According to Thomas (2013), the success of a business is significantly determined by the way capital is mobilized and utilised. The amount of financial leverage may change across firms and/or time depending on the business culture, administration method, or the industry in which the business operates. In principle, there is no theoretically optimal level for the proportion of debt and equity (Modigliani and Miller, 1958). This research carried out with a panel data of 85 listed firms in HSX market during the period from 2006 to 2017 (financial sector will be excluded) and reveals that short term leverage is significantly positive correlated with business financial performance.
EFFECTS OF FINANCIAL LEVERAGE ON PERFORMANCE OF LISTED FIRMS IN HO CHI MINH STOCK EXCHANGE MARKET Lecturer Hoang Xuan Que Msc Hoang Vu Hiep National Economics University Abstract According to Thomas (2013), the success of a business is significantly determined by the way capital is mobilized and utilised The amount of financial leverage may change across firms and/or time depending on the business culture, administration method, or the industry in which the business operates In principle, there is no theoretically optimal level for the proportion of debt and equity (Modigliani and Miller, 1958) This research carried out with a panel data of 85 listed firms in HSX market during the period from 2006 to 2017 (financial sector will be excluded) and reveals that short term leverage is significantly positive correlated with business financial performance Keywords: Capital structure, HSX, financial performance, financial efficiency Introduction According to Thomas (2013), the success of a business is determined by the way capital is mobilized and utilised The capital structure is defined as the ratio of long-term debt to equity, both of which are used by a business to pay for its assets (Swanson et al., 2003) This proportion may change across firms and/or time depending on the business culture, administration method, or the industry in which the business operates In principle, there is no theoretically optimal level for the proportion of debt and equity (Modigliani and Miller, 1958) Modigliani and Miller (1958) could be typically considered as the pioneers in concluding and modelling the relationship between capital structure and firm performance by proposing capital structure irrelevant theory More recently, ShyamSunder and Myers (1999) proposed ―pecking order theory‖ in which they advised that in terms of raising capital, companies should first use internal accruals, followed by debt, and then equity Kajanathan and Nimalthasan (2013) argued that the impacts of capital structure on business performance and growth must be concluded based on specific characteristics of the firms, industries, or the whole macro economy of countries It can be seen that the relationship between capital structure and firm performance has been argued widely in the recent years when it comes to financial management issues (Kajanathan and Nimalthasan, 2013) From these points of view, this research aims to examine the impacts of capital structure (represented by the financial leverage) on firm performance of Vietnamese listed firms on HSX The impacts will be moderated based on industrial characteristics to bring the most precise recommendation for Vietnamese listed firms 993 Variables measurement 2.1 Firm performance measurement In explanations of firm performance, there are many financial indicators which can be used as measures of firm financial performance such as returns on assets, returns on investment, returns on equity, gross and net profit margin, earnings per share, or tobin's q (Soumadi and Hayajneh, 2012; Pratheepkanth, 2011; Kajananthan and Nimalthasan, 2013; and Tan, 2012) In specific, in this study, Returns on Equity (ROE) will be used as dependent variables represents the business financial performance ROE is one of the most important financial indicator to measure the companies' profitability It represents the ability of companies to generate profit with the money invested by shareholders ROE is calculated by dividing the net profit after tax to the book value of shareholders' equity (Soumadi and Hayajneh, 2012; Onaolapo and Kajola, 2010; Krishnan and Moyer, 1997) 2.2 Capital structure measurement This paper will name the independent variables as the market debt ratio as measured by interest-bearing borrowings over the sum of interest-bearing debts and market value of outstanding common shares In which, short-term and long-term market debt will be used to better characterise the role of each type of debts The market debt ratio (MDR) is conducted based