Inter relasionship between capitalstructure, free cash flow, diversification and firm performance

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM ERASMUS UNVERSITY ROTTERDAM INSTITUTE OF SOCIAL STUDIES THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS INTER-RELATIONSHIP BETWEEN CAPITALSTRUCTURE, FREE CASH FLOW, DIVERSIFICATION AND FIRM PERFORMANCE MASTER OF ARTS IN DEVELOPMENT ECONOMICS BY Mr THAI BA TOAN Academic Supervisor: Dr PHAM DINH LONG Ho Chi Minh City, December 2016 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS INTER-RELATIONSHIP BETWEEN CAPITALSTRUCTURE, FREE CASH FLOW, DIVERSIFICATION AND FIRM PERFORMANCE A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By Mr THAI BA TOAN Academic Supervisor: Dr PHAM DINH LONG Ho Chi Minh City, December 2016 ASTRACT Improving firm performance is always a top concern of companies The global financial crisis and public – debt crisis in Europe has had a negative impact on the economy of Vietnam, especially on Vietnamese companies Therefore, the issues of performance enhancement, escaping from stagnating production and increasing sales are more necessary with the company Besides, the trend of diversification has become more common in Vietnamese companies These companies are attracted to investment projects outside the industry, even these industries are not related to the core business of the companies The selection of the investment plan of how, what industries, how combining funds, or the evaluation of the firm operations to take the right investment are always the most important issues The objective of the study was to find evidence of the inter – relationship between the four factors capital structure, free cash flow, diversification and firm performance in the Vietnamese market The study used data from 118 non-financial companies listed on the Hanoi Stock Exchange (HNX) and Hochiminh Stock Exchange (HOSE) in the period of 2009-2014 By using 2SLS and 3SLS regression methods, combined with comparable results from Odinary least squares estimator, the study found out the evidence of the negative impact of firm performance to leverage, but this impact is positive to diversification Free cash flow was also shown to have a positive impact on the firm performance and diversification And finally, leverage reduces free cash flow in a company From the empirical results, the study also proposes some advices to support companies in making decisions about capital structure and investment The study also points out some of its limitations and futher research Keywords: Capital structure, free cash flow, diversification, firm performance, holistic analysis i ACKNOWLEDGEMENT This thesis is the last exercise, which summarized the process of learning and training in the postgraduate programe for two years The completed study would not be accomplished without any supports Therefore, I gratefully give acknowledgement to all the assistances and motivations during the time of doing this research as a requirement of completing my Master Degree of Arts in Development Economics Foremost, I would like to sincerely and gratefully thank Dr Pham Dinh Long, my supervisor, for his great assistance, principal and valued advice during my thesis finish He always stood by me, showed me the passion and the best way to finish my thesis Without his counseling, I were not able to accomplish this study I would like to thank the Vietnam – Netherlands Programme, especially professors