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1 INTRODUCTION Rationale Stems from the importance of capital structure to profitability In the business environment, businesses are constantly faced with capital need policies to expand or maintain their business to improve profitability (Moeinaddin, Nayebzadeh, & Ghasemi, 2013) Business enterprises with poor profitability (ineffective in business), low competitiveness, and increased debts, leading to bankruptcy risk, will force businesses to reduce the rate-debt to reduce periodic payments (Scott, 1976) For businesses with high profitability (high-efficiency operations), financial leverage or increasing loans makes business results more effective when taking advantage of the tax shield Therefore, firms in different situations have different capital structure strategies Derived from the research gaps The thesis follows the research line on the nonlinear impact of capital structure on profitability (Ghosh, 2008; Margaritis & Psillaki, 2010; Do Van Thang and Trinh Quang Thieu, 2010; Doan Vinh Thang, 2016) The studies in this line add the variable of the squared debt ratio to the regression model as the independent variable to examine the nonlinear effect of capital structure on profitability The inclusion of the squared debt ratio variable in the regression model allows the nonlinear relationship of the positive or inverse U-shape between capital structure and profitability to be considered This is the relationship much mentioned in the theories of capital structure: When using debt to a certain extent, it will be beneficial, but beyond that level will be detrimental to the business If the regression coefficients of the squared variables are not statistically significant, the relationship returns to a linear form It is possible to summarize the difference between the regression model of the thesis and previous works in research history as follows: Models in previous studies: Profitability= β0+ β1*Debt ratio+ β2*Debt ratio2+ ∑βi*Control variablei +u (1) The model of the thesis: Profitability= β0+ β1*Short-term debt ratio+ β2*Short-term debt ratio2 + β3*Longterm debt ratio + β4*Long-term debt ratio + ∑βi*Control variablei +u (2) In which u is the remainder of the regression model Thus, to supplement the previous studies in history, the graduate student has considered the nonlinear impact of capital structure on profitability through the above model in his doctoral thesis " The impact of capital structure on profitability of listed companies on Vietnam's stock market " Research objectives The thesis's objective is to evaluate the impact of capital structure on the profitability of enterprises to fill the research gaps in research history on this issue The PhD student gives some recommendations for regulators, investors, businesses, and other related subjects from the research results achieved Research question H1: The impact of short-term debt on ROE has an inverse U-shape relationship H2: Increasing the ratio of short-term debt has a negative impact on ROA H3: The impact of long-term debt ratio on ROE has an inverse U-shaped relationship H4: Increasing the long-term debt ratio has a negative impact on ROA H5: The effect of debt ratio on ROE in an inverted U shape H6: Increased debt ratio has a negative impact on ROA H7: State ownership has a negative impact on ROA and ROE H8: Firm size has a positive effect on ROA and ROE H9: Product sales profit has a positive effect on ROA and ROE H10: Size of tangible fixed assets has a positive effect on ROA and ROE H11: Revenue growth has a positive effect on ROA and ROE Research subjects and scope 4.1 Research subjects The research object of the topic is the impact of capital structure on the profitability of businesses 4.2 Research scope The research scope of the topic is the non-financial enterprises listed on the stock exchange of Vietnam Data provided by Vietstock is collected from 2009 to 2018 for 490 enterprises After eliminating unreliable observations and missed observations, the author still has a complete data set of 438 firms with 3,942 observations Some observations for 2009 have been rejected due to the presence of the revenue growth variable in the model that requires the base year sacrifice to be calculated Research methodology and data 5.1 Data analysis method Data provided by Vietstock is an array of data from 2009 to 2018 for nonfinancial businesses The collected data will be put into STATA software for analysis First, graduate students will regress using the Pooled OLS model The Pooled OLS model is the simplest model when not considering differences between research firms After regressing the Pooled OLS model, the author conducted to test the reliability