(LUẬN văn THẠC sĩ) determinants of capital structure for listed construction companies in vietnam

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 th

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY THE HAGUE

VIETNAM 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 INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY THE HAGUE

VIETNAM 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

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 1

ABSTRACT 2

CHAPTER I INTRODUCTION 3

1.1 Problem Statement 3

1.2 Research Objectives 4

1.3 Research Questions 5

1.4 Research Methodology 5

1.5 Research contribution 5

1.6 Research Structure 6

CHAPTER II LITERATURE REVIEW 7

2.1 Key concepts: 7

2.2 Theoretical review 8

2.2.1 Trade-off theory 8

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

fields of economy But the research of determinant of capital structure of construction sector is almost limited In other word, construction sector is special business area, the capital resources are appropriated for a long time and firms depend too much on debt In the past years, especially the period from 2008 to

2012, Vietnam in general and construction sector in particular is almost affected by the economy crisis This was a bad period for many enterprises in Vietnam The operating of construction sector is very difficult due to the frozenness of real estate market Some had even been forecasted to go out of business or completely bankrupt At the end of the year 2012, 2,110 construction firms must stop operating The enterprises is lack of capital resources to operate because it is difficult for them

to borrow money from bank due to tightening monetary policy through controlling credit strictly and limiting in supply money for the economic to control inflation The interest from the bank is very high Shorting of capital to invest new project, no mobilizing external resources are a big problem for the financial manager of construction firms So restructuring of capital structure becomes the most important problem for the construction sector firms Firms need to have suitable leverage to improve financial ability, avoid risk of financial This research will find the determinants of capital structure in construction firms and consider if trade off theory and pecking order theory have explained capital structure of construction firms

1.2 Research Objectives

The objective of this research is to study the factors that affect to the capital structure of Vietnam’s construction sector companies in the stage of 2007 - 2012 This study also examine whether the financing behavior in construction firms can

be explain by the main capital structure theories such as trade-off theory and pecking order theory In other hand, the research also considers the difference in determinant of capital structure between public and private firms in construction industry

Question2: Does trade-off theory and pecking order theory explain the determinant

of capital structure of Vietnam construction firms?

Question 3: Is there any difference in determinant of capital structure between public and private firms in construction industry in Vietnam?

1.5 Research contribution

The contribution of this research is to identify the factors effecting to capital structure of the construction sector companies This research is also to provide an empirical evidence to test the financial theories involving trade-off theory, pecking order theory to the construction sector companies This study is to distinguish the difference in determinant of capital structure of public and private corporations in construction industry

1.6 Research Structure

The structure of this study is divided into five chapters The first chapter is to introduce the research with research objective, research methodology, research contribution, research structure and main questions of the study The second chapter

is literature reviews In this chapter, some key concepts, major theories, determinants of leverage and some empirical studies related to capital structure of a firm will be presented The third chapter presents research methodology from theory framework to data collection method The next chapter shows how to analyze data and result of econometric regressions The final chapter is conclusions

of this empirical study, suggest recommendations and limitations of the research

CHAPTER II LITERATURE REVIEW

This chapter presents about key concepts of capital structure as well as leverage, short-term leverage and long-term leverage Next, it reviews some popular capital structure theories such as trade off theory, pecking order theory and considers the prediction of two theories about some variables effecting leverage Finally, some empirical studies in the world and Vietnam related to these factors will be presented

2.1 Key concepts:

 Capital structure is the way that a company finances its assets through combination of debt, common equity and preferred equity It is measured by the ratio of debt to total assets (also called leverage), ratio of equity to total assets or ratio of debt to equity

The ratio of debt to total assets (or leverage) will be used to define for capital structure in this study There are three type of leverage - balance sheet, economic and embedded The first definition is based on balance sheet concepts, the second on market dependent future cash flows, and the third on market risk (Katia D’Hulster 2009) This study uses the balance sheet leverage which basing

on the book value in company’s balance sheet to calculate the ratio debt to total assets