and staffs for their help during my thesis process The professors not only gave me the knowledge but also created the best conditions for me in order to collect data and write this thesis The staffs of Vietnam – Netherlands Programme who were very friendly and kind, always willing to help me on the physical facilities as well as references I would like to thank all my friends, who never stopped encouraged and helped me when I met any difficulties in doing the thesis Last but not least, I would like to give my deep gratitude to my family for their sacrifices to help me not only in studying in Master Degree, but also in my whole life ii CONTENTS CHAPTER 1: INTRODUCTION 1.1 Motivation of the research 1.2 Research objectives 1.3 Research contribution 1.4 Structure of the research CHAPTER 2: LITERATURE REVIEW 2.1 The study of the relationship between firm performance, capital structure, free cash flow and diversification 2.1.1 Capital structure and firm performance 2.1.2 Free cash flow hypothesis 11 2.1.3 Diversification discount and free cash flow 15 2.1.4 The relationship between diversification and capital structure 19 2.2 Summarize the previous studies about the relationship between the capital structure, free cash flow, diversification and firm performance 23 2.3 A holistic framework 30 CHAPTER 3: METHODOLOGY 32 3.1 Model 32 3.2 Variable decription 34 3.2.1 Tobin’s q 34 3.2.2 Free cash flow 34 3.2.3 Related entropy and unrelated entropy 36 3.2.4 Total debt leverage 37 3.2.6 Advertising expenditure 38 3.2.7 Working capital 38 3.3 Data 38 3.4 Methodology 43 3.4.1 Simultaneous equations 44 iii 3.4.2 Two-Stage Least Squares (2SLS) estimator 45 3.4.3 Three – Stage Least Squares (3SLS) 46 3.4.4 Hausment test 47 3.5 Results expectation 47 3.5.1 Effect of free cash flow, diversification and leverage on firm performance 47 3.5.2 Effect of leverage to free cash flow of the company 48 3.5.3 Effect of free cash flow, company performance and leverage to the diversification of the company 48 3.5.4 Effect of diversification and company performance to leverage 48 CHAPTER 4: RESULT 50 4.1 Effect of free cash flow, diversification and leverage to company performance 50 4.2 Effect of leverage to free cash flow of the company 53 4.3 Effect of free cash flow, company performance and leverage to the diversification of the company 55 4.4 Effect of diversification and company performance to leverage 60 4.5 Inter – relationship among leverage, free cash flow, diversification and firm performance 63 CHAPTER 5: CONCLUSION 65 REFERENCES 69 APPENDIX 73 iv LIST OF TABLES Table 1: Summary the previous theories and studies 25 Table : Sample statistic 40 Table 2: Variable descriptive statistics 41 Table 3: Spearman and Pearson correlation 42 Table 1: Results of regression equations of firm performance (eq 1) 50 Table 2: Results of regression equations free cash flow (eq 2) 53 Table 3: Results of regression equations related entropy (eq 3) 55 Table 4: Results of regression equations unrelated entropy (eq 4) 55 Table 5: Results of regression equation debt leverage (eq 5) 60 v LIST OF FIGURES Figure 1: Summary of separate research related to capital structure, free cash flow, diversification and firm performance 30 Figure 2: Holistic framework for capital structure, free cash flow, diversification and firm performance 31 Figure 3.1: Number of companies which devided by diversified types and stock exchange 39 Figure 4.1: Inter – relationship