Influence of capital structure on oil and gas enterprises businese performance 2022

I BANKING UNIVERSITY OF HO CHI MINH CITY oOo HÀ NGUYỄN THANH LONG INFLUENCE OF CAPITAL STRUCTURE ON OIL AND GAS ENTERPRISES’ BUSINESS PERFORMANCE GRADUATION THESIS MAJOR FINANCE BANKING CODE 5234020.

BANKING UNIVERSITY OF HO CHI MINH CITY

-oOo -

HÀ NGUYỄN THANH LONG

INFLUENCE OF CAPITAL STRUCTURE ON OIL AND GAS ENTERPRISES’ BUSINESS PERFORMANCE

GRADUATION THESIS MAJOR: FINANCE & BANKING

CODE: 52340201

HO CHI MINH CITY, 2022

MINISTRY OF EDUCATION AND

TRAINING

STATE BANK OF VIETNAM

BANKING UNIVERSITY OF HO CHI MINH CITY

-oOo -

HÀ NGUYỄN THANH LONG

INFLUENCE OF CAPITAL STRUCTURE ON OIL AND GAS ENTERPRISES’ BUSINESS PERFORMANCE.

GRADUATION THESIS MAJOR: FINANCE & BANKING

CODE: 52340201

SCIENCE INSTRUCTOR Ph.D TRAN TRONG HUY

HO CHI MINH CITY, 2022 MINISTRY OF EDUCATION AND TRAINING STATE BANK OF VIETNAM

ABSTRACT

The thesis "INFLUENCE OF CAPITAL STRUCTURE ON OIL AND GAS ENTERPRISES' BUSINESS PERFORMANCE" was conducted with the goal of investigating capital structure and its impact on the business performance of oil and gas trading enterprises listed on the Vietnam stock exchange between 2015 and

2021 This is the time when the economy is showing indications of recovery from the 2014 oil crisis, as well as the beginning of a new crisis created by Covid-19 The author gathered balance sheet data from the financial statements of oil and gas trading companies listed on the Vietnamese stock exchange for the study

From 2015 to 2021, the author collected data on 31 publicly traded companies For testing, methods of analysis, comparison, and synthesis, as well as descriptive analysis and regression analysis methods such as Pooled OLS, FEM, REM, and FGLS, are utilized The model is developed with enterprise performance variables including such ROA and ROE, as well as independent variables like business size (SIZE), total debt to total assets (TDTA), growth opportunities (GROW), liquidity (LIQ), and corporate income tax (TAX)

The regression results demonstrate that total debt to total assets has a negative impact on a company's business performance as well as liquidity Furthermore, company size, expansion opportunities, and corporate income tax all have a favorable impact on the profitability of oil and gas trading companies

Following that, business administrators could use research findings to create capital structure decisions that are consistent with the development goals of oil and gas

firms

DECLARATION

This thesis is the author‟s own research, the research results are truthful,

in which there is no previously published content or the content made by others except the full citations cited in the thesis

The author

Ha Nguyen Thanh Long

ACKNOWLEDGEMENTS

First of all, I would like to express my sincere appreciation and express my deep gratitude to the teachers of Banking University of Ho Chi Minh City for their enthusiastic teaching, as well as consolidating the solid foundation knowledge, helping me successfully complete the university curriculum

In particularly, I would like to express my sincere thanks to Ph.D Tran Trong Huy for giving me the detailed guidance and wholehearted assistance in completing the graduation thesis Without his thoughtful support, it would be challenging for me to complete this thesis fully

Due to my limited practical experience, the content of the graduation thesis can not avoid some shortcomings, I am looking forward to receiving further advices from teachers to improve my flaws I believe with all beneficial guidances would help me develop myself well in the future

I sincerely thank you!

