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Da Nang City January 2016 Bachelor of Corporate Finance Thesis “THE IMPACT OF FOREIGN OWNERSHIP ON CAPITAL STRUCTURE OF FIRM LISTED ON HOSE” BACHELOR OF CORPORATE FINANCE GROUP Table of Contents BACHELOR OF CORPORATE FINANCE GROUP ACKNOWLEDMENT In fact, this thesis would not be successful finished without the support, encouragement as well as assistance, no matter much or less, direct or indirect of many people During the period from the start of study in university so far, we have received a lot of attention and help by teachers, family and friends We would like to send our sincere thanks to all FPT University professors and lectures together with knowledge and enthusiasm to impart valuable lessons for us during studying at school We would like to send our deepest and greatest gratitude to our supervisor M.FinVo Hoang Diem Trinh All the instruction and motivation given by her were great help in completing this thesis and we are thankful for these invaluable times as well as being the best guider in this strenuous journey Last but not least, our special thanks were extended to our families and friends, especially parents Our thanks also go to them for their support, encouragement and belief We will always appreciate their loves BACHELOR OF CORPORATE FINANCE GROUP ABSTRACT There are several studies that have focused on diverse linkages of foreign ownership and capital structure; however, some limitations still exist There are some gaps in their research Apparently, most previous studies have paid their attention on the impacts of foreign investment on firm performance, but there is a lack of research about its influence on decisions of financing Theoretically, the relationship between foreign ownership structure and capital structure has been established, but there are only a few empirical studies have examined this linkage, especially in developing countries such as Viet Nam Therefore, there is limited anecdotal empirical evidence on the influence of foreign ownership on capital structure, especially in developing countries likes Viet Nam In fact, with the sharp increase in globalization and foreign investment, equitisation process in Viet Nam, foreign ownership has been being a kinds of ownership structure have recently become important and common To fulfill these gaps, the research used data from 161 non-financial listed firms on HOSE in Vietnam during the period 2009–2014 and employed pooled ordinary least squares, random effects and fixed effects regression methods, and the dynamic panel generalized method of moments for analyzing data to examine the linkage between foreign ownership and capital structure in Viet Nam Although various approaches were applied, all results were consistent Additionally, foreign owners with experience, knowledge and incentives can help firms to reduce agency costs of equity through actively monitoring the management This research also supports the argument that one of the greatest concerns of managers is to retain or increase their control because it provides them with discretion in making decisions or accessing their private benefits BACHELOR OF CORPORATE FINANCE GROUP LIST OF ABBREVITION Characters AEC BLEV BOD CAPEX CFO DOL EBIT FDI FEM / FE FII FO FTA GDP HNX HOSE IMF LIQ MLEV NPLs PPMC REM / RE ROA ROE ROI ROTC SMEs SOCBs SOEs TNG TPA VCCI WTO Meanings Asean economic community Book leverage Board of director Capital expenditure Chief financial officer Degree of operating leverage Earnings before interest and taxes Foreign direct investment Fixed effects model Foreign institutional investor Foreign ownership Free trade agreement Gross domestic product Ha Noi Stock Exchane HoChiMinh Stock Exchange International Monetary Fund Liquidity Market leverage Non-performing loans Pearson Product – Moment Correlation Random effects model Return on asset/ profitability Return on equity Return on investment Return on total Small and medium-sized enterprises State-owned commercial banks State-owned enterprises Tangibility Trans -Pacific Partnership Agreement Vietnam Chamber of Commerce and Industry World Trade Organization BACHELOR OF CORPORATE FINANCE GROUP BACHELOR OF CORPORATE FINANCE GROUP LIST OF TABLES AND FIGURES LIST OF TABLES Table Table Table Table Table Table Table Table Table Table Table 10 Table 11 Table 12 Name Net inflow portfolio equity of foreign investors (USD million) Trading volume of foreign investors Variables used in this study Descriptive Statistics of foreign ownership, capital structure and control variables Correlation coefficients between measures of foreign ownership and bool leverage ratio Correlation coefficients between measures of ownership structure and market leverage ratio The effect of foreign ownership on capital structure – pooled OLS regression The effect of foreign ownership on capital structure – Random effect regression The effect of foreign ownership on capital structure – Fixed effect regression The effect of foreign ownership on capital structure – Fixed effect regression with robust standard error Systematic time-lagged regressions of impact of foreign ownership on capital structure of firms listed on HOSE Summary of result for hypotheses Page 13 13 39 52 54 54 55 57 58 59 64 65 LIST OF FIGURES Figure Figure Figure Figure Figure