among leverage, free cash flow, related diversification and firm performance 63 Figure 4.2: Inter – relationship among leverage, free cash flow, unrelated diversification and firm performance 63 vi CHAPTER 1: INTRODUCTION 1.1 Motivation of the research Vietnam is one of the few countries that was less affected by the global financial crisis in 2008, and is said to still maintain economic growth in a positive way However, more or less, Vietnam is yet not able to avoid the negative impacts of this financial crisis storm; as the panorama of Vietnam’s economy has recently deteriorated and started to slow down In addition, the public – debt crisis in Europe also contributed to the growth of our country's GDP with the GDP in the period after 2008 much lower than the pre - crisis one According to the General Statistics Office of Vietnam, Vietnam’s GDP in 2014 increased by 5.98%, compared to this indicator in 2007, which was 8.46% Besides, the high inflation rate leads to tight monetary policy of central banks, meanwhile, the sudden increase of lending rates has brought about numerous difficulties to the firms in raising capital to expand their either production or investment for potential new projects In this situation, the Vietnamese firms have become the most serious “victims” which were negatively influenced by the financial crisis and public - debt crisis in Europe Manufacturing and business suffered from the pressure resulting from the economic and political instability worldwide as well as domestic such as the existence of bad debts, the difficulties in goods consuming, or the ability of fund disbursement was still low, etc In recent years, a number of companies failed to continue operations because of daily losses, ended up bankruptcy In this tough situation, many companies needed to change to survive These companies have chosen to restructure the capital structure, or invest in other factors to minimize business risks, as well as have verity production, etc Whether implementing any business strategies, companies’ top priority is focused on improving firm performance, withstanding and overcome the crisis repercussion Therefore, which factors and how they impact on firm performance are the most essential points that companies need to pay attention to There have been multiple studies aimed for finding out exactly what factors and these factors’ effects on the firm performance, and one of the most highlighted directions is the consideration of the change in firm performance in relation to free cash flow, capital structure, and firm diversification Many economists have pointed out there is a strong correlation between these factors, but how they interact with each other was still a controversy Modigliani and Miller (1958) argued that capital structure did not affect the firm value, but in the author’s own study in 1963, the authors confirmed the firm value could be determined by the capital structure of company Tang and Jang (2007) with the trade – off theory between equity and debt, or Myers and Majluf (1984) with pecking order theory also had the valuable research on the relationship between capital structure and firm performance The relationship between leverage and diversification was also analyzed in the studies by Taylor and Lowe (1995), Kochhar and Hitt (1998), Markides and Williamson (1996) and La Rocca et al (2009) However, the comprehensive study of the relationship between these four factors was still