TABLE OF CONTENTS

ABSTRACT I DECLARATION II ACKNOWLEDGEMENTS III TABLE OF CONTENTS IV LIST OF ACRONYMS VIII LIST OF TABLES AND IMAGES IX

CHAPTER 1: INTRODUCTION 1

1.1 The urgency of the subject 1

1.2 Research objectives 2

1.2.1 General objectives 2

1.2.2 Specific objectives 2

1.3 Research question 3

1.4 Subject and scope 3

1.4.1 The research object 3

1.4.2 Scope of the study 3

1.5 Methodology 4

1.6 Significance of the research 4

1.7 Research contents 4

CHAPTER 2: THEOROTICAL BASIS AND RELATED RESEARCHES 6

2.1 Overview of the capital structure of the enterprises 6

2.1.1 Definitions of capital structure 6

2.1.2 Indicators affect capital structure 6

2.2 Overview of the business performance of the enterprise 8

2.2.1 Theory of business performance 8

2.2.2 Factors affecting business performance 8

2.2.2.1 Group of subjective factors 8

2.2.2.2 Group of subjective factors 10

2.2.3 Indicators to evaluate the business performance of enterprises 11

2.3 The relationship between capital structure and business performance of enterprises 12

2.3.1 Durand's Classical Theory 12

2.3.2 Capital Structure Theories of Modigliani and Miller (M&M) 13

2.3.3 Trade-off theory of Capital structure 14

2.3.4 Asymmetric information theory 14

2.3.5 Agency theory 15

2.3.6 The theory of market timing 16

2.4 Related studies 17

2.5.1 Related studies in the world 17

2.5.2 Related studies in Vietnam 19

CHAPTER 3: MODEL AND METHODS OF RESEARCH 25

3.1 Research data 25

3.2 Research process 25

3.3 Research method 27

3.3.1 Panel data regression 27

3.3.2 Pooled OLS model 27

3.3.3 Fixed Effect Model 27

3.3.4 Random Effect Model 27

3.3.5 Testing methods to choose regression model 28

3.4 Research model and variables description 29

3.4.1 Research model 29

3.4.2 Dependent variables 30

3.4.3 Independent variables 31

3.4.4 Data process 33

CHAPTER 4: EMPIRICAL RESULTS 35

4.1 Descriptive statistics 35

4.2 Correlation matrix between variables 36

4.3 Regression results of ROA 38

4.3.1 Model regression results 38

4.3.2 Check the selection of the appropriate model 40

4.3.3 Test the model's hypotheses 41

4.3.4 Regression model after defect correction 41

4.4 Regression results of ROE 42

4.4.1 Model regression results 42

4.4.2 Check the selection of the appropriate model 44

4.4.3 Test the model's hypotheses 45

4.4.4 Regression model after defect correction 45

4.5 Analysis of research results on factors affecting business performance 46

4.5.1 Total debt to total assets 46

4.5.2 Size 47

4.5.3 Liquidity 47

4.5.4 Tangible assets 48

4.5.5 Growth opportunity 48

4.5.6 Corporate income tax 49

CHAPTER 5: CONCLUSIONS AND RECOMMENDATIONS 51

5.1 Conclusions 51

5.2 Recommendations 52

5.2.1 Maintain a reasonable ratio of debt to available capital 52

5.2.2 Improve business efficiency 52

5.2.3 Recognize the stage of business growth 53

5.3 Limitations of the thesis and new approaches in the future 53

REFERENCES 55

APPENDIX 1: LIST OF 31 OIL AND GAS INDUSTRY ENTERPRISES 59

APPENDIX 2: DATA USED FOR THE MODEL 60

APPENDIX 3: RESULTS OF DESCRIPTIVE STATISTICS AND CORRELATION MATRIX BETWEEN VARIABLES 68

APPENDIX 4: RESULTS OF THE REGRESSION MODEL OF FACTORS AFFECTING ROA 70

APPENDIX 5: RESULTS OF REGRESSION MODEL OF FACTORS AFFECTING ROE 75

LIST OF ACRONYMS

1 M&M Theories of Modigliani and Miller

4 UPCOM Securities trading place of unlisted public company

5 TDTA Total debt to total assets

12 Pooled OLS Standard ordinary least squares regression

16 FGLS Feast Generalized Least Squares

LIST OF TABLES AND IMAGES

Table 2.1 Summary of some empirical studies both at domestic and

Table 3.1 Depentdent and Independent variables in research model 29 Table 4.1 Results of descriptive statistics of variables in the model 34

Table 4.2 Correlation matrix between independent and dependent variables

Table 4.3 Correlation matrix between independent and dependent variables

Table 4.5 Regression results of ROA variable by Pooled OLS method 37 Table 4.6 Regression results of ROA variable by Fixed Effect Model method 38

Table 4.7 Regression results of ROA variable by Random Effect Model

Table 4.9 Regression results of ROE variable by Pooled OLS method 41 Table 4.10 Regression results of ROE variable by Fixed Effect Model method 42

