Understanding capital structure of companies in vietnam effects of profitability, tanggible assets, growth opportunities, firm size ownership typeand non debt tax shields

UNIVERSITY OF ECONOMICS HO CHI MINH CITY INTERNATIONAL SCHOOL OF BUSINESS - MASTER THESIS Understanding capital structure of companies in Viet Nam Effects of profitability, tangible assets, growth opportunities, firm size, ownership type, and non-debt tax shields Author: Vo Tien Dung Student No.: 22110010 Email address: tiendung.usp@gmail.com Supervisor: Dr Pham Quoc Hung Email address: phquhung76@yahoo.com November 2013 TABLE OF CONTENTS TABLE OF CONTENTS ACKNOWLEDGEMENTS ABSTRACT CHAPTER 1: INTRODUCTION 1.1 Background of the research 1.2 Research problem 1.3 Research question 1.4 Research objectives 1.5 Expected contribution 1.6 Organization of the study CHAPTER 2: LITERATURE REVIEW AND HYPOTHESES 11 2.1 Theoretical background 11 2.1.1 Capital structure 11 2.1.2 The trade-off theory 12 2.1.3 Pecking order theory 13 2.1.4 Market timing theory 13 2.1.5 Signalling problem 14 2.1.6 Agency cost problem 15 2.1.7 Asymmetric information problem 16 2.2 Empirical literature review 17 2.2.1 Leverage (Lev) and capital structure 17 2.2.2 Profitability (PRO) and leverage 18 2.2.3 Tangibility (TANG) and leverage 20 2.2.4 Growth opportunities (GROW) and leverage 20 2.2.5 Firm size (SZ) and leverag 2.2.6 Ownership type (OWNT) and leverage 2.2.7 Non –debt tax shields (NDTS) and leverage CHAPTER 3: RESEARCH METHODOLOGY 3.1 Sample size and data set 3.2 Calculation of the variables 3.2.1 Dependent variable 3.2.2 Independent variables 3.3 Model specification 3.4 Method of data analysis CHAPTER 4: RESULT ANALYSIS 4.1 Screening and cleaning the data 4.2 Checking assumptions of multiple regression 4.2.1 Outliers 4.2.2 Checking normality, linea 4.2.3 Checking multicollinearit 4.2.4 Testing autocorrelation p 4.3 Results of multiple linear regressions 4.3.1 Descriptive statistics 4.3.2 Evaluation of the model 4.3.3 Evaluating the independe CHAPTER 5: CONCLUSIONS AND IMPLICATIONS 5.1 Conclusions 5.2 Limitation of the study 5.3 Implications References: 48 APPENDICES 55 Table 5: Correlations 55 Table 6: Histogram 56 Table 7: Normal P-P Plot of regression standardized residual 56 Table 8: Scatterplot 57 Table 9: List of non-financial companies 63 Table 10: Interest rate from banks in Viet Nam 64 Table 11: Summary of some theoretical results 65 ACKNOWLEDGEMENTS First of all, I would like to express my deep gratitude to my master thesis supervisor, Dr Pham Quoc Hung who spends very much time teaching me many things from the beginning of the master thesis I would like to thank you Ho Chi Minh Stock Exchange, cophieu68, and cafef whose published data on the website to support me saving the collected time Special thanks are given to International school of business (ISB) supporting me vary information, guiders relating to the master thesis in order to help me finish the master thesis on time Finally, I am deeply grateful for support, understanding of my wife who spends a lot of time to take care of all works in my family in order to make more free time for me during nearly two-year MBUS program ABSTRACT The objective of this article is to understand the effect of capital structure of 124 non-financial companies listed on the Ho Chi Minh City Stock Exchange (HOSE) in Viet Nam The research collected panel data from the annual financial statement of 124 companies to examine the six factors such as profitability, tangibility, growth opportunities, firm size, ownership type, and non-debt tax shields effect to capital structure (leverage) Under trade off and pecking order theories, the empirical results found that there was a negative (-) relationships between profitability, ownership type and leverage The Tangibility, size of firm, and non-debt tax shield were a positive effect to leverage Growth opportunities had a not statistically significant impact on the capital structure Key words: Capital structure, leverage, trade off, pecking order, non-financial companies, Viet Nam CHAPTER INTRODUCTION 1.1 Background of the research Capital structure plays a very important role in corporate financial management There are many research papers talking about capital structure and how to find out the particular model for the optimal capital structure for the business The most important task of the financial manager is to balance the debt and equity capital to ensure capital structure is better, hence strive to find out the optimal corporate capital structure (Tong and Green, 2005), lower cost of capital will lead to maximizing value of a company (Shah and Kahn, 2007) A firm faces with a financial deficit during doing business, thus the manager of the firm should find out a fund to support new investments in order to maintain the activity of a firm stably as well as making a right financial decision One way that can be chosen is to undertake a capital structure of a firm, especially debt restructuring In order to take a capital structuring, a manager has a high acknowledgement in financial filed and analytic capabilities hence a manager