limited and the problem has not been fully exploited Capital structure, free cash flow, diversification and firm performance have important implications in the survival and development of companies Therefore, the results of this study may be helpful for companies listed on the stock market in particular and Vietnamese companies in general in determining the proper capital structure, in line with long-term orientation of company, or using the cash sensibly, avoiding the cash holding expense while still maintaining the ability to invest in potential new projects Moreover, the clarification of the relationship between diversification and firm performance would be useful for companies in the implementation of diversification strategies in production or business In the world in general and Vietnam in particular, there were a lot of studies which research the relationship between capital structure and business results in the company, but the relationship between these factors with the diversification has not yet been extensively researched, therefor this research focused on the inter-relationship between 33 FDT FiditourJoint Stock Company 34 GAS PetroVietnam Gas Joint Stock Corporation 35 36 GMC GMD Saigon Garmex Manufacturing Trade Joint Stock Company Gemadept Corporation 37 38 39 HAP HHC HLG Hapaco Corporation Haiha Confectionery JSC Hoang Long Group 40 41 HMC HOT HCM City Metal Corporation Hoi An Torurist Service Joint Stock 42 43 HRC HSG Hoa Binh Rubber Joint Stock Company Hoa Sen Group 44 HTC HocMon Trade Joint Stock Company 45 46 47 IMP KDC KHA Imexpharm Corporation KIDO Group Khanh Hoi Investment and Services Corporation 48 49 50 51 52 KHP KKC KMR KMT KSA Khanh Hoa Power Joint Stock Company Produce & Trading Metal Joint Stock Company Mirae Joint Stock Company Central Viet Nam Metal Corporation Binh Thuan Mineral Industry Joint Stock Company 53 54 55 56 57 58 59 60 61 62 63 64 65 66 KSB KSH KSS L18 LIG LSS MHC MKV MPC NBP OPC PAC PCG PET Binh Duong Mineral & Construction Joint Stock Company KSH Invesment & Development JSC Na Ri Hamico Mineral Joint Stock Company Investment And Construction JSC No.18 Licogi 13 JSC Lam Son Sugar Joint Stock Corporation MHC Joint Stock Company Cai Lay Veterinary Pharmaceutical Joint Stock Company Minh Phu Seafood Corporation Ninh Binh Thermal Power JSC Ninh Binh Thermal Power JSC Dry Cell And Storage Battery Joint Stock Company PetroVietnam Gas City Investment and Development JSC Petrovietnam General Services JS Corporation 80 67 PGC Petrolimex Gas Corporation - JSC 68 PGS Southern Gas Joint Stock Company 69 70 PHC PHR Phuc Hung Holdings Construction JSC Phuoc Hoa Rubber Joint Stock Company 71 72 73 PLC PMC POM Petrolimex Petrochemical Corporation - JSC Pharmedic Pharmaceutical Medicinal JSC Pomina Steel Corporation 74 75 PPS PSC Petro Vietnam Power Services Joint Stock Company Petrolimex Saigon Transportation and Service JSC 76 77 PTC PVC Post & Telecommunications Investment And Construction JSC Drilling Mud Joint Stock Corporation 78 PVD PetroVietnam Drilling & Well Services Corporation 79 80 81 PVE PVS PVT PetroVietnam Engineering Consultancy JSC PetroVietnam Technical Services Corporation Petrovietnam Transportation Corporation 82 83 84 85 86 PVX RAL RDP SAV SCD Petro Vietnam Construction Joint Stock Corporation Rangdong Light Source And Vacuum Flask JSC Rang Dong Plastic JSC Savimex Corporation Chuong Duong Beverages Joint Stock Company 87 88 89 90 91 92 93 94 95 96 97 98 