Table 4.11 Regression results of ROE variable by Random Effect Model

CHAPTER 1: INTRODUCTION 1.1 The urgency of the subject

Capital sources and capital structure are always crucial factors in the development of businesses When it directly influences the cost of capital as well as the level of financial risk that the firm takes, the managers' choice of size

as well as capital mobilization channels will affect the enterprise's overall business performance In addition, the optimal capital structure will assist the firm in lowering its weighted average cost of capital (WACC) and, as a result, increasing the value of the shareholders' assets Furthermore, capital structure has an impact on profitability and business risks that the organization may face (Frank and Goyal, 2009) As a result, defining the best capital structure for firms is always a topic that enterprise administrators pay great attention to Based on the foregoing practical needs, researchers have utilized a variety of research methods, including both qualitative and quantitative approaches, to answer the questions: Is there an optimal capital structure for any enterprise? If

so, what factors influence the completeness of an enterprise's capital structure?

Is this capital structure exclusive to certain enterprises in the economy? These are some of the study issues that have piqued the interest of numerous experts throughout the world, but the answers remain contentious and inconsistent Throughout the country's industrialization and modernization, the oil and gas industry has always been a spearhead industry, an essential connection, supplying an important source of raw materials and fuel For a variety of other businesses and fields in the economy, including: power, transportation, the chemical industry, fertilizer Oil and gas, in particular, are important sources of revenue for the government budget Oil and gas commerce is a component of Vietnam's oil and gas industry's value chain, serving as a link between producers and consumers, as well as other firms in the economy This is the final and most important link in Vietnam's oil and gas supply network

Most importantly, the global economy has been suffering from the pandemic of COVID-19, and the event has recently occurred in Russia and Ukraine in 2022, which dramatically affected the global market for oil and gas In addition, The macroeconomy experienced many unpredictable fluctuations between 2014 and

2021, particularly issues related to oil and gas production output of world oil and gas powers such as Russia and OPEC, as well as the world oil price crisis, which has had a significant impact on the operation of the oil and gas industry in general and oil and gas trading enterprises in particular So, how have the oil and gas companies responded to the economic downturn? What adjustments have they made to their capital structure to balance their existing capital or borrow as much funds as they could to to survive during COVID-19 and global issues that also have a significant impact on financial leverage?

Furthermore, there have been serveral uncertain developments arise of the domestic and global economy, the capital structure of many oil and gas enterprises has been greatly affected Therefore, based on the scientific basis of theory and practice, and taking into account the importance of the oil and gas industry to the Vietnamese economy, the author decided to choose:

“INFLUENCE OF CAPITAL STRUCTURE ON OIL AND GAS ENTERPRISES’ BUSINESS PERFORMANCE” as my graduation thesis 1.2 Research objectives

1.2.1 General objectives

The purpose of this thesis is to determine the direction and level of impact of capital structure to the business performance of oil and gas firms, as well as provide possible management implications for developing an appropriate capital structure to enhance business efficiency

1.2.2 Specific objectives

To accomplish the aforementioned goal, the thesis must complete the following specific task formalizing the theoretical basis of enterprise capital structure:

(i) Determine the direction of influence and the degree of influence of the factors

on the enterprise's capital structure

(ii) Measure the level of impact of the influence of the mentioned determinants, evaluate the degree of impact in order to construct a suitable capital structure to increase business performance

(iii) The thesis will propose several management implications that recommend building an appropriate capital structure

1.4 Subject and scope

1.4.1 The research object

The research object of the thesis is how the capital structure would influence

the business performance of oil and gas enterprises

1.4.2 Scope of the study

In terms of space: The thesis investigates the commercialization of oil and gas in Vietnam The research sample of the thesis includes 31 Vietnamese oil and gas trading companies listed on the stock market

In terms of time: The study analyzes the factors affecting the capital structure of oil and gas companies in Vietnam The research data uses secondary data from the annual financial statements from 2015 to 2021 at stock exchanges in Vietnam

1.5 Methodology

The research methods will be used in the thesis include: Data collection methods, Descriptive statistics method, Methods of analysis and synthesis, Econometric modeling method

Descriptive statistics method: method of analyzing and evaluating the volatility

of events and phenomena through the use of indicators This method aids in the synthesis of data, as well as the accurate calculation of data in a scientific, objective, and exact manner Methods of analysis and synthesis: Analytical methods and synthetic methods are closely linked, regulated and complement each other in the research process

