Determinants of capital structure evidence from listed companies on hochiminh stock exchange

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY o0o - VĂNG NGUYỄN PHƯƠNG THẢO DETERMINANTS OF CAPITAL STRUCTURE EVIDENCE FROM LISTED COMPANIES ON HOCHIMINH STOCK EXCHANGE MASTER THESIS Ho Chi Minh City - 2011 MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY o0o - VĂNG NGUYỄN PHƯƠNG THẢO DETERMINANTS OF CAPITAL STRUCTURE EVIDENCE FROM LISTED COMPANIES ON HOCHIMINH STOCK EXCHANGE MAJOR: BANKING AND FINANCE MAJOR CODE : 60.31.12 MASTER THESIS INSTRUCTOR : ASSOC PROF – DR PHẠM VĂN NĂNG Ho Chi Minh City - 2011 ACKNOWLEDGEMENT I would like to express my deepest gratitude to my research Instructor, Associate Professor – Doctor Pham Van Nang for his intensive support, valuable suggestions, guidance and encouragement during the course of my study My sincere gratitude are also due to Doctor Vo Xuan Vinh for his valuable feedback on the problems of the study I would like to express my thanks to all of my lecturers at Banking and Finance Faculty, University of Economics Hochiminh City for their teaching and guidance during my Master of Banking and Finance course Moreover, I would like to specially express my thanks to all of my classmates, my friends for their support and encouragement My final and greatest thanks are sent to my family including my parents, my brothers, my husband and my baby who are the greatest encouragement for me to overcome all difficulties in my life i ABSTRACT This thesis research the explanatory power of some of the literary theories that have been propounded to explain variations in capital structures across firms In specific, this thesis investigates capital structure determinants of firms listed on Hochiminh Stock Exchange based on a panel data set from 2006 to 2010 comprising 77 companies Main characteristic of Vietnamese firms, including firms listed on Hochiminh Stock Exchange, is short-term debt comprises a considerable part of firms’ total debt An analysis of determinants of leverage based on total debt ratios may hide significant differences in the determinants of long and short-term forms of debt Therefore, this thesis studies determinants of total debt ratios as well as determinants of short-term and long-term debt ratios The thesis consider the impact of those ratios on capital structure during period 2006-2010 to consider whether there was any different from before, in and after the financial crisis The thesis also tests the different choice of capital structure of eleven groups of industries And the last answer should be find out is the difference of capital structure of firms with different size Keywords: Capital structure, Vietnam, HOSE ii CONTENTS Acknowledgement i Abstract ii Contents .iii List of Tables vi Abbreviations vii CHAPTER 1: INTRODUCTION 1.1 Introduction 1.2 Research objectives 1.3 Research methodology 1.4 The structure of the research CHAPTER 2: LITERATURE REVIEW 2.1 Introduction 2.2 Theoretical and Empirical Findings 2.3 Potential determinants of capital structure 2.3.1 Profitability (PROF) 2.3.2 Firm size (SIZE) 2.3.3 Assets tangibility (TANG) 10 2.3.4 Growth opportunities (GRO) 10 2.3.5 Non-debt tax shield (NDTS) 11 iii 2.3.6 Income variability (INVAR) 12 2.3.7 Time dummies 12 2.3.8 Industry Dummies 13 2.4 Measures of capital structure/financial leverage 13 2.4.1 Financial leverage of firms 13 2.4.2 Decomposition of total debt into short-term and long-term debt ratios 16 2.5 Conclusion 19 CHAPTER 3: RESEARCH METHODOLOGY 21 3.1 Introduction 21 3.2 Data specifications 21 3.2.1 Research sample description 21 3.2.2 Explanatory variables 22 3.2.3 Dependent variables 22 3.3 Empirical model specifications 22 3.3.1 Model 23 3.3.2 Model 24 3.3.3 Model 24 CHAPTER 4: DATA ANALYSIS AND FINDINGS 26 iv 4.1 Introduction 26 4.2 Descriptive statistics 26 4.3 Correlation matrix of explanatory variables 29 4.4 Results of Model 30 4.5 Results of Model 