99 100 SGH SJ1 SMC SPP SRC SSC SSM SVI TAC TBC TCM TCT TLG TLH Sai Gon Hotel Corporation Hung Hau Agricultural Corporation SMC Trading Investment Joint Stock Company Saigon Plastic Packaging JSC Sao Vang Rubber Joint Stock Company Southern Seed Corporation Steel Structure Manufacture Joint Stock Company Bien Hoa Packaging Company Tuong An Vegetable Oil Joint Stock Company Thac Ba Hydropower Joint Stock Company Thanh Cong Textile Garment Investment Trading JSC Tay Ninh Cable Car Tour Company Thien Long Group Corporation Tien Len Steel Group Joint Stock Company 81 101 TMP Thac Mo Hydro Power Joint Stock Company 102 TNC Thong Nhat Rubber Joint Stock Company 103 104 TNG TPC TNG Investment And Trading JSC Tan Dai Hung Plastic Joint Stock Company 105 106 107 TRC TTP VCF Tay Ninh Rubber Joint Stock Company Tan Tien Plastic Packaging Joint Stock Company Vinacafé Bienhoa Joint Stock Company 108 109 VHG VID Quang Nam Rubber Investment JSC Vien Dong Investment Development Trading Corporation 110 111 VIS VKC Vietnam – Italy Steel Joint Stock Company Vinh Khanh Cable Plastic Corporation 112 VNC Vinacontrol Group Corporation 113 114 115 VNG VNH VNM Thanh Thanh Cong Tourist Joint Stock Company Viet Nhat Seafood Corporation Viet Nam Dairy Products Joint Stock Company 116 117 118 VPK VTB VTF Vegetable Oil Packing Joint Stock Company Viettronics Tan Binh Joint Stock Company Viet Thang Feed Joint Stock Company 82 Table 4: Sample statistic Sector Number of firms Percentage Accommodation and Food Services 3% Agriculture production 6% Construction and real estate 6% Manufacturing 63 53% Mining, Quarrying, and Oil and Gas Extraction 6% Retail trade 3% Transportation and Warehousing 3% Utilities 8% Wholesale trade 10 8% Other services 4% 118 100% Total 83 Table 5: Variable descriptive statistics Std Variable Obs Mean Dev Min Max Ln(Tobin’s q) 708 0.054439 0.374683 -1.0633 1.638896 FCF 708 0.035644 0.173483 -0.65403 0.9166707 R_entropy 708 0.072474 0.14441 0.69187 U_entropy 708 0.038798 0.100092 0.6279052 Ln(TDL) 708 -0.91272 0.627054 -3.44337 -0.0563218 Cashflow 708 0.115411 0.095163 -0.51623 0.6494679 Sales_GR 708 0.306248 1.967851 -0.73001 42.2235 Ln(Sales) 708 13.55237 1.449882 8.819961 18.11135 Repurchase 708 0.003492 0.048585 -0.03814 1.259968 Dummy_Dividend 708 0.720339 RER 708 0.080609 0.092543 -0.51644 0.4790376 PPNE 708 -1.49951 0.834154 -5.5274 0.0348644 Ln(Ad_Ex) 708 -2.0605 2.154858 -10.0756 0.7612531 QR 708 1.545304 2.106022 0.074629 28.01609 Wcap 708 Ln(Capx) 708 6.177632 5.260623 0.44915 0.23136 0.208633 -0.26051 0.8819049 16.14248 84 Table 6: Pearson correlation lnq fcf dr du lnd cf slg lns re div rer ppne lna qr wc lnc lnq fcf 0.19 dr -0.02 -0.02 du 0.01 0.09 0.06 -0.23 -0.30 0.01 -0.13 cf 0.61 0.37 -0.08 0.04 -0.54 slg 0.02 -0.09 0.02 -0.04 0.05 0.04 lns 0.16 0.00 0.01 -0.19 0.36 0.04 -0.01 re 0.03 0.04 0.01 -0.02 0.00 0.03 -0.01 0.02 div 0.17 0.15 -0.06 -0.05 -0.08 0.23 -0.12 0.14 0.03 rer 0.53 0.16 -0.10 0.00 -0.48 0.74 0.00 0.04 0.04 0.22 ppne 0.06 -0.08 -0.01 0.00 -0.10 0.09 -0.03 0.01 -0.05 -0.11 0.03 lna 0.01 0.14 0.04 0.08 -0.15 0.04 -0.04 -0.15 0.04 -0.04 -0.05 0.10 qr 0.31 0.29 0.08 0.27 -0.73 0.50 -0.02 -0.24 0.00 0.05 0.43 -0.08 0.12 wc 0.21 0.28 -0.05 0.05 -0.65 0.47 -0.01 -0.18 0.01 0.19 0.44 -0.36 0.02 0.57 lnc 0.09 -0.44 -0.01 -0.09 0.12 0.03 0.09 0.21 -0.05 -0.03 0.16 0.27 -0.60 -0.15 -0.20 lnd 85 Table 7: Spearman correlation lnq fcf dr du lnd cf slg lns re div rer ppne lna qr wc lnc lnq fcf 0.18 dr 