 Financial distress or Bankruptcy cost: financial distress refers to condition in which a firm can’t pay off its debt obligation Raising the leverage ratio increase the probability of financial distress Bankruptcy cost is understood as the increase costs when the firms finance with debt instead of equity that result from a higher probability of bankruptcy If the financial distress can’t be relieved,

it leads to bankruptcy

 Agency cost: Jensen and Meckling (1986) defined agency cost as a cost of the agency relationship which is “a contract under which one or more persons (the principal (s) engage another person (the agent) to perform some service on their behalf of which involves delegating some decision making authority to the agent”)

In this paper, we use “leverage” as the main concept Besides, we also consider short-term leverage and long-term leverage as dependent variables Short-term leverage is a ratio of short-term debts to total assets In other word, Short-term debt is a debt which maturity is within one year If maturity is over one year, it is classified as a long-term debt Hence, long-term debt is a ratio of long-term debts to total assets

2.2 Theoretical review

The first modern theory of capital structure is Miller and Modigliani theory studied by Miller and Modigliani in 1958 This theory aims to analyze the impact of tax and cost of capital to the change of capital structure of firms The theory also can explain the relationship among of the value of company, cost of capital and leverage of firm After the Miller and Modigliani theory, there are a number of theories on capital structure that have been developed However, in this paper, we will consider two popular theories including trade off theory and pecking order theory This chapter will review these theories that contribute considerably to capital structure of a firm, figure out what each theory predict and compare some empirical studies with the prediction of these theories

2.2.1 Trade-off theory

Myer (1984) argued that firms which follow this theory try to have their target debt to equity ratio and achieve this ratio for having an optimal capital structure by balancing the cost and benefit Firm managers are likely to establish an optimal debt-to-equity ratio to maximize firm value The benefits are the tax saving

benefits of debt, the interest tax shield and the costs which include the financial distress cost and bankruptcy cost The cost of financial distress is the most influenced critical factor serious for growth firms with higher proportions of intangible assets The interest tax shield becomes increasingly important with higher profit This tax shield allows firms to pay lower tax than they should when those firms use debt capital instead of using only their own capital It is a trade off of costs and benefits of borrowing, holding the firm’s assets and constant investment plans The firm is guessed to substitute debt for equity or equity for debt until theirs firm value are maximized

Frank and Goyal (2005) argued that trade off theory divided into two ways consisting of the static trade off theory and the target adjustment behavior (or dynamic trade-off theory) A firm follows the static trade off theory if the firm’s leverage is determined by a single period trade-off between the tax benefit of debt and the deadweight cost of bankruptcy In addition, a firm is said to show target adjustment behavior if it has a target level leverage and if deviations from that target gradually move over time

In the study of Myers (1984),’the capital structure puzzle’, firms applying the static trade-off theory should set a target debt-to-equity ratio and attempt to achieve

it step by step However, according to Myers, managers do not want to issue equity

if they predict that it is undervalued in the market As a result, investors should be aware that issuing equity will happen if equity is over-priced Consequently, investors appear to have a negative opinion of new equity issue of firms and thus

board of managers should limit new equity issue as much as possible

Myers (1984) found that three factors including costs of adjustment, debt and taxes, and cost of financial distress would impact financial behavior of firms under static trade-off theory This theory predicts a positive relationship between tangible assets and financial leverage and between profitability and financial leverage

Empirical studies that support the trade off theory document that capital structure is influenced by firm factors such as size, grow opportunity, asset tangibility and tax rate in a manner consistent with the prediction of trade off hypothesis (Rajan and Zingales 1995, Deesomsak at al 2004, Frank and Goyal 2005 ) However, there are also some studies found the negative correlation between debt and profitability that does not support the theory (Nguyen et al 2012, Fama and French 2002)

