Determinants of capital structure for listed construction companies in Vietnam

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 DETERMINANTS OF CAPITAL STRUCTURE FOR LISTED CONSTRUCTION COMPANIES IN VIET NAM BY NGUYỄN THỊ MỸ KHÁNH MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, November 2013 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 DETERMINANTS OF CAPITAL STRUCTURE FOR LISTED CONSTRUCTION COMPANIES IN VIET NAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By NGUYỄN THỊ MỸ KHÁNH Academic Supervisors: Assc Prof Dr NGUYEN TRONG HOAI HO CHI MINH CITY, November 2013 CERTIFICATION “I certify that the substance of this thesis has not already been submitted for any degree and have not been currently submitted for any other degree I certify that to the best of my knowledge and help received in preparing this thesis and all sources used have been acknowledged in this thesis.” NGUYỄN THỊ MỸ KHÁNH ACKNOWLEDGMENTS The process of writing a thesis is a collaborative experience involving the support and helps from many people I want to express my gratitude to those who give me the tremendous support to complete this thesis I am deeply indebted to my parents and my husband for their invaluable support and constant encouragement From my early childhood, my parents always teach me valuable lessons on the importance of learning The boundless love of my parents have accompanied with me as I continue my long journey on the pathway of intellectual acquisition I wish to express my heartfelt gratitude to Associate Professor Doctor Nguyen Trong Hoai, Lecturer at Department of Economic Development, University of Economics (HCMC), my supervisor, for his valuable suggestions during the time I write this thesis His wide knowledge, excellent advice and logical way of thinking have provided me a good basis in present this thesis In addition, my special thanks should send to Dr Trương Đang Thuy for their help and sharing of their resources to complete this thesis successfully and in time Finally, I take a pride in myself for working very hard to finish this thesis I realize that after each success stories, there is a process of lots of hard works, difficulties, obstacles and overcoming Even in the hardest time when I write this thesis, I always believe that great efforts will eventually to be paid off Thank for the great time to learn and to grow up Nguyễn Thị Mỹ Khánh November 2013 TABLE OF CONTENTS LIST OF TABLES ABSTRACT .2 CHAPTER I INTRODUCTION .3 1.1 Problem Statement 1.2 Research Objectives 1.3 Research Questions 1.4 Research Methodology 1.5 Research contribution .5 1.6 Research Structure CHAPTER II LITERATURE REVIEW .7 2.1 Key concepts: 2.2 Theoretical review .8 2.2.1 Trade-off theory 2.2.2 Pecking order theory 10 2.3 Determinants of leverage: .12 2.3.1 Leverage and Tangibility: 13 2.3.2 Leverage and Profitability 15 2.3.3 Leverage and Size .16 2.3.4 Leverage and Growth .17 2.3.5 Leverage and Liquidity .18 2.4 Empirical studies review on determinant of leverage: 19 2.4.1 Empirical evidences finding from the world: 19 2.4.2 Empirical evidences from Vietnam : 20 CHAPTER III RESEARCH METHODOLOGY .23 3.1 Overview the construction industry in Vietnam: 23 3.2 Data and description variable 25 3.2.1 Data 25 3.2.2 Description variable 26 3.2.2.1 Dependent Variable 26 3.2.2.2 Explanatory Variables 27 3.3 Method of estimation .28 3.3.1 Fixed effect (FE) estimator : .29 3.3.2 Random effect estimator (RE): 29 3.3.3 Hausman specification test : .30 3.4 Hypothesis .30 CHAPTER IV EMPIRICAL RESULTS .32 4.1 Descriptive Statistic 32 4.2 Empirical Result 34 4.2.1 Hausman test: 34 4.2.2 Fixed effects model (FEM) .36 4.2.2.1 Tangibility 37 4.2.2.2 Profitability 38 4.2.2.3 Size .39 4.2.2.4 Growth .39 4.2.2.5 Liquidity .40 4.3 Public and Private Firm Comparison 41 4.3.1 Descriptive Statistic 41 4.3.2 Determinants of Financial Leverage 42 CHAPTER V CONCLUSION AND RECOMMENDATION 44 5.1 Conclusion .44 5.2 Policy recommendation: 46 5.2.1 Recommendations for construction firms: .46 5.3 Limitation: .49 REFERENCE APPENDIX ABBREVIATIONS SMEs: small and medium size enterprises WTO: World Trade Organization GDP: Gross Domestic Product FE: Fixed effects RE: Random effects TEs: Transition economies LIST OF TABLES Table 2.1 Summary of leverage determinant 18 Table 3.1 Variable, Description and expected sign 28 Table 4.1 Descriptive Statistics of Leverage, short-term leverage, long-term leverage and Explanatory Variables with construction firms 33 Table 4.2 