on the ideas of Flannery and Rangan (2005) to consider the market capital capacity of the firm In which, SMDRi,t is defined as short-term interest-bearing debt of firm i at time t; LMDRi,t is long-term interest-bearing debt of firm i at time t; Di,t is the total interest-bearing debt, while Si,t indicates the number of common shares outstanding of firm i Pi,t denotes the price per share of stock i at time t 2.3 Control variables Sales growth (SG), measured as rate of change in sales between the observation year and the preceding years, can have a positive effect on performance and growth as companies are able to generate higher profits This variable has been used in testing the effect of capital structure on financial efficiency by Margaritis and Psillaki (2010); and Zeitun and Tian (2007) Ramaswammy (2001); Frank and Goyal (2003); Jermias (2008), Ebaid (2009) suggest that the firms size may influence its performance; larger firm may have more capacity and capabilities Therefore, this study controls the differences in firms operating environment by including the size variable in the model Size is measured by the log of total assets of the firm (TA), as illustrated in the equation below, and included in the model to control for effects of firm size on dependent variable This research further includes liquidity (LQ), measured in terms of current assets ratio, as another control variable since it helps control for industry-related, firm-specific and business cycle factors 2.4 Empirical research model The regression analysis focuses on the coefficient for short-term and long-term debt ratio, (𝛽 and 𝛽 ) The control variables for profitability motivated by prior literature, 994 including the firm age, liquidity, and firm size (e.g., Coad et al., 2016; Frank and Goyal, 2003; Jermias, 2008; Ebaid, 2009) Therefore, based on the relevance and reliability of such theories and approaches, the empirical model for this research will be developed and tested through panel regression model The research‘s empirical model is illustrated below: 𝛽 𝛽 𝛽 𝛽 𝛽 𝑄 The project will attempt to test the hypotheses below: H0: Financial leverage has no impact on firm financial performance H1: Financial leverage has positive impact on firm financial performance In order to confirm the reliability of the quantitative model above, a number of econometric tests will be carried out as mentioned in the next part Firstly, even though pooled ordinary least square (Pooled OLS) model has been criticised in this study, the author will still use Breusch and Pagan Lagrangian multiplier test to make sure that the Pooled OLS is not appropriate for this research Secondly, Hausman test will also be used to figure out the appropriateness between fixed-effects and random-effects model Finally, the autocorrelation and heteroskedasticity will be tested Details are given below Research model analysis 3.1 Unit Root Test (Harris-Tzavalis test) The Harris-Tzavalis approach for unit root test has been applied across all variables to ensure the stationarity of the panel data The results are showed in the tables below Table 01: Summary of Harris-Tzavalis unit-root test Variables Harris-Tzavalis Statistic p-value ROE 0.1567 0.0000 LnSTD 0.6963 0.0395 LnLTD 0.4779 0.0000 LnSZ 0.6852 0.0216 LQ 0.2012 0.0000 SG -0.1014 0.0000 As can be seen from the table above, all the null hypotheses are rejected at the 5% significance level for all the unit root tests Therefore, it is evident that the panel data contains no unit root and stationary 3.2 Breusch and Pagan Lagrangian multiplier Breusch and Pagan Lagrangian multiplier has been proposed by Breusch and Pagan (1980) which is known as a typical test to determine between traditional pooled OLS and random-effect approach The result is below 995 Table 07: Breusch and Pagan Lagrangian multiplier test for random effects ROE[firm1,t] = Xb + u[firm1] + e[firm1,t] Estimated results: Var sd = sqrt(Var) ROE 314.6469 17.73829 e 235.1386 15.33423 u 48.25641 6.946683 Test: Var(u) = chibar2(01) = 65.10 Prob > chibar2 = 0.0000 Since the result of the table above shows the significance level lower than 5%, so it is suggested to reject the null that OLS residuals not contain individual specific error components In other words, Pooled OLS is indicated to be inappropriate as it ignores the difference between units and the time effect Thus, using this method can lead to bias in estimation of model results Based on this result, random-effect model is suggested to be used In the next part, Hausman test will be applied to determine the appropriateness between random-effect and fixed-effect models 3.3 Hausman test The result of Hausman test presented