Figure Name The Modiglinani and Miller (MM) theory The capital structure The effect of foreign ownership on capital structure - MLEV The effect of foreign ownership on capital structure - BLEV Four steps in the deductive approach research Page 23 25 33 34 42 BACHELOR OF CORPORATE FINANCE Figure Figure Research progress Panel data analysis’s conceptual framework GROUP 44 50 BACHELOR OF CORPORATE FINANCE GROUP CHAPTER 1: INTRODUCTION 1.1 Research background In the world of increasing globalization, foreign investment is a trend for all companies over the world Being a strongly emerging developing economy, Vietnam has become an attractive market for investment inflows As a matter of fact, there has been a growing overseas cash flow into the country In recent years, foreign investment in the industrial sector in Vietnam has established the development and promoting economic growth Moreover, to be keep pace with the borderless trade as well as pave the way for foreign funds into domestic companies, Vietnam government has enacted The Law of Foreign Investment in Vietnam since 1987 Up to now, the law has been amended many times and the latest amendment is in the beginning of 2014 to extend the maximum rate of foreign ownership in domestic commercial bank From this, it is indicated that foreign investment not only contributes to the process of integration with the world economy of Vietnam but also plays a very important role for our country's economy Most of the Vietnam enterprises previously are owned by the state and dependent on the funding from the government However, in the context of economic reform from the mid 80’s onwards, a number of enterprises were privatized and rapidly developed with the diversity in ownership structure such as private ownership, foreign ownership and joint-stock companies That is reflected by strong economic growth, the participation in the World Trade Organization (WTO - 2007) as well as Trans-Pacific Partnership Agreement and the establishment of Vietnam stock exchange market in 2000 The prosperity of corporations depends greatly on the access to appropriate source of capital such as debt or equity, as well as determining the optimal capital structure Upon the advancement, Vietnam though is in lack of the diversity of financial channels and empirical researches which are consistent with the reality of capital structure so that they can support enterprises to make appropriate financing decisions BACHELOR OF CORPORATE FINANCE GROUP 1.2 An overview about foreign ownership in Vietnam 1.2.1 Vietnamese listed firms The number of listed firms has been increasing noticeably since 2000 Specifically, on the first trading day, only two stocks with a total market capitalization of USD 27.95 million were listed In the next five years, the growth by number of listed companies was rather slow However, the situation changed quickly in the period 2006–2013 The number of listed companies increased sharply from 193 in 2006 to 696 in 2013 (HoChiMinh Stock Exchange [HOSE] 2013) An examination of the ownership structure of listed firms reveals that, although the proportion of shares owned by foreign investors in Vietnam is limited to 49% by law (Robinson 2012), this ownership is an essential part of the ownership structure in listed firms in Vietnam In terms of state ownership, through the privatization programs, the average of state ownership dramatically decreased; however, state ownership still accounts for a significant proportion of listed Vietnamese firms Another point is that the percentage of foreign and state ownership varies considerably from industry to industry, and from firm to firm Foreign ownership is significantly higher in healthcare, oil, gas and technology, which also have high performance in both accounting and market value Hence, questions can be raised regarding whether relationships exist among ownership structure and capital structure 1.2.2 Foreign investment in Vietnamese stock market During the global financial crisis of 2008, the net foreign inflow into the Vietnam equity market decreased sharply before recovering in recent years The net foreign portfolio inflow was higher than those of Indonesia, Thailand and Philippines, reaching USD 1.3 billion in 2013 (see Table 1) The Vietnam stock market is becoming more and more of an attractive investment channel for foreign investors, and the market expectation is for continued growth in foreign portfolio investment inflows in the future This can be explained by the fact that Vietnam is an emerging market with a high growth rate and that the Vietnamese firms are undervalued and considered cheap compared with their regional peers in Asia (Rong Viet Securities 2011, 2014) 10 BACHELOR OF CORPORATE FINANCE GROUP 3.4.1 Detection for multicollinearity When there is a high correlation between two or more predictor variables in regression model, it is called multicollinearity In other words, when multicollinearity occurs, one variable can be linearly predicted from the other variables with a non-trivial degree of accuracy The authors will use the correlation matrix to explore whether or not it contains multicollinearity errors According to Hair et al (1998), the multicollinearity occurs between a pair of variables when the correlation number is about 0.8 or higher 3.4.2 Detection for