Hausman Test 35 Table 4.3: Result of Fixed effects regression in construction sector 36 Table 4.4 Summary of leverage determinants 37 Table 4.5 Descriptive Statistics of Public and Private Firms 41 Table 4.6 Regression Result of Public and Private Firms .42 ABSTRACT This study explores the determinant of capital structure of Vietnam listed construction companies using panel data for the period of 2007-2012 Tangibility, profitability, size, growth and liquidity use as independent variables Total leverage, short-term leverage and long-term leverage were dependent variable The research finds that all the selected independent variables were significantly associated to at least one of the leverage ratios except profitability Profitability seems to have no significant effect to the capital structure of Vietnamese construction listed firms A positive significant related to leverage and tangibility and growth variables; a negative relationship between leverage and liquidity also supported the implication of pecking order theory while a positive significant of size variable confirmed to prediction of trade off theory The study also finds that there are different in determinants of capital structure between public and private firms in construction industry about the profitability and growth variables Size, profitability and liquidity effect to leverage of public firms while size, growth and liquidity have a relation to leverage of private firms Public firms tend to use more debt than private firms Keywords: capital structure, leverage, construction companies CHAPTER I INTRODUCTION 1.1 Problem Statement Capital structure is not a new area to study From the first research of capital structure was presented by Modigliani & Miller (1958), after that a lot of researches try to identify determinants of capital structure But the results are still an argument problem in financial and inconsistent among researchers at different countries and different industries Myers (1984) also showed that “the average debt ratio will vary from industry to industry because assert risk, asset type and requirement for external fund also vary by industry” In Vietnam, there are only a limited number of studies on determinant of capital structure among Vietnam firms Some of these studies just focused on listed firms (Dzung Nguyen et al 2011) or small and medium size enterprises (SME) (Nguyen, Tran Dinh Khoi 2006) and the empirical results also have conflicts with the results from many other researches in the world Corporate financing means that all the money economy expressed through mobilizing and using capital in order to maximize the value of company In there, capital structure is the ratio between debt and equity to finance for the enterprise Specifying the capital structure is an important issue not only for the manager but also for the financial officer to build up the logical funding policy to ensure the illiquid and to salvage the effect of debt margin to upgrade the value of the company In the process of activity the enterprises have to face the important decisions such as investment, finance, dividing dividend, etc Each decision effects to the value and the capital structure of the enterprise Decisions involving capital structure are vital for every business organization Management has to carefully ensure that their capital structure decisions maximize their firm value However, in order to achieve optimal capital structure, the manager has to consider how factors affect to capital structure of firms There are many empirical studies about the determinant of capital structure, each research disperse in different 4.3.2 Determinants of Financial Leverage Regression result of public and private firms as follow Table 4.6 Regression Result of Public and Private Firms Variables Constant Tangibility Size Profitability Growth Liquidity Number of observation R2 Private Firms (S.E,) 3936039*** (.143136) 0.112525 (.07446) 0.06789** (.026209) -.214769 (.1513372) 0.02241* (.0134162) -.0934054*** (.0140991) 174 0.3112 Public Firms (S.E.) 49099*** (.1799) -0.1042 (.08095) 06844** (.03062) -.77943*** (.2751) 02604 (.01798) -0.0879*** (.02453) 120 0.2964 Table 4.6 is obtained from fixed effect model regression with public data In public firms, growth and tangibility explanatory variables not affect financial leverage of firm, while size, profitability and liquidity variables strongly influence leverage In particularly, profitability and liquidity variables are negatively significant