Econometric modeling method: by using econometric software Stata to analyze the data to evaluate the indicators affect like solvency, profitability,… through Pooled OLS, FEM and REM models

1.6 Significance of the research

To evaluate the factors affecting the structure of oil and gas businesses in Vietnam, a review of empirical studies conducted both at home and abroad was conducted Then, in order to create a research model that is appropriate for the current situation in businesses

The result of the study can be used to identify factors and their impact on an enterprise's capital structure, allowing Vietnamese oil and gas companies to better organize and rearrange business capital sources by making financing decisions that result in a reasonable capital structure that is adaptable to each stage of development

1.7 Research contents

The main content of the thesis, in addition to two part: introduction and conclusion, the thesis includes 05 chapters as follow:

Chapter 1 (Introduction) present the urgency of the topic, research issues,

research objectives, research questions, research object and scope, research

methods, the contribution of the topic as well as the thesis‟s structure to give readers an overall picture of the entire study

Chapter 2 (Theoretical basis and related researches) presents basic theories

and background theories related to capital structure, the ratio of total debt to total assets (TDTA), methods of measuring and forecasting these contents as well as evalutation results of previous studies, this has been published to clarify the urgency of the topic and provide a basis for proposing research models and analyzing research results presented in the next chapters

Chapter 3 (Model and methods of research) presents information on the

research method and design for the thesis The following section goes through the regression models that were created for the research The model looks at

capital structure affects financial performance, with return on assets (ROA) and return on equity (ROE) as dependent variables Also, independent variables such

as firm size, fixed assets, liquidity,

Chapter 4 (Empirical results) presentation of research findings, including

descriptive statistics and regression model results, as well as discussion of implications

Chapter 5 (Conclusions and recommendations) gives the key findings and

suggestions for oil and gas firms and the state based on the analysis of research results, while also pointing out the topic's limits so that future study may be more accurate

Summary of chapter 1

In this chapter, the author introduces the overview of the research, the reasons for choosing the topic, the search objectives, the research questions, the subjects and scope of the study, research method and the main content of the thesis

CHAPTER 2: THEOROTICAL BASIS AND RELATED RESEARCHES

2.1 Overview of the capital structure of the enterprises

2.1.1 Definitions of capital structure

A company's capital structure is a mix of short-term debt, long-term debt, preferred stock, and common equity used to fund investment choices An optimum capital structure exists when the cost of capital is minimized, risk is minimized, and returns are maximized A company should strive to enhance its own value while also providing great interests of its shareholders The market value of debt plus the market value of equity is used to calculate a firm's valuation

According to Umar (2012), the primary financing options used by all firms are debt and equity The amount of debt or equity options used by a firm to finance its operations represents the firm's capital structure for the purposes of operation The capital structure of a corporation, according to Ghalibafasl (2005), is the mix

of numerous financial sources An optimal or desirable capital structure is the best mix of a company's financial resources

The proportional relationship between a firm's debt capital and equity capital can be defined as its capital structure Firms typically utilize a capital structure to fund and expand their operations Futhermore, the capital structure of the firm is significant

in investment and financing decisions because of its impact on profitability, as well as the risk level that the company faces as a result of its reliance on and expansion of debt

2.1.2 Indicators affect capital structure

Enterprises must develop a debt ratio that matches with their strategy and make decisions based on this debt ratio in order to construct an ideal capital structure, or goal capital structure This ratio indicates what proportion of the company's total assets is financed by debt A low debt ratio may indicate that firms are not effectively using debt, whereas a high debt ratio indicates a lack of financial autonomy and will transform these loans into a burden for enterprises

Total debt ratio, short-term debt ratio, and long-term debt ratio are the key measurements used to determine an enterprise's optimal degree of financial structure

Total Debt to Total Assets

This ratio demonstrates how much debt a company utilizes This indicator reflects how much debt a company utilizes to fund its assets The greater this ratio, the more liabilities account for a big part of the organization's total assets, and the enterprise

is heavily reliant on debt to finance production and commercial operations In contrast, the smaller this coefficient, the less reliant the business is on creditors When this ratio is high, it suggests that the company is borrowing money to finance business operations and costs, which results in a huge profit for the company when compared to the issuance of shares Furthermore, if the profit earned exceeds the interest payment, the shareholders benefit the most However, if they are unable to afford the cost of borrowing, they may face bankruptcy

Short-term Debt Ratio

The short-term debt ratio measures how much of a company's assets are financed by short-term liabilities It also indicates if the company's short-term loans borrowed could lead to insolvency, so partly measuring the company's financial sustainability Long-term Debt Ratio