0.13 0.06 du -0.07 0.06 0.08 lnd -0.12 -0.34 0.07 -0.06 cf 0.57 0.38 0.02 -0.03 -0.55 slg 0.16 -0.15 0.00 -0.08 0.14 0.16 lns 0.18 -0.04 0.16 -0.09 0.38 0.01 0.16 re 0.02 0.07 -0.05 -0.05 -0.08 0.08 0.00 0.12 div 0.18 0.16 0.00 0.03 -0.10 0.28 -0.03 0.15 0.04 rer 0.47 0.22 -0.03 0.02 -0.49 0.75 0.13 0.06 0.11 0.26 ppne 0.04 -0.09 -0.06 0.02 -0.12 0.15 0.01 -0.06 -0.03 -0.14 0.06 lna 0.02 0.22 0.04 0.06 -0.14 0.03 -0.12 -0.18 0.01 -0.03 -0.03 0.05 qr 0.15 0.32 0.07 0.01 -0.74 0.49 -0.01 -0.23 0.05 0.14 0.41 -0.11 0.10 wc 0.12 0.30 -0.01 0.00 -0.68 0.44 -0.03 -0.20 0.10 0.19 0.44 -0.40 0.04 0.75 lnc 0.10 -0.47 0.01 -0.07 0.10 0.05 0.23 0.29 0.06 -0.02 0.15 0.35 -0.58 -0.10 -0.21 1 86 Table 8: 3SLS estimator for five equations Three-stage least-squares Eq Obs Parms lnq 708 129 fcf 708 126 dr 708 129 du 708 128 lntdl 708 129 regression RMSE R-sq 0.247269 0.5639 0.142682 0.3226 0.070726 0.7598 0.058514 0.6578 0.542343 0.2509 chi2 2150.41 360.76 2389.44 1594.56 1581.96 P 0.000 0.000 0.000 0.000 0.000 P>z [95% Conf Coef Std Err fcf dr du lntdl cashflow sales_gr lnsales -0.20743 -1.73073 -2.52901 -0.02481 1.121518 0.000275 0.095542 0.121623 0.858039 1.210665 0.072838 0.183585 0.003549 0.028838 -1.71 -2.02 -2.09 -0.34 6.11 0.08 3.31 0.088 0.044 0.037 0.733 0.938 0.001 -0.44581 -3.41246 -4.90187 -0.16757 0.761698 -0.00668 0.03902 0.030948 -0.04901 -0.15615 0.117954 1.481337 0.007232 0.152063 lntdl rep Dum_div lnsales -0.18085 0.032086 0.139898 0.117806 0.045719 0.01579 0.053715 0.018804 -5.64 1.19 2.9 2.86 -0.24374 0.235 -0.091 0.004 0.014771 0.004 0.016859 -0.11797 0.370794 0.076666 0.090571 fcf lnq lntdl rer ppne lnad_ex lnsales -0.16161 0.057568 -0.02422 -0.09217 -0.01656 0.000254 -0.00512 0.044738 0.065002 0.020145 0.079506 0.007801 0.001465 0.012204 -3.61 0.89 -1.2 -1.16 -2.12 0.17 -0.42 0.376 0.229 0.246 0.034 0.863 0.675 -0.24929 -0.06983 -0.0637 -0.248 -0.03185 -0.00262 -0.02904 -0.07392 0.184971 0.015266 0.06366 -0.00127 0.003124 0.018802 fcf lnq lntdl rer ppne lnsales -0.02063 -0.0995 -0.04489 0.032621 0.008837 0.014915 0.02525 0.041173 0.013631 0.037369 0.005128 0.009415 -0.82 -2.42 -3.29 0.87 1.72 1.58 0.414 0.016 0.001 0.383 0.085 0.113 -0.07012 -0.1802 -0.0716 -0.04062 -0.00121 -0.00354 0.028856 -0.01881 -0.01817 0.105863 0.018888 0.033368 dr du 1.408844 0.809632 -8.00734 1.458054 1.74 -5.49 0.082 -0.17801 -10.8651 2.995694 -5.14961 z Interval] lnq fcf dr du lntdl 87 lnq qr wcap lncapx lnsales -1.16042 -0.05434 -0.71885 0.005699 0.285282 0.248012 0.009683 0.142182 0.002284 0.067942 -4.68 -5.61 -5.06 2.5 4.2 0 0.013 -1.64651 -0.07331 -0.99753 0.001223 0.152117 -0.67432 -0.03536 -0.44018 0.010174 0.418446 Endogenous variables: lnq fcf dr du lntdl Exogenous variables: cashflow sales_gr lnsales repurchase dummy_dividend rer ppne lnad_ex qr wcap lncapx i.year i.id 88 Table 9: 2SLS estimator for five equations Two-stage least-squares regression Eq Obs Parms RMSE lnq 708 129 0.213145 fcf 708 126 0.157501 dr 708 129 0.0771 du 708 128 0.062351 lntdl 708 129 0.449123 R-sq 0.7354 0.3226 0.767 0.6822 0.5806 F-Stat 13.65 2.35 15.06 10.13 9.82 t P>t P 0 0 Coef Std Err [95% Conf fcf dr du lntdl cashflow sales_gr lnsales -0.0776 -1.29265 -1.14288 0.069123 1.303409 0.000838 0.08359 0.159809 1.183042 1.579537 0.091226 0.220713 0.005236 0.032783 -0.49 -1.09 -0.72 0.76 5.91 0.16 2.55 0.627 0.275 0.469 0.449 0.873 0.011 -0.39096 -3.61234 -4.24001 -0.10975 0.870638 -0.00943 0.01931 0.235746 1.027045 1.954253 0.247997 1.73618 