Heteroscedasticity Heteroscedasticity is said to be occurred when the variability of a variable is not equal across the range of values of a second variable that predicts it To make it simple, Heteroscedasticity occurs when the variances of observations are inconstant The Breusch – Pagan based test is conducted to test the problem of Heteroscedasticity There are two hypotheses: H0: The variance of all observations is constant H1: The variance of all observations is not constant If P-value is smaller than α (at 1%, 5% or 10% level of confidence), the authors failed to reject the H1 hypothesis, thus there is Heteroscedasticity error in the model Otherwise, when p-value is greater than α, rejecting the H1 hypothesis would lead to a Heteroscedasticity error-free Figure 2: Panel data analysis’s conceptual framework (Source: Authors’ development) 47 BACHELOR OF CORPORATE FINANCE GROUP 3.4.3 Detection for Autocorrelation The autocorrelation error indicates the correlation of a time series with its own past and future values It can also say that autocorrelation is the similarity between observations To check out this error, Wooldridge test for autocorrelation in panel data is conducted with H0: no first-order autocorrelation 3.5 Ethical consideration and Limitations 3.5.1 Ethical consideration In the process of conducting this study, the ethical standard of doing good and not harm was applied Though our research consults on some previous studies, the data also the results used in this study take the pledge that our team always have respect the copyright and not distort the content of the researches In the references part, the team listed enough the name of authors as well as research, year of research which were mentioned Furthermore, all results were secured with the truthfulness There were no edition and intermediation in the results of the last studies together with the numerical data In any case, we truly make a commitment that every information piece is accurate and dependable In addition, plagiarism was avoided completely in this thesis, in case it can be checked easily by a plagiarism detector program All the used quotes are fully noted in the reference section In conclusion, all the result which presented in this study will be took full responsibility by the group Beside that our group guarantees to avoid the harm to anyone also anything as well 3.5.2 Limitations This research has been conducted carefully and diligent but there are still some limitations due to various reasons when doing research Firstly, the research sample period is relatively short The timeline spans only five years, from 2010 to 2014, which may have some influences on the significance of testing 48 BACHELOR OF CORPORATE FINANCE GROUP Besides, the research also faced some obstacles in collecting data such as foreign ownership percentage because, in Vietnam, there are some rules that is not strict enough to force all companies provide enough information Additionally, the result may be distorted by some effects from the financial crisis that influencing investor behavior Secondly, although the group have used various different methods, including pooled OLS, RE, FE model to identify normality issues such as unobserved effect, heteroscedasticity and potential endogeneity problems Apparently, it is not sure that all the econometric issues were well-controlled, especially in term of endogeneity Because FE and RE models are only focused on unobserved heterogeneity, some endogeneity problems are not accounted, which is time-invariant endogenous variables and reverse causality and he measurement errors that often happens in financial related research 3.6 Conclusion Generally, this part aims to explain all the models being used in the research as well as ethical consideration and limitations After applying these models to the data, the results and findings will be displayed in next chapter with full explanatory 49 BACHELOR OF CORPORATE FINANCE GROUP CHAPTER 4: DATA ANALYSIS AND FINDINGS 4.1 Introduction Findings from the studies are presented in this chapter At initial the effect of foreign ownership on capital structure is demonstrating The ratio of total debt to the market value of total assets and the ratio of total debt to book value of total assets as proxy for capital structure Besides, various method is applied, including RE, FE, and pooled OLS were utilized to analyze econometric issues of unobserved heterogeneity or the endogenous problems, thereby increasing the robustness of the results This chapter is organized as follow Part 5.2 shows a descriptive for the data, section 5.3 represent the correlation between variables Section 5.4 and 5.5 present the results on the effect of foreign ownership on capital structure Final section is the conclusion 4.2 Descriptive analysis stats fo size blev mlev roa mean 0.138 11.9 0.472 0.463 max 0.883 13.5 0.875 0.951 9.24 0.00262 0.00263 -0.646 sum 165 15269 607 548 97.2 p50 0.0689 11.8 0.498 0.462 0.0637 0.767 0.25 0.0356 1.64 sd 0.162 0.204 0.246 0.0765 800 0.205 0.0791 2.04 0.583 dol tng capex 0.0755 -27.1 0.288 0.0618 2.19 0.501 0.939 0.568 25.9 -26501 0 0.113 -30557 371 79.5 2814 665 liq Table 4: Descriptive Statistics of foreign ownership, capital structure and control variables Summary of all variables as proxies of capital structure, foreign