2.2.2 Pecking order theory

Pecking order theory is the best known alternative to the trade-off model Pecking order theory was first studied by Donaldson in 1961 and it was modified by Myers in 1984 In contrast to the static trade off theory, Pecking order theory does not clearly define any target debt ratio so there is no target capital structure According to pecking order theory of capital structure, firm managers know more about the real value and risk of the company than outsider investor In addition, insiders may hide good investment opportunities to take advantages comparing to common investors That is the asymmetric information between insiders (managers

of firms) and common investors (outside of firms) as external financing Asymmetric information affects the choice between internal and external financing and between new issues of debt and equity securities.This leads to a pecking order,

in which investment is financed first with internal funds, reinvested earnings primarily; then by new issues of debt; and finally with new issues of equity New equity issues are a last resort when the company runs out of debt capacity, that is, when the threat of costs of financial distress brings regular insomnia to existing creditors and to the financial manager So the pecking order theory can explain the reason that most profitable companies tend to use debt less They seemly do not need external fund On the contrary, less profitable companies use more debt because they do not have internal fund and because debt has lower flotation and

information cost compared to equity

In contrast to the prediction of trade-off theory, internal funds and external funds are used orderly following the criteria of at first internally with retained earnings, debt, and finally with an issue of new equity

The theory works on the assumption of asymmetric information which indicates that managers know more about their company than outside investor According to the states of the theory, firms prefer financing from internal as retained earnings to financing from external funds as debt and finally from an issue

of new equity At the top of the model, internal finance is chosen even with sticky dividend policies If internally generated cash flow is less than investment outlays, firms would move away from marketable securities portfolio At the bottom, external finance is required in the following order from debt, hybrid securities to issuing equity at last Myers debates that it is difficult for a firm to achieve an optimal capital structure with its equity at the top and the bottom of the ‘pecking order’ Moreover, the leverage target of firms is difficult to approach if the firms have two types of equity as internal and external There are several advantages including no flotation costs and no disclosure of the firm’s proprietary financial information when the firm follows internal funds In addition, using internal funds may make new potential investment chances for the firms and increase profitability

as a result of undertaking such investments

There are three factors that pecking order theory is based on and that must be considered by firm when raising capital Firstly, internal fund are cheap to use (no insurance cost) and require no private information release Secondly, debt financing

is better than equity financing And lastly, managers tend to know more about the future performance of firm than lenders and investors Because of asymmetric information, investors may make inferences about the value of the firm based on the external source of capital the firm chose to raise External financing using equity inference-firm is currently overvalued Financing by debt inference-firm is correctly

or undervalued

Besides two theories of capital structure above, there are also have another theories such as agency cost theory, market timing theory, signaling theory, etc In this study, we will only consider two main theories trade off theory and pecking order theory to check whether they effect to capital structure choice in construction listed firms in Vietnam

2.3 Determinants of leverage:

There are a number of factors that effect to capital structure of enterprises from many previous researchers According to De Jong at al (2008), there are two major type of variable as country- specific and firm-specific determinant factors that affect to capital structure Rajan and Zingales (1995) examined the determinants of capital structure choice of public firms in G7 countries and concluded that many variables such as company size, asset tangibility, firm growth, and profitability have correlation with leverage Booth et al (2001) found consistent relations between firms’ profitability, asset tangibility, growth options and leverage Harris and Raviv (1991) has a brief result from many researches that “leverage increases with fixed assets, non-debt tax shields, growth opportunities, and firm size and decreases with volatility, advertising expenditures, research and development expenditures, bankruptcy probability, profitability and uniqueness of product”

In Vietnam, the research of Dzung Nguyen et al (2011) also found that profitability and liquidity remain negative related to leverage while growth and state-ownership have a positive impact Size and tangibility have a positive relationship with long-term leverage but a negative effect on short-term leverage

Due to shortage of data, this study will base on some factors which are found significant in research of Harris and Raviv (1991) such as profitability, firm size, growth rate, tangibility asset, and liquidity ratio (as in Zehra 2008) to check for determinant of capital structure of Vietnam listed construction firms Profitability, tangibility and firm size are considered three of five factors that make changing up

to 27% of leverage in many studies before (Murray and Vidhan (2007))