0.011105 0.14787 lntdl Rep Dum_div lnsales -0.18092 0.167666 0.043862 0.053907 0.035425 0.134282 0.017739 0.020759 -5.11 1.25 2.47 2.6 -0.25038 0.212 -0.09563 0.013 0.00908 0.009 0.013202 -0.11145 0.430963 0.078644 0.094611 fcf lnq lntdl rer ppne lnad_ex lnsales -0.0994 0.080692 -0.01569 -0.10898 -0.01179 0.000784 -0.01154 0.050877 0.075458 0.023073 0.097106 0.009067 0.001769 0.013634 -1.95 1.07 -0.68 -1.12 -1.3 0.44 -0.85 0.051 0.285 0.497 0.262 0.194 0.658 0.397 -0.19916 -0.06726 -0.06093 -0.29938 -0.02957 -0.00268 -0.03828 0.000359 0.228648 0.029554 0.081429 0.005987 0.004254 0.015193 fcf lnq lntdl rer ppne lnsales 0.005177 -0.0755 -0.03433 0.086474 0.013231 0.005582 0.041131 0.057717 0.01842 0.074984 0.007318 0.010645 0.13 -1.31 -1.86 1.15 1.81 0.52 0.9 0.191 0.062 0.249 0.071 0.6 -0.07547 -0.18867 -0.07045 -0.06055 -0.00112 -0.01529 0.085825 0.037673 0.001791 0.233501 0.027579 0.026455 dr du lnq 0.672174 1.970322 -5.64236 2.434882 -0.80198 0.30044 0.34 -2.32 -2.67 0.733 -3.1912 0.021 -10.4166 0.008 -1.39108 4.535549 -0.86808 -0.21288 Interval] lnq fcf dr du lntdl 89 qr wcap lncapx lnsales -0.07833 -0.74136 0.000968 0.230023 0.020083 0.222842 0.004536 0.082458 -3.9 -3.33 0.21 2.79 0.001 0.831 0.005 -0.11771 -1.17831 -0.00793 0.068341 -0.03895 -0.30442 0.009863 0.391705 Endogenous variables: lnq fcf dr du lntdl Exogenous variables: cashflow sales_gr lnsales repurchase dummy_dividend rer ppne lnad_ex qr wcap lncapx i.year i.id 90 Table 10: OLS estimator for five equations Multivariate regression Eq Obs Parms lnq fcf dr du lntdl 708 708 708 708 708 12 12 11 12 RMSE 0.270302 0.162446 0.144006 0.098273 0.369388 R-sq F-Stat 0.4884 55.29 0.1344 12.04 0.0225 1.33 0.051 3.4 0.6589 111.86 Coef Std Err fcf dr du lntdl cashflow sales_gr lnsales -0.07515 0.092167 0.021484 0.046517 2.540322 -0.00522 0.03207 0.064988 0.071028 0.104502 0.022124 0.142441 0.005279 0.008096 -1.16 1.3 0.21 2.1 17.83 -0.99 3.96 lntdl Rep Dum_div lnsales -0.09001 0.010548 0.135891 0.1263 0.050227 0.014369 0.010984 0.004625 fcf lnq lntdl rer ppne lnad_ex lnsales -0.02887 0.030714 -0.01593 -0.25791 -0.00342 0.001478 0.002084 fcf lnq lntdl rer ppne lnsales 0.045761 0.007081 -0.01083 -0.05572 0.000367 -0.01115 dr du P 0 0.1932 0.0001 [95% Conf Interval] 0.248 0.195 0.837 0.036 0.323 -0.20257 -0.04709 -0.18341 0.00314 2.261045 -0.01557 0.016197 0.052272 0.231428 0.226375 0.089894 2.8196 0.005132 0.047944 -8.53 1.08 3.5 2.38 0.282 0.018 -0.11069 -0.11174 0.022055 0.001917 -0.06933 0.383521 0.0784 0.020051 0.034042 0.019276 0.011548 0.080223 0.00666 0.002647 0.004327 -0.85 1.59 -1.38 -3.21 -0.51 0.56 0.48 0.397 0.111 0.168 0.001 0.607 0.577 0.63 -0.09561 -0.00708 -0.03857 -0.4152 -0.01648 -0.00371 -0.0064 0.037878 0.068509 0.006709 -0.10062 0.009632 0.006667 0.010568 0.023084 0.013134 0.007842 0.054341 0.004517 0.002932 1.98 0.54 -1.38 -1.03 0.08 -3.8 0.048 0.59 0.167 0.305 0.935 0.0005 -0.01867 -0.02621 -0.16226 -0.00849 -0.0169 0.091021 0.032831 0.004542 0.050825 0.009223 -0.0054 0.141998 0.097518 0.323224 0.147894 1.46 2.19 0.145 -0.0492 0.029 0.033256 0.333197 0.613193 t P>t lnq fcf dr du lntdl 91 lnq qr wcap lncapx lnsales -0.07156 -0.15065 -1.0045 -0.00689 0.09112 0.043845 -1.63 0.008969 -16.8 0.083635 -12.01 0.002848 -2.42 0.010644 8.56 0.103 0 0.016 -0.15752 -0.16823 -1.16848 -0.01248 0.070251 0.014408 -0.13306 -0.84053 -0.00131 0.11199 Table 11: Hausman specification test for eq.1 Coefficients -(b) fcf dr du lntdl cashflow sales_gr lnsales 