of the model: - Multicollinearity test - Check variance change - Test for similar correlation 5.2 Analysis data Data used in the thesis is provided by Vietstock Company Table data will be used for the model given by the author with non-financial companies listed on the Vietnam stock exchange from 2009 to 2018 The form of data collection is to use financial statements of enterprises that have been audited and announced on the stock exchange Data was collected for 490 businesses After eliminating unreliable observations and missed observations, the author still has a complete data set of 438 firms with 3942 observations Some observations for 2009 have been rejected due to the presence of the revenue growth variable in the model that requires the base year sacrifice to be calculated New contributions of the thesis 6.1 Contribution to the theory Theoretical contribution: The topic will contribute and reinforce the theory of the impact of capital structure on the profitability of firms by providing empirical evidence of the nonlinear impact between Short-term debt structure over total assets and long-term liabilities over total assets to profitability 6.2 Contribution to the practice The research results of the topic will be a reference for managers in the use of capital structures With research-based decisions making the decision more reliable The structure of the thesis Chapter 1: Research overview and theoretical background on impact of capital structure on enterprise's profitability Chapter 2: Research methods Chapter 3: The current situation of capital structure and profitability of listed enterprises in Vietnam’s stock market Chapter 4: Analysis of the impact of capital structure on profitability of listed companies on Vietnam stock’s market Chapter 5: Discuss research results and recommendations Using many different measures of firm profitability and many different assessment methods, studies show mixed results on the impact of debt ratios on business profitability Karma Research by Krishnan and Moyer (1997) shows the relationship between capital structure and profitability through large-scale firms in three countries in Asia (Singapore, Hong Kong, and Korea) Phillips and Sipahioglu (2004) use the Pooled OLS model to find the relationship between capital structure and UK hospitality firms' profitability Tran Hung Son (2008) studies the relationship between capital structure and profitability with profitability variable measured by ROA, ROE while the capital structure is measured by the ratio of short-term debt to total assets (TS ), the ratio of long-term debt to total assets, debt to equity ratio with a sample of 50 non-financial companies listed on HOSE The paper uses the OLS model to study the relationship between capital structure and profitability, and ROA, ROE measure profitability variables while the capital structure is measured by the ratio of short-term debt to total assets Assets (TS), the ratio of long-term debt to total assets, and debt ratio to equity The results show that there is a positive relationship between the debt ratio and ROA, ROE In addition, the growth rate and scale are not statistically significant 1.1.2 Studies using nonlinear functions in analysis The most important theoretical basis for a nonlinear relationship between capital structure and firm profitability is the tradeoff theory Debates about M&M theory have led to the introduction of the tradeoff theory, in which businesses trade tax benefits from debt financing for problems caused by possible causes of bankruptcy This theory was initiated by Kraus and Litzenberger (1973) and continued to be developed by Myers' work (1984) Ghosh A (2008) studies the impact of dividend policy, debt balance, and profitability on firms' future value Research has demonstrated an exponential (level 2) relationship between firm future value measured by market value on book value as the dependent variable and debt balance as Independent variables Margaritis & Psillaki (2010) study the relationship between capital structure, ownership structure and firm performance using a sample of French manufacturing firms The authors use data encapsulation analysis (DEA) methods to construct firm performance measures in terms of distance from marginal value Do Van Thang and Trinh Quang Thieu (2010) researched to analyze the empirical relationship between firm value (measured by Tobin's Q index) and listed companies' capital structure Ho Chi Minh City contract Also researching in Taiwan market but the research period is from 1993 to 2005, Lin and Chang (2011) conducted research with 196 enterprises in Taiwan to find answers to the question of influential debt To the profitability of businesses? Research