Luận văn thạc sỹ quốc tế impact of capital structure FULL DISSERTATION (1)

FACULTY OF BUSINESS AND LAW MSCFVIETNAM ASSIGNMENT HAND-IN FORM I certify by my signature that this is my own work The work has not, in whole or part, been presented elsewhere for assessment Where material has been used from other sources it has been properly acknowledged and referenced If this statement is untrue I acknowledge that I will have committed an assessment offence Student ID: 77182404 Level of Study: Master Module Title: Dissertation Course Title: MSCF2016 Module Tutor: Do Thi Phi Hoai Student Name: Tang Duc Tu Student Signature: Date of Submission: Word Count: 21 September 2017 18.997 (excluding table of contents, reference list) Name of first marker: Mark: Name of second marker: Mark: Summary of feedbacks to student: DISSERTATION ON THE IMPACT OF CAPITAL STRUCTURE ON FIRM PERFORMANCE BY TANG DUC TU ID: 77182404 21 september, 2017 ABSTRACT Capital Structure is regard as the decision made for funding activities, which encompass both elements of debt and equity for funding the assets Whether financial structure affect the firm’s operation is still under investigation due to divergences in different academic frameworks This paper adapts prior studies to look at Vietnamese case, even though there were many inconsistencies in the outcomes and the conclusions might be confusing The case study will examine selected firms in Vietnam in 10-year period (2007 – 2016) using OLS, Random and Fixed Effects regression model to test the theories and variables such as debt ratio from both long and short term, so on and so forth It is concluded that it is relevant to say that financial structures affect performance of a business This paper shed light on how authorities can build a policy on market security when debt funding made the market instable They should revise restriction policy as well as encourage business to raise long-term investment, which can be a positive influence on the financial structure of a firm ACKNOWLEDGEMENT I wish to express my gratitude to my kind, generous instructor for always give me the guidance I need and treat me with patience Thanks all my friends and colleagues who accompanied me through this journey, and give me their sincere advice Last but not least, my family who love my dearly and put up with me throughout this process I am internally grateful for your support Contents LIST OF TABLES Table 4.1 Definition of detail number Table 4.2 Pearson Correlation Matrix Table 4.3 Result of Hypothesis Table 4.4 Result of Hypothesis Table 4.5 Results of Hypothesis Table 4.6 Regression results of ROA and capital structure Table 4.7 Regression results of ROE and Capital structure CHAPTER ONE: INTRODUCTION 1.1 Background of the research Financial structure can be defined as monetary choice embraced by a company in subsidizing its joint speculation This involves the mix of arrears and financial ownership to back company's resources The characteristic dangers in industry context have added to each allied association cooperating its monetary choice towards accomplishing ultimate goal Abu-Rub (2012) argues that capital choice alters as indicated by the scale of danger identified with each financing alternatives and in addition the connection amongst deviation and investment revenue Businesses try to embrace a combination of capital structure that ensures least cost to accomplish the chief objective of augmenting association's execution The effect of financial structure on operation of a company has been questionable because of large-scale discussion from differing ways of thinking Researchers contend mainly about unrelated and related hypothesis of capital structure The previous claim that under extremely prohibitive suppositions of immaculate financial markets, it is not capitalist' analogous desires, symmetric data and no insolvency cost, money related formation to decide capabilities of a business At the same time, the latter which assume blemished financial markets have displayed and indisputably uncovered pessimistic and optimistic main connection between money related structure and execution of a company (see for instance, Zeitun and Tian, 2007; Onaolapo and Kajola, 2010; Skopljak and Luo, 2012) However, according to Modigliani and Miller (1958) any company’s worth in market has nothing to with its investment choice is equivalent to the anticipated return of invested money Similarly, the standard expense to invest in any business does not depend on its investment choice and is equivalent to how much pure flow of its class gets capitalized The doubtful idea of MM recommendations combined with their resulting work in 1961 and 1963 activated dubious contentions This in any case, brought forth the enthusiasm of numerous researchers who took a gander at differing measurement to investigate the impacts of less prohibitive presumptions on the connection between finance system and the company’s value (Eriotis, 2007) Following work of Miller (1977), exhibited another test by pointing that under specific conditions, the duty shield advantage of loan financing at the firm scale is precisely off set by the uninspiring expense of obligation from personal income tax Modigliani and Miller hypotheses, in any case, accepted that speculators and firms have same level access to the finance markets, which tolerate with custom made leverage (Brealey and Myers, 1996) As contended, financial specialists can make any leverage they needed yet not offered, or the financial specialists can dispose of any use that the firm went up against yet was