below shows the significance level of 17.8% which means that the null hypothesis H0 cannot be rejected Therefore, the random-effect model will be accepted to be used in this paper Table 08: Hausman test Coefficients -| (b) (B) (b-B) sqrt(diag(V_b-V_B)) | fe re Difference S.E -+ -STD | -1.09e-06 -1.53e-06 4.44e-07 9.74e-07 LTD | -8.80e-07 -1.04e-06 1.62e-07 1.14e-06 SZ | 6.38e-07 9.54e-07 -3.16e-07 7.67e-07 LQ | -.0785226 -.113974 0354514 0191178 SG | 5.568908 5.508314 0605944 2242256 -b = consistent under Ho and Ha; obtained from xtreg B = inconsistent under Ha, efficient under Ho; obtained from xtreg Test: Ho: difference in coefficients not systematic chi2(2) = (b-B)'[(V_b-V_B)^(-1)](b-B) = Prob>chi2 = 996 3.45 0.1780 3.4 Random effect model estimation Table 09: Random-effects GLS regression Random-effects GLS regression Number of obs Group variable: firm1 Number of groups = 85 R-sq: within = 0.3246 Obs per group: = 12 between = 0.0057 avg = 12.0 overall = 0.1471 max = 12 Wald chi2(5) corr(u_i, X) = (assumed) ROE | Coef Std Err Prob > chi2 Z P>|z| = = 1020 49.25 = 0.0000 [95% Conf Interval] -+ -LnSTD | 1.882123 1.680004 1.12 0.003 -1.410624 5.174869 LnLTD | 2747095 4306036 0.64 0.523 -.569258 1.118677 LnSZ | -5.675382 2.116236 -2.68 0.007 -9.823129 -1.527635 LQ | -.0525371 0901778 -0.58 0.560 -.2292823 1242082 SG | 5.450136 1.021961 5.33 0.000 3.44713 7.453143 _cons | 65.11555 13.21136 4.93 0.000 39.22175 91.00934 -+ -sigma_u | 7.3827718 sigma_e | 14.784374 rho | 19959248 (fraction of variance due to u_i) As can be seen from the table above, the model is significance with the p-value less than 5% With the R-square of 32.46%, it can be concluded that 32.46% variation of the dependent variable (ROE) is explained by the explanatory variables The coefficient summary shows that STD, SZ, and SG have correlation with ROE at a statistical significance level of 5% Meanwhile, there is no statistical evidence for the relationship between ROE and LTD and LQ (with p-value of 52.3% and 56%, respectively) In order to ensure the empirical model is valid and reliable, cross sectional dependence and autocorrelation issues will be tested below Table 10: Cross-sectional dependence test Pesaran's test of cross sectional independence = 11.042, Pr = 0.3247 Average absolute value of the off-diagonal elements = 0.332 As can be seen from the table 10, the p-value of Pesaran‘s test of cross sectional independence is 32.47% which is much higher than the significance level of 5% Therefore, null hypothesis will not be rejected, or in other words, there is no crosssectional dependence 997 Table 11: Wooldridge test for autocorrelation in panel data H0: no first-order autocorrelation F( 1, 84) = 1.026 Prob > F = 0.3190 No auto correlation Ho: Panel Homoscedasticity - Ha: Panel Groupwise Heteroscedasticity - Lagrange Multiplier LM Test = 4.20e+04 P-Value > Chi2(31) 0.0000 - Likelihood Ratio LR Test = 233.5239 P-Value > Chi2(31) 0.0000 - Wald Test = 8.53e+05 P-Value > Chi2(32) 0.0000 -As the result of table 11, the Wald test statistic is significant with the p-value of 0.0000, which means the null hypothesis H0 will be rejected Thus, the empirical model encounters an issue of autocorrelation This problem can be solved by applying FGLS regression in the table below Table 12: FGLS regression Cross-sectional time-series FGLS regression Coefficients: generalized least squares Panels: homoskedastic Correlation: no autocorrelation Estimated covariances = Number of obs Number of groups = Estimated autocorrelations = Estimated coefficients = Time periods = = Wald chi2(5) Log likelihood = -1631.294 Prob > chi2 1020 85 12 = 36.33 = 0.0000 -ROE | Coef Std Err z P>|z| [95% Conf Interval] -+ -LnSTD | 4008238 1.411165 -0.28 0.006 -3.166656 2.365008 LnLTD | 1657248 3288532 0.50 0.614 -.4788157 8102653 LnSZ | -1.234379 1.740915 -0.71 0.478 LQ | -.2142249 0902443 SG | 5.1241 1.09138 _cons | 34.33621 9.560688 -2.37 0.018 4.70 0.000 3.59 0.000 -4.646508 2.177751 -.3911004 -.0373494 2.985034 15.5976 7.263166 53.07481 -As can be seen in the table above, FGLS regression result reveals that the data is homoscedastic and there is no autocorrelation The model is also significant with the pvalue of 0.0000 There are minor changes in the coefficient summary part, in which the SZ 998 variable no longer has a significant correlation with ROE, meanwhile, LQ shows a significant relationship with p-value of 1.8% Discussion and Conclusion As the result of the FGLS regression table, it can be concluded a significant positive correlation between short term debt and financial performance of 85 listed firms in Vietnam with the coefficient of 0.4, which means if the short-term