can minimize the cost of capital and maximize the value of the firm, the composition of capital structure consists of debt and equity, the resource of funds include retained earning, debt, and equity Orderly, retained earnings is cheapest fund due to without borrowing cost, cost of debt always lower than a cost of equity due to the shareholders requires a rate of return bigger than the interest rate Based on capital analysis, the managers raise the fund for investments by issuing debt or equity or retained earnings reasonable Previously, there are two studies from Franco Modigliani and Merton H Miller in 1958 with title “Cost of capital, corporate finance and theory of investment” states that the capital structure is not impacted on the value of the company and the revised publish in 1963 named “Corporate income tax es and the cost of capital: a correction” to reverse that corporate income tax ef fect on the value of the company it mean that capital structure also impacts to the value of the firm Those great theories above encouraged many researchers around the world to study models of capital structure, the result states that there is different outcome regarding to capital structure comparing between research from developing countries (Graham and Harvey, 2001), (Tong and Green, 2005), (Shah and Khan, 2007) and developed countries (Mazur, 2007), (Rajan and Zingales, 1995) in term of the score factors effect to capital structure of the firm Previous studies examined the interaction between leverage on behalf of capital structure and exogenous such firm growth opportunities, firm size, firm profitability, ownership type, intangible assets, non-debt tax shied, firm performance, dividend policy, uniqueness, tax, volatility, asset structure, etc This research will focus on six independent variables such as growth opportunities, firm size, profitability, tangibility (collateral), ownership type, and non-debt tax shields effect to dependent variable defined leverage 1.2 Research problem There are many empirical researches regarding to the impact of factors on capital structure in many different approaches of researchers in term of techniques, models, variable selections, countries Different approaches leading to many outcomes relating to positive or negative impact of factors on capital structure For instance, there is a negative effect of profitability (Kester, 1986), (Shyam-Sunder and Myers, 1999) and firm size (Kester, 1986), (Titman and Wessels, 1988) to leverage upon pecking order theory whereas trade-off theory is a positive impact (Bowen, Daley and Huber, 1982), table 11 shows some of theoretical results related to capital structure This study identifies the capital structure of listed companies in Viet Nam and responds to the gap that there are many issues related to the selection of capital structure in every country in the world Furthermore, the manager of a firm can consider the cost and benefit of capital structure based on the theories in order to finance their financial deficit or new investments 1.3 Research question The research is going to answer the following major research question: Which factors have significant effects on capital structure of companies in Viet Nam? 1.4 Research objectives Capital structure decision is mainly influenced by the trade-off theory and the pecking order theory, based on the research question, the objectives of this research are to examine the effects of six independent variables such as profitability, asset tangibility, growth opportunities, size of firm, ownership type, and non –debt tax shields to debt ratio (leverage r atio) as implied by the tradeoff theory and pecking order theory, then the research finds out the relationship between above six dependent variables and leverage The objectives of the research are to investigate how firms in Viet Nam finance for investments by internal or external resources? 1.5 Expected contribution The purpose of this research will not produce a theory that applying to all populations, the objectives of research is trying to examine the six mentioned independent variables effect to debt ratio of listed companies in Viet Nam The research finds out what factors influence the choice of capital structure? How firms finance capital for investments, by internal or external resources, since this study will conducts firms to make the choice of capital structure 1.6 Organization of the study CHAPTER 1: Introduction CHAPTER 2: Literature review and hypotheses CHAPTER 4: Result analysis CHAPTER 3: Research methodology CHAPTER 5: Conclusions and recommendations Appendices 52 Long, M S., & Malitz, I B (1985) Investment patterns and financial leverage In Corporate capital structures in the United States (pp 325-352) University of Chicago Press Mackie-Mason, J K (1990) Do taxes affect corporate financing decisions?.The Journal of Finance, 45(5), 1471-1493 Mazur, K (2007) The determinants of capital structure choice: evidence from Polish companies International Advances in Economic Research, 13(4), 495-514 Modigliani, F., & Miller, M H (1958) The cost of capital, corporation finance and