CHAPTER RESEARCH OVERVIEW AND THEORETICAL BACKGROUND ON IMPACT OF CAPITAL STRUCTURE ON ENTERPRISE'S PROFITABILITY 1.1 Overview of research on the impact of capital structure on the profitability of businesses 1.1.1 Studies using linear functions in analysis Many studies have focused on the relationship between capital structure and firm profitability with mixed results (Abor, 2005; Salim & Yadav, 2012; Okiro et al., 2015; Chadha & Sharma, 2015; Vătavu, 2015; Kodongo et al., 2015; Hamid et al., 2015; Detthamrong et al., 2017; Muritala, 2018; Tirumalsety and Gurtoo, 2019) 5 has discovered two thresholds between the debt ratio and the profitability of that enterprise is 9.86% and 33.33% When the debt ratio was lower than 9.86%, the enterprise's profitability as measured by Tobin'Q increased by 0.0546%, corresponding to an increase of 1% in the debt ratio Doan Vinh Thang (2016) examines the effect of capital structure on the profitability of 2,888 state-owned joint-stock companies in Vietnam According to OLS method, estimated results by the regression model show that capital structure and profitability, represented by the ratio of ROA and ROE, have an inverse U-shaped relationship 1.2 Research gaps - First: The application of linear functions in analysis has not accurately reflected the nature of the nonlinear relationship between capital structure and profitability - Second: Some studies have looked at the nonlinear relationship between capital structure and profitability, but have not considered debt maturity - Third: Some studies have examined debt maturity but applied linear relationships and have not considered a sufficiently variable model It is possible to summarize the difference between the regression model of the thesis and previous works in research history as follows: Models in previous studies: Profitability = β0+ β1* Debt ratio + β2* Debt ratio + ∑βi* Control variablei +u (1) The model of the thesis: Profitability = β0+ β1* Short-term debt ratio + β2* Short-term debt ratio + β3* Long-term debt ratio + β4* Long-term debt ratio + ∑βi* Control variablei +u 1.3 Theoretical basis of the impact of capital structure on a firm's profitability 1.3.1 The basics of capital structure in the business 1.3.1.1 Capital structure and capital structure composition There are many definitions of capital structure: Some authors define an enterprise's capital structure as a mixture of debt and equity used to finance production and business activities (Damodaran, 2011) According to Ahmad et al (2012), capital structure is the relationship between debt and equity in a firm's total capital to finance production and business activities 1.3.1.2 The theory of capital structure in the business There are different definitions to be made for capital structure According to the definition of Ross et al (2008), the capital structure of a firm, also known as financial leverage, is a combination of the use of debt capital and equity in a particular proportion to finance business operations (Ross, Westerfield, & Jordan, 2008) The relationship between capital structure and a firm's profitability can be explained through the following capital structure theories Theory of optimal financial structure Theory of Modigliani and Miller (M&M) Theory The theory of M&M in the case of taxes The theory of M&M in the absence of tax There is a tradeoff Static capital structure tradeoff theory Dynamic capital structure tradeoff theory Theory of classification order Representative cost theory Signal theory Market peak theory 1.3.2 The indicators reflect the capital structure and profitability of the business 1.3.2.1 Indicators reflect the capital structure The capital structure as theoretical is measured through three components: Liabilities are credits that are mobilized by enterprises from entities in the economy and committed to repay the principal and cost of debt over a specified time The manifestations of liabilities are borrowed capital, borrowed from outside or through the issue of debt securities Over time, liabilities include short-term debt and long-term debt Equity is the capital contributed by the owner to the enterprise, and the enterprise does not have to commit to paying, but they expect to bring benefits from the enterprise's business operation 1.3.2.2 Indicators reflect the profitability of the business Output reflects profits Profitability = Resources inputs or outputs (Or profitability) reflect the results The rate of return of equity Profit after tax 100 Return on equity = x (%) (ROE) Average equity The rate of return of asset Return of assets (ROA) = Profit after tax X 100 (%) 1.3.3 Relationship between capital structure and firm's profitability So far, the debate about the importance