2SLS -0.0776 -1.29265 -1.14288 0.069123 1.303409 0.000838 0.08359 (B) 3SLS -0.20743 -1.73073 -2.52901 -0.02481 1.121518 0.000275 0.095542 (b-B) Difference 0.1298251 0.4380854 1.386134 0.0939295 0.1818912 0.0005624 -0.0119515 sqrt(diag(V_bV_B)) S.E 0.1036659 0.8144676 1.014509 0.0549247 0.1225192 0.0038501 0.0155906 b = consistent under Ho and Ha; obtained from reg3 B = inconsistent under Ha, efficient under Ho; obtained from reg3 Test: Ho: difference in coefficients not systematic chi2(129) = (b-B)'[(V_b-V_B)^(-1)](b-B) = 5.60 Prob>chi2 = 1.0000 92 Table 12: Hausman specification test for eq.2 Coefficients -(b) (B) 2SLS -0.18092 0.167666 0.043862 lntdl repurchase dummy_dividend sqrt(diag(V_bV_B)) Difference S.E -0.0000616 0.0150148 0.0277673 0.064446 -0.0018564 0.0080832 (b-B) 3SLS -0.18085 0.139898 0.045719 b = consistent under Ho and Ha; obtained from reg3 B = inconsistent under Ha, efficient under Ho; obtained from reg3 Test: Ho: difference in coefficients not systematic chi2(129) = (b-B)'[(V_b-V_B)^(-1)](b-B) = 0.23 Prob>chi2 = 1.0000 Table 13: Hausman specification test for eq.3 Coefficients -(b) 2SLS -0.0994 0.080692 -0.01569 -0.10898 -0.01179 0.000784 -0.01154 fcf lnq lntdl rer ppne lnad_ex lnsales (B) 3SLS -0.16161 0.057568 -0.02422 -0.09217 -0.01656 0.000254 -0.00512 (b-B) Difference 0.0622081 0.0231234 0.00853 -0.0168065 0.0047675 0.0005308 -0.0064235 sqrt(diag(V_bV_B)) S.E 0.0242282 0.038322 0.0112489 0.0557527 0.0046221 0.0009928 0.0060788 b = consistent under Ho and Ha; obtained from reg3 B = inconsistent under Ha, efficient under Ho; obtained from reg3 Test: Ho: difference in coefficients not systematic chi2(129) = (b-B)'[(V_b-V_B)^(-1)](b-B) = 15.04 Prob>chi2 = 1.0000 93 Table 14: Hausman specification test for eq.4 Coefficients -(b) (B) 2SLS 0.005177 -0.0755 -0.03433 0.086474 0.013231 0.005582 fcf lnq lntdl rer ppne lnsales 3SLS -0.02063 -0.0995 -0.04489 0.032621 0.008837 0.014915 (b-B) Difference 0.0258089 0.0240067 0.0105594 0.0538526 0.0043939 -0.0093339 sqrt(diag(V_bV_B)) S.E 0.0324681 0.0404479 0.0123898 0.0650088 0.0052203 0.0049687 b = consistent under Ho and Ha; obtained from reg3 B = inconsistent under Ha, efficient under Ho; obtained from reg3 Test: Ho: difference in coefficients not systematic chi2(129) = (b-B)'[(V_b-V_B)^(-1)](b-B) = 9.21 Prob>chi2 = 1.0000 Table 15: Hausman specification test for eq.5 Coefficients -(b) 2SLS 0.672174 -5.64236 -0.80198 -0.07833 -0.74136 0.000968 dr du lnq qr wcap lncapx (B) 3SLS 1.408844 -8.00734 -1.16042 -0.05434 -0.71885 0.005699 (b-B) Difference -0.73667 2.364984 0.358438 -0.02399 -0.02251 -0.00473 sqrt(diag(V_bV_B)) S.E 1.796291 1.950059 0.16957 0.017595 0.171589 0.00392 b = consistent under Ho and Ha; obtained from reg3 B = inconsistent under Ha, efficient under Ho; obtained from reg3 Test: Ho: difference in coefficients not systematic chi2(129) = (b-B)'[(V_b-V_B)^(-1)](b-B) = 14.41 Prob>chi2 = 1.0000 94 ... of free cash flow, diversification and leverage on firm performance 47 3.5.2 Effect of leverage to free cash flow of the company 48 3.5.3 Effect of free cash flow, company performance and. .. capital structure, free cash flow, diversification and firm performance 30 Figure 2: Holistic framework for capital structure, free cash flow, diversification and firm performance ... the relationship between firm performance, capital structure, free cash flow and diversification 2.1.1 Capital structure and firm performance 2.1.2 Free cash flow hypothesis