33 4.6 Results of Model 35 4.7 Robustness tests 38 CHAPTER 5: CONCLUSION 42 5.1 Introduction 42 5.2 Conclusion 42 5.3 Limitations 44 5.4 Recommendations 45 References 47 Appendix A – Regression results of models 52 Appendix B – Research data set (2006 – 2010) 76 v LIST OF TABLES Table 2.1 Short-term vs long-term debt 17 Table 2.2 Short-term debt ratios and firm sizes 19 Table 2.3 Long-term debt ratios and firm sizes .19 Table 3.1 Potential determinants of capital structure, corresponding measures, and expected effect on financial leverage .23 Table 4.1 Summary of the industry structure 27 Table 4.2 Descriptive statistics of the variables used in the study for the nonfinancial firms listed on HOSE for the period 2006 to 2010 28 Table 4.3 Comparative means for different size of firms 28 Table 4.4 Correlation coefficients among the explanatory variables 29 Table 4.5 The reported results of Model 31 Table 4.6 The reported results of Model 34 Table 4.7 The reported results of Model 36 Table 4.8 Results of Model : Fixed Effects versus Random Effects 39 Table 4.9 Results of Model : Fixed Effects versus Random Effects 41 vi ABBREVIATIONS HOSE Hochiminh Stock Exchange PROF Profitability SIZE Firm size TANG Asset tangibility GRO Growth opportunities NDTS Non-debt tax shield INVAR Income variability TDTA Total debt to total assets SDTA Short-term debt to total assets LDTA Long-term debt to total assets vii Determinants of Capital Structure CHAPTER 1: INTRODUCTION 1.1 Introduction One of the tough challenges that firms face is the choice of capital structure Capital structure decision is important because it affects the financial performance of the firm The capital structure of a firm is defined by Abor J (2005, p.438-45) as specific mix of debt and equity that a firm uses to finance its operations The modern theory of capital structure was firstly established by Modigliani and Miller (1958) Thirty-seven years later, Rajan and Zingales (1995, p 1421) stated: “Theory has clearly made some progress on the subject We now understand the most important departures from the Modigliani and Miller assumptions that make capital structure relevant to a firm’s value However, very little is known about the empirical relevance of the different theories” Similarly, Harris and Raviv (1991, p 299) in their survey of capital structure theories claimed: “The models surveyed have identified a large number of potential determinants of capital structure The empirical work so far has not, however, sorted out which of these are important in various contexts.” Thus, several conditional theories of capital structure exist (none is universal), but very little is known about their empirical relevance Moreover, the existing empirical evidence is based mainly on data from developed countries (G7 countries) Findings based on data from developing countries have not appeared until recently – for example Booth et al (2001) or Huang and Song (2002) So far, no study has been published based on data from Vietnam (especially the Hochiminh Stock Exchange (HOSE)), at least to the extent of this author’s knowledge The main goal of this thesis is to fill this gap, exploring the case of the listed firms in HOSE The remainder of this chapter provides general introduction about the research objectives, research methodology and the structure of the research ... regression analysis to explore the impacts of debt measures on the determinants of the capital structure of listed firms on Hochiminh Stock Exchange Chapter 5: Conclusions Determinants of Capital Structure. ..MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY o0o - VĂNG NGUYỄN PHƯƠNG THẢO DETERMINANTS OF CAPITAL STRUCTURE EVIDENCE FROM LISTED COMPANIES ON HOCHIMINH STOCK EXCHANGE. .. firms listed on Hochiminh Stock Exchange based on a panel data set from 2006 to 2010 comprising 77 companies Main characteristic of Vietnamese firms, including firms listed on Hochiminh Stock Exchange,