The long-term debt ratio displays the proportion of long-term debt to total assets Because debt takes a long time to pay off, the LTD ratio might not be as concerning

as the short-term debt ratio

2.2 Overview of the business performance of the enterprise

2.2.1 Theory of business performance

Business performance efficiency is a major problem for business managers and owners A company that achieves peak performance will generate the revenues they want They are all concerned with how to make a unit of capital investment yield

"x" unit of the highest possible return Business performance represents an enterprise's capacity and health when it can expand, develop, and produce income streams that tend to increase with the lowest expenses "Efficiency is the outcome gained in economic activity, which is the revenue from the consumption of products," says economist Adam Smith Alternatively, "Efficiency is when all commodities and inputs of production in an economy are distributed or allocated to their most useful uses and waste is minimized."

Business efficiency is a measure that is becoming increasingly important for the development of an enterprise in particular and the growth of the entire economy in general, and it is a fundamental basis for evaluating an enterprise's performance that shows the economic goals of the business over time

2.2.2 Factors affecting business performance

2.2.2.1 Group of subjective factors

 Economic environment and market trends

Economic crises, growth rates, interest rates, inflation rates, currency rates, and so

on are examples of macro factors that have an influence on enterprises Factors and the present state of the economy have an impact on a company's performance A firm's business cycle consists of four stages: expansion, peak, contraction, and trough The health of an economy at each stage has various consequences on enterprises in that country At the peak stage, the quick growth rate, as well as consumer spending habits and consumption, are strong, offering corporate development chances and drawing more investors In contrast, when the economy is

in a contraction or trough period, consumption falls and the business's income suffers The exchange rate influences the import of commodities to customers,

which can increase prices for firms and cause earnings to vary, particularly in the oil and gas industry

 Legal and political environment

In terms of politics - law, a well-built legal system with political stability and consistent state policies provides the foundation for companies to thrive sustainably Government spending policies have an impact on companies when infrastructure and transportation generate advantageous circumstances for firms to transport, purchase and sell, and operate business Labor rules and regulations also have an impact on enterprises, such as allowances, employee pay, insurance, and so on

It is a basis for entrepreneurial commercial activity with a stable political context that has a certain impact on the country's economy Political shifts can boost certain businesses while harming others For example, in the year 2022, the Russian Federation is renowned as a country having a big amount of oil in the globe, but political tensions between Russia and surrounding countries have impacted the price

of oil To summarize, politics and law have a significant impact on the economy in general, and business performance in particular, through macro tools, legal tools,

 Natural environment

Natural elements have an impact on production and economic businesses Natural resources, geography, land, climate, and other factors may have an impact on corporate manufacturing methods, technology, and business success When specialized sectors, such as agriculture, forestry, and fisheries, experience natural changes, the operating process becomes unstable, and the business's income suffers

as a result To industrial and mining industry, when the mining area changes, the quality of raw materials will be altered in several ways, which will have an impact

maintain stability, and have a policy to reduce product costs in order to compete with competitors, promote consumption, increase revenue and sales, increase capital turnover, restructure the operating apparatus to improve business activities in order

to create operational efficiency, thereby increasing the competitiveness of products and prices with competitors It is clear that rivals have influence among enterprises

in the same industry, providing encouragement for expansion The greater the number of rivals in the same market, the more challenging it will be to enhance business performance

 Client

Customers are both product consumers and income generators for businesses, hence this is a key component in deciding the survival and growth of firms Customers' direct influence is unavoidable for all firms, thus building prestige, brand, and meeting customers' wants is always a top priority and more substantial

2.2.2.2 Group of subjective factors

 Human Resources

An effective firm must have an abundance of reliable human resources to be able to build technologies and techniques as well as follow the process to generate completed items to offer to consumers, which enhances business efficiency The labor force in this enterprise ensures that the enterprise's products and services are maintained in terms of quality, minimizing errors, affecting labor productivity, and the level of use of other resources such as machinery, equipment, all of which have

a direct impact on the enterprise's business performance

 Technology

It is indisputable that technical technology plays a significant part in the production and commercial operations of firms in today's developed economic environment with improved technology and procedures It will generate excellent and consistent items due to the manufacturing method and superior technology Because the impact of technology varies by industry, its impact on company success is determined by the individual characteristics of each industry