related to leverage, whereas size is positive significant associated to leverage This implies that it is possible supported from government to public firms and large firms tend to use more debt than small firms The firms with more profit tend to use less debt because they prefer to use internal fund as retained earnings to external funds It is particularly important to be aware that growth does not impact significantly on financial leverage of public firm Tangibility is negative insignificant related to leverage This result is the same with the result above Tangibility only affects to short-term and long-term leverage but not have impact to total leverage Public firms have a higher shot-term debt but a lower long-term debt than the one of private firms 42 The result of regression with data of private firms is presented in table 4.7 Size and growth variables have positive significant influence on financial leverage of private firms whereas liquidity is negative related to leverage Otherwise, tangibility and profitability variable is not significant for private firms It is obvious that size, growth and liquidity determine the financial leverage degree of private firms From the result above, we see that liquidity also have a negative significant related to leverage of public and private companies in construction sector Tangibility has insignificant statistic to both of all But one point seemed to be different between public and private companies is the influence of growth and profitability variable Growth variable has a positive significant related to capital structure of private companies, but no impact to public firms is found Otherwise, profitability has a negative significant to public firms but not impact to private firms And one important point is that public companies tend to have higher leverage than private firms 43 CHAPTER V CONCLUSION AND RECOMMENDATION 5.1 Conclusion The research investigated the determinants of construction sector firms with data set of 49 Vietnamese listed firms in construction sectors from 2007 to 2012 Dependent variables are total leverage, short-term leverage and long-term leverage and independent variables are tangibility, profitability, size, growth and liquidity The measure of all variables bases on book value By using Stata software, Data descriptive statistic suggests that, on average, the leverage of construction sector companies is still very high and higher than the one of listed firms in Vietnam in the research of Dzung Nguyen at al (2011), higher than in developing countries, and higher than in some TEs such as Czech Republic, Russia and China In there, amount of long – term debt (only 11.86%) is lower than short-term debt (55.3%) The lower amount of long-term leverage indicates that Vietnam construction listed firms prefer to use short-term debt rather than long-term debt Source of capital for long-term investment might be financed by equity and banks loan supply mostly for short-term capital financing In other hand, the profitability is very low with mean only 4.97% This is due to the frozenness of real estate market, tighten public investment, lower level of bank credit, increase interest rate, etc these have caused serious problem to construction enterprises The higher of leverage make firms meet problem with liquidity lead to bankruptcy because the interest rate is very high in the last period so the cost of interest loan is also high and firms can’t afford to repay for bank Hundred of enterprises go bankruptcy One of the reasons is due to the financial imbalance because the enterprises use short –term debt to finance for longterm investment as buying new equipment, building factory, etc When the shortterm loan is coming to pay, the firms not have resources to repay for bank So they have problem in balancing financial Moreover, tangibility ratio is still low 44 only 21.17% which reflects the status out of date of machine equipment, small production scale that leading to risk of low competition The study employs methods of panel regression as fixed effect and Random Effects and bases on two main theories as trade off theory and pecking order theory to test whether they explain the determinant of capital structure in construction sector firms Hausman test chooses fixed effects method to regress data By using fixed effect model (FEM) in regression, this study finds that all independent variables were confirmed to be a relevant determinant of at least one of the measures of leverage except