not needed Thus, firms' use choices don't impact its value (Afrasiobi and Ahemadina, 2011) The supporters (Adelegan, 2007, pratheepkanth, 2011) of Modigliani and Miller hypothesis have given exact proof that capital structure is irrelevant However, given the situation that the flawed financial market has not have its internal and external fitly alternated, this fact is reflected by the various recent theories along with their anticipations Thus, relevance theories recommended that impact from many elements such as tax, agency, liquidity, market timing, etc greatly affect financial choices of action and thusly the firm’s value (Jensen and Meckling, 1976; Ross, 1977, Leland and Pyle, 1977; Kim et al., 1977; Fama, 1980, Myers and Mauflis, 1984; Myers, 1984; and Fama and French, 1998) In particular, these speculations that have been progressed to clarify the finance system incorporate theory regarding tradeoff, agency costs, pecking order, market timing neutral hypothesis According to Kim and Babbel (1995), many body of thought has started to compromise gradually though many different factors have been deeply emphasized The main issues among the hypotheses can be limited to augmentation of investors' value The partition of proprietorship and control in a professionally oversaw firm as accepted by agency cost framework may bring about administrators applying inadequate work exertion, enjoying perquisites, picking sources of info or yields that suit their own inclinations, or generally neglecting to amplify firm value (Jensen and Meckling, 1976) Thus, the cost for agency of outside proprietorship is covered by incentive from managers optimizing their own utility, instead of the firm’s value Many frameworks stated that financial structure may help moderate these agency expenses Debt funding is used to control shrewd conduct for individual benefit of some managers It decreases the free money streams with the firm by paying settled premium installments and cores directors to stay away from negative speculations and work in light of a legitimate concern for investors In any case, if a venture yields extensive returns, investors catch a large portion of the pick up And in case the venture fizzles, debt holders are to bear the consequences Subsequently, investors may profit by betting on business activities that highly hazardous, regardless of the possibility that they are value-diminishing "asset substitution effect" as mentioned by Jensen and Meckling (1976) Obviously, when leverage turns out to be generally high, agency expenses for external debt are high as well, including higher foreseeable bankruptcy costs or financial adversity costs which may stem from divergences among bondholders and investors Similarly, Nosa and Ose (2010) and Huan and Ritter (2004) as supporters of trade-off theory stated that firm’s power allocation might be thruster by three opposing factors namely agency costs, benefits of tax and bankruptcy expenses Also in Onwumere et al, (2011), at high power position, investors’ value may not be improved when prohibitive pledges incorporated into finance obligation assertions restrict the capacity of firms to optimize its assets As a result, a business may choose to boosts its value by excessive utilization of debt Many prior researchers over the last decade such as Berger and Patti (2002), Zeitun and Tian (2007); Ebaid, (2009); Onaolapo and Kajola (2010); Akbarpour and Aghabeygzadeh (2011); Skopljak and Luo (2012) have conducted academic researches to shed light on the matter whether and how financial system how impact on business operation Bunn and Young (2004) discussed regarding trade off theory that in deciding on power allocation, business try to equalize debt benefits and the potential expenses of financial adversities due to high debt status On one hand, it is debated by pecking order theories advocate that company does not aim at optimizing financial system; but on the other hand, trade-off theory fires back by saying business uses the minimum resistant and expensive funding mix (Kasoxi and Ngwenya, 2010) Along these lines, the latter gives no thought to any profit collected from the utilization of debt against liquidation cost but instead take a gander at obligation as option because of lacking inner funds Additionally, the pecking order hypothesis say leverage proportion to be negatively affects firm’s operation This relationship has been affirmed in numerous academic researchers in Lemmon and Zender (2008) or Onaolapo and Kajola (2010) Meanwhile, the former argue that power proportions are affirmative for firm’s performance which has been affirmed in numerous work as well (in Sola, 2010; Nosa and Ose, 2010) However, signaling theory expresses that supervisors have impetuses to utilize different apparatuses to send signs to the market about the distinction that exist amongst them and other weaker firms One of the key instruments to send these signs is the utilization of obligation Employment of debt as a financial choice shows that manager has optimistic future expectation regardless the uninspiring current equity situation Consequently, the vast majority of the contentions of relevancy theory are on dangers and returns nature utilizing financial combination available to each company Generally, the essential point of decision making in finance by means of equity and debt is to boost the market value of a firm at lowest possible cost (Khrawish and Khraiwesh, 2008) Thus, use of various levels of obligation and equity in the association's budgetary structure is one of the firm-particular techniques