 Capital factor

This is a component that demonstrates the firm's strength by the quantity of capital that it can invest in business operations, the capacity to distribute and invest successfully, and the ability to manage business capital sources This component represents the enterprise's development and serves as the foundation for measuring the enterprise's business success

 Corporate governance factors

Determining the goals and plans for the firm to develop is the responsibility of corporate governance; the appropriate orientation is the foundation for assuring long-term success for the business; and managers must create preparation for the present economy's fluctuations Corporate governance has a significant influence on the creative activities of the workforce, as well as on ensuring the balance of the enterprise's elements, and thus has a significant impact on the enterprise's

operational efficiency

2.2.3 Indicators to evaluate the business performance of enterprises

Typically, the following metrics indicate the business performance of industry enterprises:

ROE stands for Return on Equity

This index indicates how much profit the owner will obtain after investing a unit of equity The greater the ROE, the more effectively the firm uses equity capital, resulting in more profit after tax This is a popular index due to its simplicity, ease

of comprehension, and comparison between firms of different sizes in the same economic industry or between enterprises of various economic sectors The most significant downside of ROE is that it is easily manipulated by corporate managers' financial strategy

ROA stands for Return on Assets

This index indicates how much profit a business will make for every VND invested

in the investment This is a metric that excludes potential biases caused by corporate managers' financial tactics, such as ROE The ROA ratio considers the number of assets utilized to support corporate operations Profit from assets is estimated to include profit for creditors and owners who provided capital to the formation of assets for the firm This indicator serves as a critical foundation for lenders and borrowers to make economic judgments, as well as for owners to assess the impact

of financial leverage and make capital mobilization decisions

2.3 The relationship between capital structure and business performance of enterprises

There are several essential financial indicators in a firm, with the profitability of the business receiving special focus

Many additional factors, including capital structure, influence this financial indicator The proportion of debt in total capital to fund the enterprise's production and business operations is a feature of capital structure, therefore changes in the debt ratio will cause the weighted average cost of capital to vary, influencing the firm's profitability Corporate managers may create a capital structure with their aims in mind to maximize the value of the firm, and business performance will

reflect the ideal level of that capital structure Below are the underlying theories of

capital structure related to business performance

2.3.1 Durand's Classical Theory

Durand's research (1952) is a classic study on the problem of firm capital structure Durand's traditional theory set the framework for further capital structure research

by economists and business finance managers Durand believes that the capital structure of an organisation has an impact on its business performance According

to the theory, debt has a lower cost than equity, thus when the firm utilizes more debt, the average cost of capital is lower, which increasing the value of the business

As a result, increasing the usage of debt increases the chance that shareholders might want a security to avert insolvency or interrupt corporate operations, raising the cost of equity (WACC increase) This will result in a decrease in both commercial operations and enterprise value The balance between growing equity costs and debt financing benefits influences the impact of capital structure on business value As a result, when the cost of capital is low or firm value is high, an optimal capital structure exists

The theory's shortcoming is that it only considers the link between the cost of capital and the cost of equity

2.3.2 Capital Structure Theories of Modigliani and Miller (M&M)

In 1958, Modiglani and Miller published the first research on modern capital structure studies, with two case studies: enterprises operating in a taxed environment and firms operating in a non-taxed environment

M&M theory demonstrated that in the absence of taxes, the option between equity and debt is the same, the value of a corporation with or without debt is the same in a non-tax environment Furthermore, in a tax environment, the value of the unlevered corporation will be lower than the value of the debt company since it does not benefit from the tax shield (since interest is tax deductible) The theory also demonstrates that employing debt provides owners with a greater rate of return, but this higher return is precisely what offsets the increased risk from the debt ratio According to the M&M Theory (1963) on the removal of the corporate income tax theory, their study reveals that using debt increases the firm's worth Because interest expenditure is a legitimate deductible item for computing corporate income tax, a percentage of a firm's profits or the value of the company that employs debt is passed on to investors The value of the unlevered company plus the benefit from debt usage equals the use of debt M&M has demonstrated that capital structure and firm value are related in general

2.3.3 Trade-off theory of Capital structure

The trade-off theory assumes that corporate managers can determine the optimal capital structure to maximize firm value based on a trade-off between the benefits and costs of using debt The tax shield on interest payments is a benefit of borrowing The potential risk of debt financing is the cost of financial distress, including bankruptcy costs, costs of losing customers and suppliers or agency costs, and costs of accounting and administrative staffing businesses in the process of bankruptcy,