Two mainstream theories: pecking order theory and trade off theory are applied to be explained determinant of firms in almost previous researches Chen (2004) examined the determinant of capital structure of China-listed firm for the period from 1995 to 2000 concluded that the capital structure choices of Chinese firms supported a new pecking order theory with such determinant as retained earnings, equity and long-term debt Some other studies also supported pecking order theory in explaining better choice of leverage (De Jong et al (2008), Nivorozhkin (2003), Friend and Lang (1988) whereas other researches also ague leverage is consistent with prediction of both pecking order and static trade off theory (Deesomsak et al (2004), Antoniou et al (2008)) Novorozhkin (2003) sum

up that pecking order theory explains important variation in corporate capital structure choice in transitional economies Dzung Nguyen et al (2011) concluded that pecking order theory better explains financing decision in Vietnam than Trade off theory

This research will concentrate on both Pecking order and trade off theories to find whether which theory is applicable to leverage of construction firm in Vietnam Pecking order theory seems to be better than trade off theory in explaining leverage

of firm because according to trade off theory, firms should take more debt to inherit tax shield deduction, however, in reality, there are some firms with high profit take less debt This theory can’t explain for that Pecking order theory proposes firms’ hierarchy of finance: retained earnings, debt and equity The impact of each factor

to leverage will be explained according to the point of view of pecking order theory

in the section as follow

2.3.1 Leverage and Tangibility:

According to trade-off theory, tangible assets serve as good collateral to support debt A firm with higher tangibility will use more debt than a firm with higher intangibility assets because cost of financial distress is lower with high tangibility In contrast, if financial distress happened, intangibility assets are more

likely to lose value So it is expected that there is a positive relationship between tangibility and leverage of firm according to static trade-off theory

According to Myers (1984) in pecking order theory, a high tangible assets level may mitigate the asymmetric information associated with financing cost thanks to being secured by collateral As a result, a positive relationship is expected

between financial leverage ratio and tangible assets level

Timan and Wessel (1988), Rajan and Jingales (1995), Faman and French (2000) argued that tangibility should be an important factor of leverage Chen (2004) found a positive relationship between tangibility and leverage in China He suggested that asset tangibility is an important criterion in bank’s credit policy, and this is true for long-term debt Booth et al (2001) investigated the determinant’s capital structure of 10 developing countries and found generally negative correlation between total debt ratio and tangibility He also suggested the existence

of positive between long-term debt and tangibility of assets Rajan and Zingales (1995), Murray and Vidhan (2007) also found the result supporting pecking order theory and trade off theory that leverage have a positive related to tangibility The study of Antoniou (2002) is about the determinant of capital structure in European countries found different results across countries There is a positive relationship between leverage and tangibility in Germany, but negative in the UK and insignificant in France

In Vietnam, it is more difficult for firms to borrow money from capital market than traditional bank Bank usually requires fixed assets as collateral when firms ask for borrowing money If a firm has more fixed assets with high collateral value, it is easy for it to borrow money from the bank This study takes fixed assets

to total assets as independent variable, so the first hypothesis is conducted for the relationship between tangibility and leverage as follow:

Hypothesis 1: There will be positive relationship between tangibility and leverage

2.3.2 Leverage and Profitability

The relationship of leverage and profitability is contradiction in the prediction of theories Pecking order theory (Myers & Majluf (1984)) suggested a negative relationship between profitability and leverage Because of asymmetric information condition, cost of collecting inside capital will be always lower than outside capital Firm managers prefer to finance internally than finance externally

by using retained earnings Especially, firms with higher profitability will have more retained earnings than firms without or less profitability So firms will use this resource to finance its operation without depending on external of fund to avoid problem of changing interest rate or pressure of payment at due day, so level of ratio of debt will be lower Jensen (1986) predicted a negative relationship if the market for corporate control is ineffective Some empirical studies also supported a negative relationship between profitability and leverage (Frank and Goyal, 2009), (Huan and Song, 2006), (Tong and Green 2005) Rajan and Zingales (1995) for G7 countries, Wald (1999) in developed countries also found a negative correlation between leverage and profitability

Contrary to pecking order theory, trade off theory supported a positive relationship between leverage and profitability Firms have a target debt ratio and attempt to achieve this ratio for having an optimal capital structure by balancing the cost and benefit of debt Any decrease in cost of debt allows firm to adjust target debt ratio The firms use more debt will have advantage from tax shield Frank and Goyal (2009) suggested that expected cost of financial distress is low for profitable firms thus finding tax shield more valuable Philip et al (2003) confirm that a firm with high profitability may create belief in lender, so it is easy for them to borrow money than firms with lower profitability Nivorozhkin (2003, 2005) suggested that tax shields are really significant for firms with higher and stable income