utilized by administrators in enhancing its effective execution In spite of the fact that, the suspicions of irrelevance hypothesis grounded on the ideal capital market setting such as no tax nor bankruptcy cost, reasonable shareholders, fair competition and market productivity This prompted Modigliani and Miller (1958) contention that in a universe of certainty in returns, the qualification amongst obligation and value stores decreases generally to wording In this way, regardless of by debt or by equity is the firm established on, market assessment of any firm bear no effect whatsoever from financial structure Yet, in the realm of flawed capital market that exists in our reality, most finance system might be applicable The underlining contention of conventional framework of financial structure is underscored on frictionless nature of MM hypothesis that fills the hypothesis inadequate Ross (1977) focuses that if MM hypothesis is finished and thought to be right, at that point capital structure is vague or arbitrary in fact, and to some degree restraining premise on which to build up a clarification of finance structure One conceivable way to deal with the issue is to adjust the MM hypothesis to assess the auxiliary highlights of this present reality" Ross (1977) focused deeper that since intrigue installment on debt are deductible in figuring corporate wage charge; the value of the firm should ascend with the substitution of debt for profits Along these lines, high profits could be related with high target debt proportion, which may emerge for various reasons, for example, possible tax cost cutting from debt benefits, less liquidation risks and conceivably higher overinvestment, and different things to break even with (Hovakimian et al., 2004) The implausible nature of MM hypothesis; and ensuing work by Jensen and Meckling (1976) in regards to the impact of capital structure on firm execution because of organization expenses of a firm and different variables has brought forth various experimental tests as mentioned before Despite the significance of the vast majority of the underscored factors, there is changed observational proof on the effect of finance structure on the operation of a firm in Vietnam Trial of the agency theory regularly regression measures of financial system on firm execution markers and some control factors (Allen and Emilia, 2002) As a result, this will utilize these measures on panel info regression models to look at the effect of financial structure on the execution of Vietnamese quoted companies utilizing the latest accessible information of the firms to fill the research hole 1.2 Current issues of the research Different firms have various approaches to access the source of finance They can get financial source inside and outside firms Different choice of funding mobilization has advantage and drawbacks The adoption of suitable capital structure is useful to boost the corporate performance and lessen threats For example, decisions of share issuance for capital mobilization can decrease the leverage ratio and ease the risks related to liability and solvency By contrast, firms can govern their business operations without the share of right with other shareholders Therefore, the determination of capital structure has the large effect on the corporate performance for all listed firms, which are attempting to enhance the business activities In the situation of intense competition, firms are trying to strengthen the corporate performance for profit improvement Researchers in the earlier studies explored several factors affecting corporate performance, such as capital structure, firm culture, and labor The financial system decision on the performance of a firm has been making elusive effects due to far-reaching arguments from a variety of 10 54 APPENDICES Appendix Learning statement Approach to the research (incl ethical emphasis) When I have to hand in my topic for ….University, I am very confused as I not consider any thought in this time To select topic, I have to refer various papers, books and articles in Vietnamese and English I choose some articles but still not to know to choose which one My teacher of Research Methods module proposes to me that we ought to collect a topic which we are interested during the process of thesis Finally I decide to employ the topic in relation to effect of capital structure on the corporate performance of companies in Vietnam In this topic, there are lots of dissimilar aspects to research such as capital, capital structure, the effect of capital structure on the corporate performance and so on It is really a challenge for me Achieved learning Through overcoming various troubles, I have experiences additionally in the process of conducting study This also makes me more confidently with the growth of management and research skills, language skills and critically thinking Critically thinking Before utilized for one-sided arguments in my study, the theories are less convinced and boring Along with the supervisor’s guidance in this program, I realize that everything ought to be considered in various aspects and it is not totally right or wrong Employing essential knowledge in this thesis, I point out the shift with 55 exciting analyses of these definitions of capital structure, effect of capital structure on corporate performance, etc Critically thinking is helpful for my future work since a phenomena’s nature always has a coin’s two sides I understand that it is the greatly thing I gained Language skill English is the second language to me Hence, writing a