debt increases by unit, ROE will increase accordingly by 0.4 unit The results of this model show that the shortterm financial leverage has the positive effect on financial performance According to the capital structure theory, the debt ratio increases the profit of the enterprise by benefiting from the tax shield, debt is the leverage for businesses to increase revenue, thereby increasing profits The results show that Vietnamese listed businesses made good use of short-term debt efficiently and the benefits from debt financing can offset the costs incurred from in debt During the process of collecting data and information of 85 Vietnamese listed firms in particular and the whole economy in general, there are several problems found out related to their capital structure and financial performance In details, in Vietnamese economy, the capital retained from annual income after tax was less concerned The State Own businesses, which have finance sponsored by the Government, has no pressure for raising capital (Phan, 2016) Therefore, most of them are operating inefficiently and have no retained earnings for capital This also applied to small and medium enterprises in Vietnam which are currently unable to generate profit which leads to capital deficit Furthermore, in Vietnamese economy there are a lot of insolvencies between huge number of companies This leads to the situation of the amount of bad debts is rising gradually and affects badly to the whole economy Besides, capital gained from issuing shares on stock market also brings about advantages and disadvantages for Vietnamese businesses (Bui and Nguyen, 2017) In facts, stock market has been developing strongly in the last 12 years and become the most crucially important financing method for every listed companies Although the market is still new and somehow unstable, the ability to attract capital from issuing shares is completely necessary and realistic By the way, businesses can build up their brands' images and reputation through this activity However, there is a problem existed in this too-fast development of stock market In specific, it is now too easy for firms to go public and issue shares to raise capital, which can result in the imbalance in their capital structure and unexpected risks The reason might be due to the unprofessional of Vietnamese investors while they not pay attention on the profits and risks of their investment but mainly buying and selling shares to get income from short-term changes in share prices By this way, it brings a lot of risks to businesses when they need capital for a project investment which can generate profit after few years; investors, however, still require companies to pay annual dividends and expect for rises in share prices In case that company cannot guarantee a stable amount of dividends, share prices will absolutely fall down incessantly More crucially, some companies issued shares and used the amount of capital gained from that to pay their debts rather than to run the business (Le, 2017) On 999 the other hand, the source of capital from borrowings also has problems In Vietnam, bank credit usually used for State Own companies, the private sector is less concerned although they contributed more than 42% of GDP (Le, 2017) Within companies, only one of them is able to approach borrowing capital from banks, the rest of them are difficult to approach or unable to approach One of the most crucial reason is that they not have enough assets for mortgage, and even in case that they have some mortgage, they can only borrow 70% of the value of their assets (Nguyen and Dang, 2017) References Breitung, J (2000) The local power of some unit root tests for panel data Advances in Econometrics, Volume 15: Nonstationary Panels, Panel Cointegration, and Dynamic Panels, ed B H Baltagi, 161–178 Amsterdam: JAY Press Breitung, J., and S Das (2005) Panel unit root tests under cross-sectional dependence Statistica Neerlandica 59: 414–433 Breusch, T and Pagan, A (1980) The Lagrange Multiplier Test and its Applications to Model Specification in Econometrics Review of Economic Studies 47 (1), 239-253 Bui and Nguyen (2017) Tác Ďộng cấu trúc vốn vốn luân chuyển Ďến hiệu tài doanh nghiệp nhỏ vừa [Online] Finance Plus Available at: https://tapchitaichinh.vn/tai-chinh-kinh-doanh/tai-chinh-doanh-nghiep/tac-dong-cua-cautruc-von-va-von-luan-chuyen-den-hieu-qua-tai-chinh-cua-doanh-nghiep-nho-va-vua116709.html [Accessed 16 Mar 2018] Choi, I (2001) Unit root tests for panel data Journal of International Money and Finance 20: 249–272 Coad, A., Segarra, A., and Teruel, M (2016) Innovation and firm growth: Does firm age play a role? Research policy, 45, 