In context of Vietnam, the research of Dzung Nguyen et al (2011) and Nguyen Tran Dinh Khoi (2006) also concluded that profitability has a negative relationship with all measure of capital structure These result supported the pecking

order theory that firm prefers to use the internal source of finance to debt It seems that pecking order theory is more suitable to explain for leverage of Vietnam firms

So we hypothesize with pecking order theory that:

Hypothesis 2: There will be a negative relationship between leverage and profitability

2.3.3 Leverage and Size

Theoretical prediction shows contradiction views about relationship between leverage and size

The pecking order theory specifies that larger firm display lower information asymmetry with financial market and are able to issue more equity compared to small companies Most large companies can reach non-bank debt financing while smaller companies are often unable to access it Pecking order theory predicted a negative correlation between leverage and size because larger companies are well know and have longer history of adding retained earnings to their capital structure (Frank and Goyal 2009) So firms which use retained earnings to finance their investment should have less leverage According to pecking order theory, firms prefer internal financing than external financing And larger firms usually have more profit as compared to small firms This shows that leverage is negative associated with size

In other hand, trade off theory predicted a positive relationship between leverage and size It is expected to have higher leverage levels in larger companies,

or an increase in size of a firm often leads to an increase of its financial leverage Bankruptcy will less impact to large firms so it is easy for them to borrow with lower interest (Pinches and Mingo (1973)), so the debt ratio will be higher Rajan & Zingales (1995) stated that larger firms tend to reduce the probability of insolvency due to their diversification, and have better access to debt from financial institutions than smaller firms

In Vietnam, the study of Nguyen and Ramanchara (2006) found significantly positive relationship between firm size and all measure of capital structure Larger firms will use more debt to finance their operation and smaller firms will use their own equity for operation financing and employ less debt Dzung (2012) also suggested that Size is negative related to short-term leverage and positive associated with long-term leverage Therefore, in this research, the relationship between firm size and leverage is predicted to be positive

Hypothesis 3: Trade off theory suggested a positive relationship between size and leverage

2.3.4 Leverage and Growth

There are conflict views about the relationship between leverage and growth Growth is raising cost and probability financial distress when the companies borrow more debt to support growth opportunity Raising cost of financial distress may limit firm from borrowing more It means that trade-off theory suggested a negative relationship between growth and leverage Rajan and Zingales (1995), Timan and Wessel (1988) also supported a negative relationship between leverage and growth

Pecking order theory predicted a positive relationship between growth and leverage According to Myer and Majluf (1984) information asymmetry will raise external funds to finance growth The company first finances its project by internal financing (Rose, et al 2008) Tong and Green (2005) found a signification positive relationship between growth and debt ratio In Vietnam, Nguyen and Ramanchanra (2006) supported that growth is positive associated with leverage So it is hypothesized that:

Hypothesis 4: There was a positive between leverage and growth

2.3.5 Leverage and Liquidity

Trade-off theory suggested a positive relationship between liquidity and leverage Firms with high liquidity ratio may borrow more debt because they have ability to meet their liabilities obligation This idea was supported by Zera (2008) about UK listed companies 1998-2007

In contrast to trade off theory regarding liquidity, according to pecking order theory, there is a negative relationship between liquidity and leverage because firm with high cash and liquid asset will prefer this available internal fund to borrowing Deesomsak et al (2004) suggested that there was a negative relationship between leverage and liquidity for all countries they studied They stated that their liquid assets were tended to use to finance their investment in preference to raising external debt In Vietnam, supporting the ideas liquid firms prefer to use accumulated cash and liquid assets rather than to resort to external finance, Dzung Nguyen et al (2012) also found a negative relationship between liquidity and total leverage and short-term leverage which supported pecking order theory So in this study, it is hypothesized that:

Hypothesis 5: There is a negative correlation between leverage and liquidity Table 2.1 Summary of leverage determinant