profitability Profitability has no impact to all of leverage because of the lower profit in construction sector firms so firms not have retained earnings to finance their operation as prediction of pecking order theory Liquidity has a negative correlation with total and short-term leverage but a positive with long-term leverage Liquid firms prefer to use accumulated cash and liquid assets rather than to use external finance Tangibility has a negative significant related to short-term leverage but a positive significant related to longterm leverage Size and Growth variables also have a positive associated to total leverage and long-term leverage It means that construction firms prefer on debt financing to equity financing for expansion and growth There are also different factors that effect to determinant of capital structure in public and private firms Public firms tend to use more debt than private firms due to government support Liquidity has a negative impact to leverage of all public and private firms whereas size has a positive related to both of all Tangibility has no impact to leverage of public and private firms Furthermore, growth only has effects to private firms and profitability has a negative significant related to leverage of public firms From the result above, it is clear that pecking order theory is better in explaining determinant of leverage in Vietnam construction listed firms than Trade off theory A negative significant to leverage of liquidity variable and a positive 45 significant of tangibility and growth confirm pecking order theory whereas a positive relationship between size and leverage also consistent the trade off theory 5.2 Policy recommendation: The financial leverage degrees of construction firms can be predicted by using the result of this study In particular, entrepreneurs can adjust their financial leverage to stable degree in case the leverage value is deviated from mean value Furthermore, optimal financial leverage figure is also defined based on regression results Then, firms can use such optimal value to build potential financial leverage degree and maintain debts close to their targets values In this research, we find that there are four variables determine capital structure of construction industry such as tangibility, size, growth and liquidity while profitability does not impact to leverage Through the influencing of these variables, the researcher will give some recommendations for firms to improve the capital structure of construction industry 5.2.1 Recommendations for construction firms: 1/ Tangibility: Tangibility plays a vital role in borrowing from the bank as loan collateral The mean of tangibility is only 21.17%, a very low rate compared to the scale of construction industry It reflects the status out of date of machine equipment, small production scale that leading to risk of low competition, lack of technical While the construction works are more and more complicated and need new technology in building In other hand, the investor and the clients also need better high quality from their projects Hence, the firms should have innovation new technology and tools for improving efficiency and quality and improve the capacity and competitiveness for local construction enterprises to enable them to undertake most of project in Vietnam The enterprises can use leasing services of the Leasing companies which will provide loans and guarantees on easier term than traditional 46 banks to contractors and consults, firms will be supplied loans for buying new equipment which will act as guarantor for loan secured Tangibility has a negative significant to short-term leverage but positive to long-term leverage It means that firms with higher tangibility tend to have more long term debt because they can use tangibility as collateral for long-term loan So with lower tangibility, the bank refuses to supply long-term debt for investment new project Consequently, the firms have to use short-term debt to finance for long – term business as building new office or buying new machine, ect To avoid this problem, firms shouldn’t use short-term debt to finance for long-term investment to avoid financial imbalance “Maturity matching” should be use on firm book where there is a match between current assets and short-term debt and a match between long - term debt and fixed assets 2/ Size and Growth: Both of them have a positive significant with total and long-term leverage Firms would like to borrow more to