie with other companies (+) For short-term debt only

Sign of impact disagrees with proposed hypothesis

Stock exchange (-) For short-term debt only

Source: Stata Regression output

First, empirical results of analysis on factors affecting the

capital structure is quite consistent with that of other research

undertaken in other countries around the world, however, the

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explanatory power of the modern finance theory for capital structure policy of Vietnamese listed companies is limited due to the fact that the capital structure of companies in Vietnam is remarkably different from those in developed countries in that the short-term financing is dorminated and the the long-term debt is substantially low

- The trade-off theory is unable to explain the capital structure policy of listed companies in Vietnam

- The pecking-order theory partly explains the listed company’s capital structure, unlike the traditional pecking-order theory, the priority order when the listed companies raise funds is retained earnings- equities-debt

- The listed companiess capital structure is affected by the assymetric information between the companies and the lenders (commercial banks)

Second, the state-owned companies are loosing their

advantages over companies owned by other economic sectors in accessing bank loans

Third, there is little evidence that more stringent listing

standards help to improve the long-term fundraising of the companies listed on the stock exchange

Fourth, the capital structure policy is also affected by the

managerial factors such as the company’s profit maximization objective, manager’s risk prospensity, manager’s experience and the network tie between the company and the bank and other companies

4.3 Policy and managerial implication

Policy implication:

- The government and regulatory bodies must be aware of the importance of supporting the listed companies to improve their ability to access to formal sources of capital

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- The government should speed up the process of

rearranging, reorganizing, renovating, developing and increasing the

operation efficiency of the privatized companies to improve their

fund mobilization

- This study also implies the necessity of strengthening

listed companies’ information disclosure regulation

- The stock exchanges should be restructured in the coming

time to support the listed companies’ fundraising

Managerial implication:

- First, managers must be aware of the fact that, in order to

minimize the cost of capital, companies should improve corporate

transparency and build reliability of the public by satisfying

information disclosure requirement

- Companies should evaluate the impact of the risk aversion

on firm’s business growth and development Based on the nature of

the area of business to decide whether they should maintain their risk

attitude and how the risk aversion may affect the company’s

survival This is especially important to the companies operating in

the fast growing and intensively competitive industries

- Companies should be aware of the benefit and importance

of building a wide and strong network tie with lenders, business

partners when they make capital structure dicision

CHAPTER 5 SOLUTION AND RECOMMENDATION TO IMPROVE

CAPITAL STRUCTURE OF LISTED COMPANIES IN

VIETNAM 5.1 Advantages and distadvantages to capital structure

decision making

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5.1.1 Advantages

(1) The macroeconomic condition has been stable since

2012, evidenced by the stability of price index, interest rate indicators

(2) The banking system becoming more and more stable with higher liquidity and lower risk

(3) The stock market restructuring process has achieved certain outcomes

5.1.2 Disadvantages

First, the government still holds a significant influence in a

number of listed companies

than 50% of the credit market share, bank loans largely flow to the big companies that have good relatioship with banks, the credit product is not diversified

Third, individual investors are the major participant, whereas

institutional investors play a limited role on the securities market

Fourth, the insufficient and limited legal framework causes

difficulties and problems to fundraising activities

Fifth, the lack of normativenes in financial management in

Vietnamese listed companies may affect their capital structure decision making

5.2 Solutions to improve capital structure of listed companies 5.2.1 Applying capital structure decision making model

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Diagram 5.1 Capital structure decision making model

Source: Author

The thesis develops a model that can be used as a guideline

for making capital structure decision of listed companies in Vietnam

This model is built based on the results of multi-dimentional analysis

of the factors affacting the capital structure of listed companies in

previous chapters

5.2.2 Establishing a division responsible for capital

management

5.2.3 Diversifying the sources of fundraising and building

strong credit network tie

5.2.4 Improving accounting system and information disclosure

process

First, the listed companies should organize its accounting

division suitable to its management structure In addition, companies

Factors affecting the willingness to use debt

Factors affecting the demand to use debt

Factors affecting the ability to raise debt

Capital structure decisions Profitability

Psychology: risk

prospensity, control aversion

Human resources:

management experience

Asymmetric information:

size, asset tangibility,

growth…

Management strategy:

growth/ profit maximization

Network tie

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should apply information technology in management, using accounting softwares to update daily data to ensure quick and timerly data accessibility

Second, beside the financial statement format as required in

Vietnamese Accounting Standard, the listed companies should more clearly explained the “sensitive” indicators on the notes of the

financial statement

Third, the listed companies should norminate information

disclosure personel or secretary devision responsible for the following up of the company’s information disclosure rather than assign the chief accountants, chief finance officer or member of

board of management to be in charge of this job

5.2.5 Improving the quality of corporate governance

- Increase the awareness of the importance of a sound corporate governance principles

- Establish the company’s own corporate governance and management standard

- Strengthen the role of controlling board and internal auditing division

- Strengthen the cooperation among the boad of management, the controlling board, the chief finance officer and the accounting division in making financial decision in general, capital structure decision in specific

5.3 Recommendation to the government and regulatory

authorities 5.3.1 Improving the legal framework that regulates

fundraising activities of the listed companies

- Draft on amended Corporate Law should supplement the following issues : (1) Amend the regulation on joint stock company’s