ownership, capital structure and other control variables are shown in the table The mean of total book leverage and market leverage overall account for 47.18% and 46.25% during the period of 2010 to 2014 and widely disperses, from 0.2615% to 87.5% and from 0.26% to 95.09%, 50 BACHELOR OF CORPORATE FINANCE GROUP respectively For examples, 22% reported by De La Bruslerie and Latrous (2012) for French companies during the period 1998–2009; 33.4% observed by Lin et al (2011) for 22 Western European and East Asian countries from 1996 to 2008; and only relatively the same 47% documented by Zou and Xiao (2006) for China listed firms These number told that, in order word, most firms in Vietnam are financed by banking rather than an issuance of equity Besides, the mean of foreign ownership occupied 13.75% of total ownership structure In the duration of 2010 to 2014, the proportion of shares that foreigner can buy in Vietnam is limited to 49% by law 4.3 Correlation Analysis The links between foreign ownership and capital structure is determined by correlation analysis The table and table represent the correlation between all variables which was considered in the regression Overall, according to the result, most correlation coefficients among these variables are quite low As can easy to be seen in the table 5, the highest coefficients (-0.5334 and -0.6278) present the relationship between BLEV (Book leverage ratio) and (Return of Asset) ROA, (Liquidity) LIQ respectively And in the table 6, the highest coefficients (-0.7149 and -0.5620) present the relationship between BLEV (Book leverage ratio) and (Return of Asset) ROA, (Liquidity) LIQ respectively And the other coefficients are mostly quite close to 10% Besides, to check whether the existence of multicollinearity among these variables, VIF test is conducted in this study for panel data through the collin command According to the result of VIF test, we have all figures show the result less than 10%, which is showed that the multicollinearity problems is not serious in both two model BLEV and MLEV The correlation coefficients for the relationship between market leverage and book leverage (capital structure) with foreign ownership is -0.2351 and -0.3291 respectively, which is higher than most of these figures, suggesting the strong relationship between foreign ownership and capital structure Specifically, according to Gujarati (2003) correlation coefficient smaller than 0.8 is acceptable and insignificant 51 BACHELOR OF CORPORATE FINANCE GROUP blev Fo size roa dol tng capex liq Blev 1.0000 Fo -0.2351 1.0000 Size 0.3467 0.2515 1.0000 roa -0.5334 0.2444 0.1285 1.0000 dol -0.0552 -0.0352 -0.0086 0.0731 1.0000 tng -0.0933 0.0644 0.0090 -0.0185 -0.0139 1.0000 capex -0.0468 0.1082 0.1358 0.2024 -0.0157 0.4176 1.0000 liq -0.6278 0.1075 -0.1958 0.3992 0.0250 -0.1731 -0.0370 1.0000 Table 5: Correlation coefficients between measures of foreign ownership and bool leverage ratio mlev fo size roa dol tng capex liq mlev 1.0000 fo -0.3291 1.0000 size 0.1082 0.2515 1.0000 roa -0.7149 0.2444 0.1285 1.0000 dol -0.0374 -0.0352 -0.0086 0.0731 1.0000 tng -0.0932 0.0644 0.0090 -0.0185 -0.0139 1.0000 capex -0.1613 0.1082 0.1358 0.2024 -0.0157 0.4176 1.0000 liq -0.562 0.1075 -0.1958 0.3992 0.025 -0.1731 -0.037 1.0000 Table 6: Correlation coefficients between measures of ownership structure and market leverage ratio 4.4 Pooled OLS regression analysis Pooled OLS regression was applied to assess the linkage between foreign ownership and debt level while controlling other variables SIZE, return on asset (ROA, profitability), Degree of operating leverage (DOL), Tangibility (TNG), Capital Expenditure (CAPEX), Liquidity (LIQ) The first column represents effects of foreign ownership on book leverage and the second column shows the effects of foreign ownership on market leverage In the parentheses below each coefficient is the standard error The OLS regression results in both model of BLEV and MLEV shows that foreign ownership has significant effect on capital structure As can be seen from the table 4.4, the coefficient of foreign ownership is negative (-0.2815 and -0.2638) for BLEV and MLEV, 52 BACHELOR OF CORPORATE FINANCE GROUP respectively at the 1% level of significance, which mean that an increase of 1% foreign ownership will lead to 0.2815% and 0.2638% decrease in BLEV and MLEV, respectively Besides, other control explanatory variables such as size, ROA, LIQ have significant effect on leverage ratio, while degree of operating leverage, tangibility and capital expenditure did not However, when adopted pooled OLS when analyze panel data, the consistency and efficiency are still widely questioned because unobserved effects or individual effect issues common in non-experimental research are not considered by pooled OLS (Baltagi, 2005) Therefore, RE and FE methods were used to deal with unobserved heterogeneity VARIABLES fo size roa dol tng capex liq Constant Blev Mlev -0.2815*** (-3.63) 0.1222*** (6.32) -0.9500*** (-5.49) -0.0000*** (-3.80) -0.1024 (-1.34) 0.1381 (1.14) -0.0394** (-2.25) -0.9074*** (-3.67) -0.2638** (-2.49) 0.0652* (2.00) -1.5692*** (-6.47) -0.0000 (-0.23) -0.1252 (-1.47) -0.1309 (-1.33) -0.0382** (-2.62) -0.1955 (-0.51) Observations 805 805 R-squared 0.6379 0.7041 Adjusted R-squared 0.621 0.690 Robust t-statistics in parentheses *** p