2.4 Empirical studies review on determinant of leverage:

2.4.1 Empirical evidences finding from the world:

The study of J.Chen in 2004 studied determinants of capital structure of China listed companies using firm level penal data The data in this study comes from annual report of 88 China public listed companies for the period 1995-2000 The study determines four elements that influence the leverage of firms including tangibility, firm size (logarithm of sales), profitability and growth opportunity According to the regression result, correlation between leverage and tangibility is significantly positive and the same for relation between leverage and growth opportunity These relationships are consistent with description of trade-off theory and agency cost theory In contrast, correlations between profitability and debt, firm size and long term debt are negative These relationships are similar to pecking order theory Chinese firms prefer to short-term debt finance to long-term debt, the level of long-term debt is lower than the level of developed countries

This study of Deesomsak et al (2004) investigated determinants of capital structure, meaning financial leverage level of firms Authors of the study used data from 4 countries in the Asia Pacific region, namely Thailand, Malaysia, Singapore and Australia in 1993-2001 periods It shows that the leverage of firms depends on firm-specific characteristics, meaning inside factors of firms However, severe events as the financial crisis of 1997 have had a significant influence on capital structure decisions of firms The study provides significant evidence about relationship between financial leverage and its determinants and consistency with capital structure theories including trade-off, pecking order and agency cost theory The determinants of capital structure are identified in this study as tangibility, firm size, profitability, growth opportunity and volatility of earnings

The research of Booth et al (2001) analyzed the capital structure choices of companies in 10 developing countries including India, Pakistan, Thailand, Malaysia, Turkey, Zimbabwe, Mexico, Brazil, Jordan and Korea in the period 1980

to 1990 The result of this paper also supported pecking order theory and vary across firms Assets tangibility tends to be negative related to total leverage, but with long-term leverage, it is positive associated The firms with more tangibility tend to use more long-term debt Profitability is consistently negative and highly significant except for Zimbabwe sample Size is negative related to long-term debt This paper also found that the type of variables affected to debt ratio in developing countries is also significant in developed countries

Rajan and Jingales (1995) examined determinant of capital structure of G7 countries (Germany, France, Italy, ỤK, Japan, Canada and USA) This study found

a significant relationship between leverage and profitability, tangibility, size and growth prospect Leverage has a positive related to size and asset tangibility

The research of Baharuddin et al (2011) examined the debt and equity structure for the construction enterprises listed in the Bursa Malaysia market over the period from 2001 to 2007 They use debt ratio as dependent variable which was calculated by total debt to total assets while independent variable are size, growth, asset tangibility and profitability The result showed that there is a significant negatively relationship between profitability and debt ratio while assets tangibility, size and growth are positively significant correlated to debt ratio This study also found that construction companies depend heavily on debt financing compared to equity financing for expansion and growth and profit will reduce when the enterprise uses more debt

2.4.2 Empirical evidences from Vietnam :

The research of Nguyen Tran Dinh Khoi and Ramachandran Neelakanta

in 2006 studied determinants influencing the capital structure of small and medium – size enterprises The data in this study comes from 558 SMEs in which 176 SMEs are state own and 382 are private available from the Company Registration Department of Ministry of Planning and Investment over the period of 1998 - 2001 All of data are unlisted firms The result showed that SMEs employ mostly short

term liabilities to finance their operation State – own SMEs have higher debt ratio than private SMEs The determinants of SMEs capital structure have a positive related to growth, firm size, business risk but negative related to tangibility Profitability has no significant effect to the capital structure of Vietnamese SMEs It implies that profitability is not important factor in helping firms access to bank loans in Vietnam

Dzung et al (2012) also explored the determinants of capital structure of listed Vietnam firms They collected data of 116 non-financial firms listed in either