According to the trade-off theory, the determination of managers' optimal capital structure is based on the point at which each additional amount of debt is just enough to compensate for the increase in the expected cost of financial distress in the fixed conditions of investment plans and assets of the enterprise The trade-off theory also helps to explain the different debt ratios across industries Enterprises with high-risk intangible assets, mainly low profitability, should choose a capital structure with low debt ratio Opposite, businesses with high profitability ratios and safe tangible assets should choose a high target debt ratio

The limitations of the M&M theory have been explained by the trade-off theory when weighing the tax advantages of debt against the costs of financial distress In addition, the trade-off theory explains differences in capital structure across industries

2.3.4 Asymmetric information theory

Signalling theory

Asymmetric information is defined as information that has not been reflected on in

a timely, full, and proper way To be more specific, the degree of information regarding the volume and quality of the event that is about to take place at a certain moment has not been disclosed to stakeholders One side to a transaction has all of the relevant information, whereas the other party does not or has insufficient This causes information asymmetry among transaction participants, resulting in an imbalance between investors and administrators The reason for this is because

owing to market limits that slow information transmission speed, the capacity to receive and interpret information is poor, or the source of information is concealed This idea is based on the work of Ross (1977), Lyland, and Pyle (1977) When the quantity of information available to investors differs, business managers and owners are more knowledgeable This means that when a company does well, it will employ borrowed money to pay just a lower fixed interest rate rather than sharing earnings with other shareholders When the firm is underperforming, they will raise funds from other shareholders to share losses, if any, with shareholders who lack information

Pecking order theory

Besides the above theories, another approach argues that there is no optimal capital structure, but indicates a priority order when financing investments as follows: first use retained earnings , followed by external debt and finally share issuance This is known as the pecking order theory that derives from the symmetric capture information According to this theory, investors think that borrowing will bring more favorable information than issuing equity This makes managers more interested in borrowing than in issuing shares Therefore, capital structure decisions will be based on market classification Financial managers will prioritize using available internal capital, if they need external funding, they will choose debt, and finally, issue shares The pecking order theory assists in verifying and better understanding managers' financing sources, as well as explaining the stock market's reaction to the firm's decision to raise external money This idea explains firms with high profitability but low debt ratios and vice versa

2.3.5 Agency theory

Jenshen and Meckling's (1976) research revisiting the M&M model, assuming investment decisions are independent of capital structure, is one of the early ideas of agency costs Jenhsen and Meckling attribute the firm's choice to employ financial leverage to agency charges This theory believes that an enterprise's financial

operations are primarily comprised of connections between shareholders, managers, and financial intermediaries, each of whom has a unique set of interests

This notion develops as a result of the separation of ownership and control, which occurs when the company's owners must hire managers to operate their firm and oversee their performance in order for them to act in the best interests of the owners Because of the managers' and owners' competing interests in an asymmetric information environment, agency cost arises Managers and owners share a same goal in maximizing individual usefulness Managers may not always operate in the best interests of the owners if both sides are concerned with their own utility maximization They might avoid unpleasant jobs or act selfishly The owners then develop incentive schemes and monitor expenses in order to match managers' actions with their interests or limit their erroneous operations The expenditures and expenses incurred as a result of these competing interests are borne by shareholders (owners) Some argue that managers should be corporate shareholders in order to have the same interests as the owners Furthermore, several academics have claimed that institutional investors have a beneficial impact on agency problems by reducing agency costs by monitoring managers' activities and affecting dividend policy (Eckbo and Verma, 1994) (Rozeff, 1982)

2.3.6 The theory of market timing

According to the market timing theory of capital structure, corporations would issue new shares when the market price is high and buy back shares when the stock price

is low This theory also implies that stock valuation has a direct impact on company capital mobilization As a result, the enterprise's desired capital structure will be influenced by market timing and stock price variations The theory also investigates the relationship between market timing and a firm's capital structure, as well as the duration of this influence According to Barker and Wurgler (2002), stock price volatility has a substantial impact on the capital structure of firms, which will issue shares when the price is high and purchase them back at a low price to take

advantage of the cheap cost of capital and reduce costs Businesses issue debt or equity based on which market is more likely to be beneficial to them

According to Luigi & Sorin, 2009, minimizing asymmetric information will encourage stock price increase By this notion, businesses would create advantageous periods for themselves to acquire funds to finance investment initiatives To summarize, market timing theory argues that managers believe they can forecast market timing in order to identify the best capital source to maximize operational efficiency