finance for their expansion creasing net sale and growth of total asset Larger firms have difficulty in accessing to capital markets of equity and bonds and still rely on external fund rather than equity issuance It gives that the bond markets are in the early stage of development Therefore, the regulator should have great efforts on development of the Vietnam’s capital market One the capital market development, the firms can be easy to mobilize capital from this market to finance for their investment and innovation technology Particularly, when firms need long term debt to finance for long term investment as building or buying machinery, they should issuing equity to mobilize capital instead of using short-term debt to avoid problem of imbalance capital Another problem of construction industry is that the construction firms usually have long productive cycle (construction progress) so the capital for production may be long stagnant in the amounts of construction progress that lead 47 to risk in capital in future time Hence, enterprises have to opt to finance reasonable their capital by liabilities or equity in order to have the lowest cost of financial and limited in happening risk in this stage 3/ Liquidity: Liquidity has a significant positive with long-term leverage and a negative significant to short-term and total leverage Firms have no need to use total and short-term leverage when increasing liquidity and using short-term debt to finance for long-term investment This will make imbalance in financial So the firms should invest much more on short-term assets but not using short-term debt to invest on long-term assets as buying new machinery, building new office, etc One of another the problem of construction industry is that the short-term receivable and inventories of firms are very high because of the difficulty in real estate sector so the investor can’t afford payment for the contractor That leads to the capital for production may be long stagnant in the amounts of construction progress So firms should choose project which have a clearly source of capital payment to pay for contractor to avoid draining capital of firms Firms should collect account receivable as soon as possible to limit the status of occupied capital and increase the capacity of firms’ finance 4/ Recommendation for public and private firms: The public firms are easier to access credit from the bank than private firm due to their relationship with state – owned commercial bank so there is an unfair treatment for private construction firms Hence, the commercial bank should ensure that all firms enjoy the same opportunity to access credit to promote the private development 48 5.3 Limitation: The limitation of this research is that the data only focus on construction sector which are listed in the main board of Ho Chi minh and Hanoi Securities Trading Center In reality, there are many other sectors in Vietnam stock exchange so that this result can not represent for the result of other sectors in Vietnam The research only uses available data collection of 49 listed firms in construction sector in Hanoi and Ho Chi Minh Securities Trading Center and not include non listed firm because of difficulty in collecting data So the sample size is too small and the statistical result is not convincing enough to reflect the overall development of whole industry In other hand, this study only considers about firms specific characteristics such as tangibility, size, profitability, growth and liquidity effect to leverage of construction sector These factors only explain 26.39% of leverage ratio Some other important variables of country specific factors aren’t cared about while they are found to have significant related to leverage by many previous researches in Vietnam and around the world Thus, these factors should include in the equation of determinant of leverage Consequently, further researches should be done with more explanatory variable that might explain variation in leverage of firms and broaden the scope of the study by collecting more data with non listed firms Besides, only two theories in capital structure are considered in impact to the determinant of capital structure in construction sector firms Further research should widen with other theories such as agency cost theory, market timing theory, etc 49 REFERENCE Antoniou, A , Guney, Y., and Paudyal, K., 2002 Determinants of Corporate Capital Structure : Evidence from European Countries, Working paper, University