Ho Chi Minh Stock Exchange or Hanoi Stock Exchange in the stage of 2007 –

2010 They based on book value of total assets to measure total, short-term and long-term leverage as dependent variables which were explored relative to firm pacific factors including tangibility, profitability, growth, size and liquidity and an economy pacific factor such as state ownership Panel data regression with GMM

model was used in this research Similar to the study of Nguyen Tran Dinh Khoi and Ramachandran Neelakanta (2006), this research found that Vietnamese

enterprise still depend much more on short-term debt as financing sources than long – term debt The result of this study also suggested that profitability and liquidity negatively related to leverage while growth and state ownership positively associated with leverage Tangibility and size variables have a positive correlated with long-term leverage but negative impact on short-term leverage and have no affect to total leverage Among these factors, tangibility and profitability have a strongly impact on leverage ratio Liquidity has only related to total and short-term leverage and no impact on long-term leverage These result of this study also indicated “Pecking order theory better explains financing decision in Vietnam than trade off theory”

The research of Cuong (2008) studied about the determinants of capital structure of Vietnam processing seafood companies He found that firm size, profitability and growth have a positive related to leverage and firm size is the

dominant factors to leverage Leverage has inverse related to fixed-assets mean that these firms tend to use equity to finance for long-term investment

In short, the research of Vietnam capital structure is also limited so it is necessary for further research The results of some researches about Vietnam context also have inconsistence The main findings in some studies of Vietnam context are most firms prefer to use short-term debt rather than long-term debt The level of short-term debt is higher than long –term debts Pecking order theory is better than trade off theory to explain financing decision in Vietnam

CHAPTER III RESEARCH METHODOLOGY

This chapter concluded four main sections The first section is to overview the construction industry in Vietnam The second section will present the source of data and description variables with dependent and independent variables The third section gives some methods using to regress data such as Fixed effects and Random Effects Hausman test is also presented in this section in order to choose between fixed effects and Random Effects The last section will introduce some hypothesis which will be test in this study

3.1 Overview the construction industry in Vietnam:

Construction industry usually has many the following characteristics: construction productivity conditions are unstable and changing follow to construction site The cycle of producing is usually lasted longer Construction products are diverse, having high uniqueness, and large cost Construction producing is influenced by profitability gap from construction site The feature of this industry is sensitive with business cycle of macro-economic

From the joining WTO in 2007, the Vietnam economic developed with growth of GDP impressively average more than 5.5% from 2008 to 2012 However,

in 2011, Vietnam’s real GDP annual growth eased from 5.9% to 5.0% in 2012 − the slowest rate since 1999 The industry sector, including construction, which represented 42% of the total GDP in 2012, rose by 4.52% annually (source : statistic

is 37,197 and number of unprofitable enterprises is 15,296 firms accounted for 30 percentage total construction firms The value of national construction productivity (at current price) was estimated at about 720,170 billion dong, an increase of 9.6% compared to 2011, in which the public sector was 112,918 billion dong, the private sector was 583,136 billion dong, foreign investment corporations was 24,116 billion dong In 2012, the value added of construction sector (at current price) approximated 179,301 billion dong, up 10.3% compared to 2011, equivalent to 6.1% GDP Total construction firms that stop business or dissolution are 2,110 firms, more than 9.4% compared to the same period in 2011 Total construction labor workers are 2,183,000 increased 25% compared to 2011 (source: statistic of Construction Ministry).

In 2012, the construction enterprises continue to face difficulties such as the frozenness of real estate market, the shortage of funds for producing and developing business that are not enough standard to access credit from the bank although interest rates have fallen but remain high, many enterprises dare not borrow The frozenness of real estate market not only makes difficult for real estate enterprises but also affects to the liquidity of banks, causing delay in producing of construction firms, building material firms, business furniture, etc Investors facing financial problems are trying to sell off as many properties as possible to increase sales Despite house prices declining during 2008−2012, buyers are reluctant to invest as they expect prices to decrease even further It is thought that prices will bottom out

by the end of 2013, and a recovery is expected thereafter

According to statistic of Construction Ministry, the urban area will increase from current 150,000 ha to 460.000 ha in 2020, the rate of urbanization will increase the current 28% to 45% in 2025 If only accounting of urban housing demand, Vietnam need to develop 35 million square of housing to archive 20m2 housing per person in 2020 This will be an important premise for construction enterprises in particular and real estate corporations in general to continue to grow