the theory of investment The American economic review, 48(3), 261297 Modigliani, F., & Miller, M H (1963) Corporate income taxes and the cost of capital: a correction The American Economic Review, 53(3), 433-443 Myers, S C (1977) Determinants of corporate borrowing Journal of financial economics, 5(2), 147-175 Myers, S C (1984) The capital structure puzzle The journal of finance, 39(3), 574-592 Myers, S C., and Majluf, N S (1984) Corporate financing and investment decisions when firms have information that investors not have Journal of financial economics, 13(2), 187-221 Pallant, J (2004) SPSS survival manual: version 12 Open University Press 53 Rajan, R G., and Zingales, L (1995) What we know about capital structure? Some evidence from international data The journal of Finance, 50(5), 1421-1460 Scott, J H (1977) Bankruptcy, secured debt, and optimal capital structure The Journal of Finance, 32(1), 1-19 Shah, A., and Khan, S (2007) Determinants of capital structure: Evidence from Pakistani panel data International Review of Business Research Papers, 3(4), 265-282 Shyam-Sunder, L., & C Myers, S (1999) Testing static tradeoff against pecking order models of capital structure Journal of financial economics, 51(2), 219-244 Stiglitz, J E (1974) On the irrelevance of corporate financial policy The American Economic Review, 64(6), 851-866 Sun, Q., Tong, W H., and Tong, J (2002) How Does Government Ownership Affect Firm Performance? Evidence from China's Privatization Experience Journal of Business Finance and Accounting, 29(1and2), 1-27 Tabachnick, B., & Fidell, L (2001) Using multivariate statistics (4th edn) New York: HarperCollins Titman, S., and Wessels, R (1988) The determinants of capital structure choice The Journal of finance, 43(1), 1-19 54 Tong, G., and Green, C J (2005) Pecking order or trade-off hypothesis? Evidence on the capital structure of Chinese companies Applied Economics, 37(19), 2179-2189 Truong, Q (2013) Vietnam: An Emerging Economy at a CrossRoads (No 2013/09) Wald, J K (1999) How firm characteristics affect capital structure: an international comparison Journal of Financial Research, 22(2), 161-187 Walsh, E J., & Ryan, J (1997) Agency and tax explanations of security issuance decisions Journal of Business Finance & Accounting, 24(7-8), 943-961 Wiwattanakantang, Y (1999) An empirical study on the determinants of the capital structure of Thai firms Pacific-Basin Finance Journal, 7(3), 371403 PRO TANG GROW Pearson Correlation Sig (2-tailed) N Pearson Correlation Sig (2-tailed) N Pearson Correlation Sig (2-tailed) N SZ OWNT NDTS TLTA * Correlation is significant at the 0.05 level (2-tailed) ** Correlation is significant at the 0.01 level (2-tailed) Table 5: Correlations Pearson Correlation Sig (2-tailed) N Pearson Correlation Sig (2-tailed) N Pearson Correlation Sig (2-tailed) N Pearson Correlation Sig (2-tailed) N 56 Table 6: Histogram Table 7: Normal P-P Plot of regression standardized residual 57 Table 8: Scatterplot 58 List of non-financial companies No Code APC ASM ASP BCE BCI BGM BMC BMP BRC 10 BTP 11 CCL 12 CLG 13 CNG 14 CSM 15 D2D 16 DAG 17 DCL 18 DHC 19 DHG 20 DIG 21 DLG 22 DMC 23 DPM 24 DPR 25 DQC 26 DRC 27 DRH 28 DRL 29 DTA 30 DTL 31 DTT 32 DXG 33 EVE 34 GAS 35 GDT 36 GMC 37 GTA 38 HAG 39 HAI 40 HAP 41 HDC 42 HDG 43 HLA 44 HMC 45 HQC 46 HRC 47 HSG 48 IDI 49 IJC 50 IMP 51 ITA 52 ITC 53 JVC 54 KAC 55 KBC 56 KDH 57 KHP 58 KMR 59 KSA 60 KSB 61 KSH 62 KSS 63 KTB 64 LBM 65 LCG 66 LCM 67 LGL 68 LHG 69 LIX 70 MCP 71 NBB 72 NSC 73 NTB 74 NTL 75 NVN 76 NVT 77 OGC 78 OPC 79 PAC 80 PDR 81 PET 82 PGC 83 PGD 84 PHR 85 PHT 86 POM 87 PPC 88 PPI 89 PTL 90 PVD 91 QCG 92 RAL 93 RDP 94 REE 95 SAM 96 SAV 97 SC5 98 SHI 99 SJD 100 SJS 101 SMC 102 SRC 103 SSC 104 SZL 105 TBC 106 TCM 107 TDH 108 TIX 109 TLG 110 TLH 111 TMP 112 TNC 113 TRC 114 UDC 115 UIC 116 VES 117 VFG 118 VIC 119 VIS 120 VMD 121 VNI 122 VPH 123 VRC 124 VSH Table 9: List of non-financial companies 64 Interest rate from banks in Viet Nam Date 28-Mar-08 25-Apr-08 30-May-08 13-Jun-08 25-Jul-08 27-Aug-08 24-Sep-08 21-Oct-08 26-Nov-08 24-Dec-08 31-Jan-09 28-Feb-09 25-Mar-09 29-Apr-09 31-May-09 24-Jun-09 31-Jul-09 31-Aug-09 30-Sep-09 31-Oct-09 26-Nov-09 31-Dec-09 30-Jan-10 26-Feb-10 25-Mar-10 20-Apr-10 20-May-10 24-Jun-10 30-Jul-10 30-Aug-10 30-Sep-10 30-Oct-10 26-Nov-10 Source: SBV Monthly Reports and Other sources Table 10: Interest rate from banks in Viet Nam 65 Summary of some theoretical results Variables Profitability Firm size Growth opportunities Tangibility Ownership type Non debt tax shields ... such firm growth opportunities, firm size, firm profitability, ownership type, intangible assets, non- debt tax shied, firm performance, dividend policy, uniqueness, tax, volatility, asset structure, ... argue that non debt tax shields are substitutes for the tax benefits of debt financing and a firm with large non debt tax shields is expected to issue less debt and consistency with its examination... of firm, firm growth, ownership type, and non- debt tax shields (independent variables) to capital structure (dependent variable) in 124 Vietnamese listed companies Trade off theory and pecking