of choosing a firm's capital structure continues even though it has been going on for decades, and in terms of nature, experts are still giving many views on capital structure's impact on the profitability of a business Modigliani and Miller (1958) have argued that: Business performance is independent of the choice of capital structures in the "assumption" of the perfect market Since Modigliani and Miller (1958) publish this, much debate has focused on the reality of "assumptions" including the absence of taxes, bankruptcy costs, and missing numbers compared to the real world Therefore, experts argue that: Because of the imperfections of the market, the choice of an enterprise's capital structure can affect the operational efficiency of the enterprise; thereby, more theories and real studies appear Additional solutions to this argument CHAPTER RESEARCH METHODS 2.1 Research hypothesis H1: The impact of short-term debt on ROE has an inverse U-shape relationship H2: Increasing the ratio of short-term debt has a negative impact on ROA H3: The impact of long-term debt ratio on ROE has an inverse U-shaped relationship H4: Increasing the long-term debt ratio has a negative impact on ROA H5: State ownership has a negative impact on ROA and ROE H6: Firm size has a positive effect on ROA and ROE H7: Revenue growth has a positive effect on ROA and ROE 2.2 Proposed research model, variables, and scales Regarding the previous research, the model evaluates the impact of capital structure on non-financial enterprises' profitability The author proposes the hypothetical model as follows: Regression: The general form of the regression equation is as follows: Profitabilityit = π0+π1Capital Structurei,t+π2*Capital Structurei,t2 +Control Variablesi,t +uit (1) The variables are described in Table 1.2 Table 1.2 The details of the model variables Dependent variables (Profitability) ROEit Net profit margin / Equity ROAit Net profit margin / Total assets Independent variables (Capital Structure) SLit Short-term debt / Total assets SL2it (Current Liabilities / Total Assets)2 LLit Long-term debt / Total assets LL2it (Long-term Liabilities / Total Assets)2 TLit Total Liabilities / Total Assets Dependent variables (Profitability) TL2it (Total Liabilities / Total Assets)2 SLNit SLit - Average of SLit SLN2it Square of SLNit LLNit LLit - Average of LLit LLN2it Square of LLNit TLNit TLit - Average of TLit TLN2it Square of TLNit Control Control variables variables SIZEi,t Firm size (log (total assets)) SO State ownership rate (Net revenuei,t-Net revenuei,t-1)/ Net revenuei,t-1 Growthi,t Source: Author analyzed the data - The thesis's main research model: Consider the impact of short-term and longterm debts on profitability simultaneously The Ph.D student will regress the following two models: ROAi,t = ψo + ψ1*SLNi,t + ψ2*SLNi,t2 + ψ3*LLNi,t + ψ4*LLNi,t2 + ψ5*SOi,t + ψ6*GROWTHi,t + ψ7*SIZEi,t + oi,t ROEi,t = ωo + ω1*SLNi,t + ω2*SLNi,t2 + ω3*LLNi,t + ω4*LLNi,t2 + ω5*SOi,t + ω6*GROWTHi,t + ω7*SIZEi,t + zi,t In which: ROAi,t: Income on total assets (measured by profit after tax on total assets) of enterprise i in year t ROEi,t: Return on equity (measured as profit after tax on equity) of business i in year t TLNi,t: Total debt-to-total assets (TL) ratio minus the average firm TL of firm i in year t LLNi,t: Ratio of long-term liabilities to total assets (LL) minus the firm's LL average in year t SLNi,t: Ratio of short-term liabilities to total assets (SL) minus the average of enterprise's SL in year t SOi,t: Proportion of state equity in firm i in year t GROWTHi,t: Growth of firm i in year t, which is equal to (net revenue in year t minus net sales in year t-1) divided by net sales in year t-1 SIZEi,t: Calculated by log of the total assets of business i in year t (total assets in units of VND 100 billion) oi,t; zi,t: error in the corresponding regression equations - Perform regression according to the models in the research history The Ph.D student will perform six regression equations as follows: ROAi,t =δo+δ1*SLNi,t+δ2*SLNi,t2+δ3*SOi,t +δ4*GROWTHi,t+δ5*SIZEi,tt+si,t ROEi,t =θo+θ1*SLNi,t+θ2*SLNi,t2+θ3*SOi,t+θ4*GROWTHi,t+θ5*SIZEi,t +σi,t ROAi,t =λo+λ1*LLNi,t+λ2*LLNi,t2+λ3*SOi,t+ λ4*GROWTHi,t+λ5*SIZEi,t+vi,t ROEi,t =φo+φ1*LLNi,t+φ2*LLNi,t2+φ3*SOi,t+ φ4*GROWTHi,t+φ5*SIZEi,t +ri,t ROAi,t =αo+α1*TLNi,t+α2*TLNi,t2+α3*SOi,t +α4*GROWTHi,t+α5*SIZEi,t +ei,t ROEi,t =γo+γ1*TLNi,t+γ2*TLNi,t2+γ3*SOi,t+γ4*GROWTHi,t+γ5*SIZEi,t+εi,t In which: ei,t; εi,t; vi,t; ri,t; si,t; σi,t: error in the respective regression equations 2.3 Outline of study sample and data Data used in the thesis is provided by Vietstock Company For the author's model, we will use array data with non-financial companies listed on the Vietnam