387-400 Ebaid, I (2009) The impact of capital-structure choice on firm performance: empirical evidence from Egypt, Journal of Risk Finance, 10 (5), 477-487 Frank, M., and Goyal, V (2003) Testing the pecking order theory of capital structure, Journal of Financial Economics, 67, 217-248 Hadri, K (2000) Testing for stationarity in heterogeneous panel data Econometrics Journal 3: 148–161 10 Harris, R D F., and E Tzavalis (1999) Inference for unit roots in dynamic panels where the time dimension is fixed Journal of Econometrics 91: 201–226 11 Im, K S., M H Pesaran, and Y Shin (2003) Testing for unit roots in heterogeneous panels Journal of Econometrics 115: 53–74 12 Jermias, J., (2008) The relative influence of competitive intensity and business strategy on the relationship between financial leverage and performance, The British Accounting Review, Vol 40, pp 71–86 13 Kajananthan, R., and Nimalthasan, P (2013) Capital structure and its impact on firm performance: A study on Sri Lanka listed manufacturing companies, Merit Research Journal of Business and Management, Vol 1, No 2, pp 37-44 1000 14 Krishnan,V., and Moyer, R (1997) Performance, capital structure and home country: An analysis of Asian corporation, Global Finance Journal, Vol 8, No 1, pp 130-143 15 Le (2017) Mối quan hệ cấu trúc vốn hiệu tài doanh nghiệp sản xuất [Online] Finance Plus Available at: https://tapchitaichinh.vn/tai-chinhkinh-doanh/tai-chinh-doanh-nghiep/moi-quan-he-giua-cau-truc-von-va-hieu-qua-tai-chinhtai-cac-doanh-nghiep-san-xuat-116367.html [Accessed 05 Mar 2018] 16 Levin, A., C.-F Lin, and C.-S J Chu (2002) Unit root tests in panel data: Asymptotic and finite-sample properties Journal of Econometrics 108: 1–24 17 Margaritis, D and Psillaki, M (2010) Capital structure, equity ownership and firm performance Journal of Banking & Finance, Vol 34 No 3, pp 621-632 18 Modigliani, F., and Miller, M (1958) The cost of capital, Corporation finance and the theory of investment, The American Economic Review, Vol 48, No 3, pp 261-297 19 Nguyen and Dang (2017) Tác Ďộng cấu trúc sở hữu Ďến hiệu hoạt Ďộng cơng ty niêm yết thị trường chứng khống Việt Nam Journal of Economics and Business, 33 (1), 23-33 [Online] Available at: https://js.vnu.edu.vn/EAB/article/view/4044/3792 [Accessed 28 Feb 2018] 20 Onaolapo, A., and Kajola, O (2010) Capital structure and firm performance: Evidence from Nigeria, European Journal of Economics, Finance and Administrative Sciences, Vol 25, pp 70–82 21 Phan (2016) Ảnh hưởng cấu trúc vốn lên kết kinh doanh doanh nghiệp sản xuất công nghiệp, Review of Finance, Issue June 2016 [Online] Available at: https://tapchitaichinh.vn/tai-chinh-kinh-doanh/tai-chinh-doanh-nghiep/anh-huong-cua-cautruc-von-len-ket-qua-kinh-doanh-cua-doanh-nghiep-san-xuat-cong-nghiep-85555.html [Accessed 13 Mar 2018] 22 Pratheepkanth, P (2011) Capital structure and financial performance: evidence from selected business companies in Colombo stock exchange Sri Lanka, Journal of Arts, Science & Commerce, Vol 2, No 2, pp 171-183 23 Shyam-Sunder, L., Myers, C (1999) Testing static trade off against pecking order models of capital structure, Journal of Financial Economics, Vol 51, No 2, pp 219–244 24 Soumadi, M and Hayajneh, O (2012) Capital structure and corporate performance, Empirical study on the public Jordanian shareholding firms listed in the Amman stock market, European Scientific Journal, Vol 8, No 22, pp 173-189 25 Swanson, Z., Srinidhi, B., and Seetharaman, A (2003) The Capital Structure Paradigm: Evolution of Debt/Equity Choice 2nd Edition United States: Greenwood Publishing House 26 Tan, T (2012) Financial distress and firm performance: Evidence from the Asian Financial Crisis, Journal of Finance and Accountancy, Vol 11, pp 36-47 27 Thomas, A (2013) Capital structure and financial performance of Indian cement industry, Management Edge Journal, Vol 6, No 1, pp 44-50 28 Zeitun, R and Tian, G (2007) Capital structure and corporate performance: evidence from Jordan Australasian Accounting Business and Finance Journal, Vol No 4, pp 40-53 1001 ... below: H0: Financial leverage has no impact on firm financial performance H1: Financial leverage has positive impact on firm financial performance In order to confirm the reliability of the quantitative... [Online] Finance Plus Available at: https://tapchitaichinh.vn/tai-chinh-kinh-doanh/tai-chinh-doanh-nghiep/tac-dong-cua-cautruc-von-va-von-luan-chuyen-den-hieu-qua-tai-chinh-cua-doanh-nghiep-nho-va-vua116709.html... the short-term debt increases by unit, ROE will increase accordingly by 0.4 unit The results of this model show that the shortterm financial leverage has the positive effect on financial performance