long study helps me to improve considerably my language skill I must read a lot of academic magazines, articles and books, etc with a series of information in relation to concepts, theories and descriptions to undertake this research Via dissimilar kinds of literature, I am able to gain lots of newly words and study to use more smoothly sentences The language skill is essential for me in the future since mostly firms ask candidates being familiar with English Together with recent capacities of English skill, I am confident to obtain great job in a foreign firm Skills in relation to management and research Before graduating this master course, I have a chance to carry out a study professionally As a result, from beginning this study, I study deeply and seriously a topic in relation to capital structure Otherwise, I understand how to work with the research process and what ought to prepare for undertaking the study This is important for me to implement other future studies and the strategies for a firm In addition, I learn the management skill in work and time Before doing something, I have to make a schedule and then push myself to satisfy the planned purposes Therefore, I work in a additionally scientific way At work, particularly in this stud, I study how to monitor various resources of data and organize suitably them I employ available tools to support me to control them like Microsoft Words, Endnote, etc 56 Views and feelings towards the Dissertation The last module of thesis is very vital to every master student It gives chances to enhance skills and knowledge of each student and obviously consisting of me This thesis is essentially a portion of my life and gives me dissimilarly emotions within the process To finish this paper, a lot of troubles come to me but due to them, I obtain a number of experiences for my following study and work This learning statement includes my challenges, gained skills and experiences and limitations in conduction of this paper Practical and/or ethical issues/problems encountered and how resolved Writing literature review In terms of literature review, it is also difficult for me This part asks a critically thought in my topic Hence, I have to read numerous books and articles This spends a long time reading for this part At the beginning, I read and note valuable ideas for my thesis Then, I categorize them in every specifically portion Last but not least, I start writing this part of my thesis Nevertheless, one of the hardest problems is that I make plan about the general outline and employ related guiding framework or model for the finding analyses At first, I am intent to choose qualitative approach However, through investigation, I feel that this approach is not suitable; then I decide to choose quantitative approach instead I am upset to delete all of my writing in relation to the former method Nonetheless, together with my interest, I believe that this method will give me exciting findings and valuable knowledge about effect of capital structure on the corporate performance of Vietnamese enterprises 57 Limitation of words and time Conducting the thesis in a long time causes the stress for me as well as all of my classmates I have to control my time strongly to finish the deadline During the period of conducting dissertation, I must undertake a number of daily tasks in my life such as working at company, studying, participating in the social activities, taking care of my family I must balance time between life, work and study Since there are lots of things must be finished, I feel very stressful The limitation of time helps me to study who to plan suitably time for each task Furthermore, restriction of words in thesis also results in challenges for me At the beginning, I think I will use long sentences to meet the requirement in relation to words of thesis Nevertheless, when completing, worlds are over Therefore, I have to narrow them but still keep the main meanings Reasoned perception of present and future value of the Dissertation All of studies are able to have disadvantages Owing to the limitations of words and time, I cannot cover more widely and deeply fields of study In terms of time limitations, I not have enough time to research more and analyze theories and data Therefore, the results of this study are relative In terms of the limitation of words, as the thesis limits the number of words, so I cannot express fully my ideas for the thesis In the future, if these limitations are solved, I think the effectiveness of the study will be more significantly Conclusions In conclusion, the thesis in my master program gives me many valuable experiences Sometimes, the nervousness, nervousness, discouragement and evenly the frightening come to me due to the pressure created by the thesis In contrast, I feel happy passionate and curious once recognizing exciting things I 58 learn useful skills to prepare for my work in the future I am very happy because I am a member of this master course of …University where I am trained in a professional way in the international trade and finance fields I hope that my supervisor will be satisfied with my thesis In addition, 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capital structure on firm performances and stated that capital structure results in adversity which often time some weighty impact on the operation of a firm What is more,... Regression results of ROA and capital structure Table 4.7 Regression results of ROE and Capital structure CHAPTER ONE: INTRODUCTION 1.1 Background of the research Financial structure can be defined