stock exchange from 2009 to 2018 The form of data collection is to use financial statements of enterprises that have been audited and announced on the stock exchange Data was collected for 490 businesses After eliminating unreliable observations and missed observations, the author still has a complete data set of 438 firms with 3942 observations Some observations for 2009 have been rejected due to the presence of the revenue growth variable in the model that requires the base year sacrifice to be calculated 2.4 Data analysis method Data provided by Vietstock is an array of data from 2009 to 2018 for nonfinancial businesses The collected data will be put into STATA software for analysis First, graduate students will regress using the Pooled OLS model The Pooled OLS model is the simplest model when not considering differences between research firms After regressing the Pooled OLS model, the author conducted to test the reliability of the model: Multicollinearity test Ho: Model does not exist multicollinearity H1: The model has multiple collinearities With a VIF value less than 10, it shows that the model does not have multiple collinearities; On the contrary, if VIF is greater than 10, conclusions exist multicollinear model (Ramanathan, 2002; Gujarati, 2003) Check variance change: Ho: Model has no variance H1: Model has variable variance With the p-value of the hetero test greater than 0.05 -> accept the Ho hypothesis (Model does not exist with variance); Conversely, if the p-value is less than 0.05 -> the model exists variance change Self-correlation test: Ho: The model does not have a similar correlation H1: Model has a similar correlation 10 With the p-value of autocorrelation test greater than 0.05 -> accept the Ho hypothesis (Model does not exist, cointegration); on the contrary, if the p-value is less than 0.05 -> the model exists with a similar correlation After that, the Ph.D student proceeds to regress under Fixed effect and Random effect The Hausman test is used to find a suitable model (between the Fixed effect and the Random effect) for the actual research data (Hausman, 1978) The selection of the research model will use the Hausman test between the Fixed effect model and the Random effect model, with the hypothesis: Ho: The Random effect model is suitable H1: The Fixed effect pattern is appropriate In the case of the Hausman test that gives a p-value greater than 0.05, the Random effect model is appropriate and vice versa If the p-value of the Hausman test is less than 0.05, the Fixed effect model is appropriate After choosing the Fixed effect or Random effect model, the author continues to test the correlation and variance change In case these problems exist, the model will be calibrated using the Generalized least squares (GLS) model CHAPTER THE CURRENT SITUATION OF CAPITAL STRUCTURE AND PROFITABILITY OF LISTED ENTERPRISES IN VIETNAM STOCK’S MARKET 3.1 Company overview listed on Vietnam's stock market 3.1.1 Concept and characteristics of enterprises listed on the Vietnamese stock market Concept: Listed companies (CTNY) are enterprises whose shares are listed on the stock exchange (stock market) Characteristics of enterprises listed on Vietnam's stock market: First: is the type of joint-stock company, shares, and bonds of an enterprise listed on Vietnam's stock market To be entitled to issue securities when there is a need to increase capital - Second: CTNY also includes businesses that own equitized houses (businesses with 50% or more of state ownership are considered state-owned enterprises) - Third: Securities listing means bringing qualified securities into trading at the Stock Exchange or the Securities Trading Center 3.1.2 Stock market history Vietnam's stock market has two centralized stock exchanges: (1) HOSE in Ho Chi Minh city and (2) HNX in Hanoi city * Stock exchange HOSE From the date of its establishment up to now, the HOSE can be divided into six characteristic periods associated with the ups and downs of the market as well as the volatility of the Vietnamese economy: ... of capital structure and profitability of listed enterprises in Vietnam’s stock market Chapter 4: Analysis of the impact of capital structure on profitability of listed companies on Vietnam stock? ??s... calculated New contributions of the thesis 6.1 Contribution to the theory Theoretical contribution: The topic will contribute and reinforce the theory of the impact of capital structure on the profitability. .. OF CAPITAL STRUCTURE AND PROFITABILITY OF LISTED ENTERPRISES IN VIETNAM STOCK? ??S MARKET 3.1 Company overview listed on Vietnam's stock market 3.1.1 Concept and characteristics of enterprises listed
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