of Durham Bevan, A and Danbolt, J., 2002 Capital structure and its determinants in the UK- a decompositional analysis, Applied Financial Economics 12, 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leverage tangibility size profitability growth liquidity, fe Fixed-effects (within) regression Group variable: code Number of obs Number of groups = = 294 49 R-sq: within = 0.2639 between = 0.4305 overall = 0.3835 Obs per group: = avg = max = 6.0 corr(u_i, Xb) = 0.2605 F(5,240) Prob > F = = leverage Coef tangibility size profitabil~y growth liquidity _cons 0215341 0718339 -.0077601 0215082 -.0958766 3993532 0549331 020142 0495516 0107184 012096 1129302 sigma_u sigma_e rho 10917515 06502222 73816424 (fraction of variance due to u_i) F test that all u_i=0: Std Err t P>|t| 0.39 3.57 -0.16 2.01 -7.93 3.54 F(48, 240) = 0.695 0.000 0.876 0.046 0.000 0.000 17.21 0.0000 [95% Conf Interval] -.0866785 0321563 -.1053717 000394 -.1197046 1768923 14.95 1297466 1115115 0898514 0426224 -.0720487 6218141 Prob > F = 0.0000 For short-term leverage xtreg shorttermleverage tangibility size profitability growth liquidity, fe Fixed-effects (within) regression Group variable: code Number of obs Number of groups = = 294 49 R-sq: Obs per group: = avg = max = 6.0 within = 0.5434 between = 0.7699 overall = 0.7029 corr(u_i, Xb) F(5,240) Prob > F = 0.4152 shortterml~e Coef tangibility size profitabil~y growth liquidity _cons -.5224745 0118947 -.0671101 0012921 -.1635055 8252199 0507409 0186049 0457701 0099005 0111729 104312 sigma_u sigma_e rho 08439361 06006009 66380395 (fraction of variance due to u_i) F test that all u_i=0: Std Err F(48, 240) = t P>|t| = = -10.30 0.64 -1.47 0.13 -14.63 7.91 9.66 0.000 0.523 0.144 0.896 0.000 0.000 57.12 0.0000 [95% Conf Interval] -.6224289 -.0247549 -.1572725 -.0182108 -.185515 619736 -.4225201 0485444 0230523 020795 -.141496 1.030704 Prob > F = 0.0000 For long-term leverage xtreg longtermleverage tangibility size profitability growth liquidity, fe Fixed-effects (within) regression Group variable: code Number of obs = Number of groups = 294 49 R-sq: within = 0.3696 between = 0.4550 overall = 0.4314 Obs per group: = avg = max = 6.0 corr(u_i, Xb) = 0.1501 F(5,240) Prob > F longtermle~e tangibility size profitabil~y growth liquidity _cons sigma_u sigma_e rho Coef Std Err .5169712 052443 -.0050996 018598 0643775 -.3702074 t 0495711 0181759 0447149 0096722 0109153 1019071 10.43 2.89 -0.11 1.92 5.90 -3.63 = = 28.14 0.0000 P>|t| [95% Conf Interval] 0.000 0.004 0.909 0.056 0.000 0.000 4193212 6146211 0166383 0882477 -.0931833 0829842 -.0004553 0376513 0428754 0858796 -.5709539 -.1694608 09175818 05867541 70977092 (fraction of variance due to u_i) F test that all u_i=0: F(48, 240) = 14.08 Prob > F = 0.0000 Appendix Result of regression for public firms For total leverage xtreg leverage tangibility size profitability growth liquidity, fe Fixed-effects (within) regression Group variable: code Number of obs Number of groups = = 120 20 R-sq: Obs per group: = avg = max = 6.0 within = 0.2964 between = 0.5394 overall = 0.4601 corr(u_i, Xb) F(5,95) Prob > F = 0.3195 leverage Coef tangibility size profitabil~y growth liquidity _cons -.1042018 0684431 -.7794315 0260433 -.0879068 4909958 sigma_u sigma_e rho 08187802 05810147 66509418 F test that all u_i=0: Std Err .0809538 0306216 2751458 0179801 0245365 1799271 t -1.29 2.24 -2.83 1.45 -3.58 2.73 P>|t| 0.201 0.028 0.006 0.151 0.001 0.008 = = 8.00 0.0000 [95% Conf Interval] -.2649155 0076516 -1.325665 -.0096518 -.136618 1337953 0565119 1292346 -.2331979 0617383 -.0391956 8481963 (fraction of variance due to u_i) F(19, 95) = 8.74 Prob > F = 0.0000 Appendix Regression for private firms xtreg leverage tangibility size profitability growth liquidity, fe Fixed-effects (within) regression Group variable: code Number of obs = Number of groups = 174 29 R-sq: within = 0.3112 between = 0.5123 overall = 0.4506 Obs per group: = avg = max = 6.0 corr(u_i, Xb) = 0.3355 F(5,140) Prob > F leverage tangibility size profitabil~y growth liquidity _cons sigma_u sigma_e rho Coef Std Err .112525 0678902 -.2147693 0224104 -.0934054 3936039 0744634 026209 1513372 0134162 0140991 1431367 t 1.51 2.59 -1.42 1.67 -6.62 2.75 = = 12.65 0.0000 P>|t| [95% Conf Interval] 0.133 0.011 0.158 0.097 0.000 0.007 -.0346931 259743 0160736 1197067 -.5139711 0844324 -.0041141 0489349 -.1212801 -.0655307 1106149 6765929 11640575 06737991 74903462 (fraction of variance due to u_i) F test that all u_i=0: F(28, 140) = 14.48 Prob > F = 0.0000