2.4 Related studies

2.5.1 Related studies in the world

In terms of empirical study, there are now numerous distinct research subjects on issues impacting firms throughout the world Most studies employ quantitative research methodologies to examine capital structure ideas such as the trade-off theory and the pecking order hypothesis

Pouraghajan et al (2012) investigate a sample of 400 firms registered on the

Tehran Stock Exchange in the form of 12 industrial groupings between 2006 and

2010 For hypothesis testing, Pearson correlation and estimates from several regression models were employed in the study Variables such as return on assets (ROA) and return on equity (ROE) are used to assess a company's financial performance The findings demonstrate that debt ratio (DR) has a negative connection with business efficiency, but asset turnover ratio (TURN), firm size (SIZE), tangible asset ratio (TANG), and growth opportunity (GROW) have a positive link with firm performance However, the link between ROA and ROE and years of operation is insignificant Furthermore, study results demonstrate that by lowering the debt ratio, managers may boost business profitability while also increasing shareholder value

Maina Leonard et al (2014) The firms gathered at the Nairobi Stock Exchange

(NSE) from 2002 to 2011 comprise the study sample Secondary data is gathered from the financial accounts of companies listed on the NSE Panel regression

analysis was performed in the study using Gretl statistical software According to the research, debt and equity are the most important indicators of financial performance for NSE-listed companies There is evidence of a strong and negative association between capital structure (DE) and ROE, a negative relationship between the ratio of tangible assets (TANG) and ROA, but a favorable relationship between sales growth and growth opportunities Furthermore, the Tobin'Q ratio (market value/book value) shows a negative association with firm size and a positive link with the ratio of tangible assets, sales growth, and growth potential This suggests that the greater the usage of debt as a source of finance, the worse the operational efficiency According to the survey, NSE-listed companies utilize more short-term debt than long-term debt

According to Huang and Song (2006)'s research on the variables influencing

the capital structure of 1086 Chinese firms from 1994 to 2003, there is a consensual association between company size, fixed assets, and tangible identification with the capital structure It varies between industries and is negatively associated to profitability, non-debt tax shelter, and growth potential The nature of state or institutional ownership has no impact on the capital structure of Chinese firms Another noteworthy feature is that Chinese businesses employ less long-term debt than corporations in other economies This study included three estimating models: OLS, FEM, and REM; however, required tests in empirical models were neglected

This research, conducted by Sorana Vătavu (2015), seeks to establish the link

between capital structure and financial performance in 196 firms registered on the Bucharest stock exchange in Ruman in the industrial sector between 2003 and 2010 Return on assets (ROA) is a ratio of net income to total assets, while return on equity (ROE) is a ratio of net income to shareholders' equity The OLS model explains the change in return on assets by capital structure total debt, short-term debt, equity, tangible assets, taxes, and annual inflation rate In this case, tangible assets have a negative impact, but the two factors tax and inflation rate have a positive impact on ROA Furthermore, a direct influence of liquidity on

performance may be shown in the regression In terms of return on equity, only total debt, current obligations, and tangible assets have an influence on ROE in debt ratio models Taxes were shown to be statistically significant in certain regressions, but not all

Zeitun and Tian (2014) conducted research to analyze and assess the impact of

capital structure on corporate performance using a panel data sample of 167 Jordanian enterprises from 1989 to 2003 The capital structure of a corporation was found to have a large and negative influence on both accounting and market performance indicators The STDTA has a positive and significant influence on the market performance measure (Tobin's Q), which might support Myers' (1977) assertion that businesses with a high short-term debt to total assets have a high growth rate and perform well The findings also demonstrate that strong performance is linked to a high tax rate This suggests that profitable businesses pay

a high tax rate Because big businesses have minimal bankruptcy costs, company size has been proven to have a favorable influence on a firm's performance In other words, when a business grows in size, its bankruptcy expenses rise, and this has a detrimental impact on its performance

Margaritis and Psillaki (2007) examined the connection between company

performance and capital structure in 12,240 New Zealand enterprises in 2004 The author investigates both the impact of leverage on company performance and the reciprocal connection Findings from the study: the author demonstrates that leverage has a favorable influence on performance at low and medium leverage ratios but a detrimental one at high leverage ratios The impact of physical assets and profitability on leverage is favorable Size has a negative impact on leverage in the lower half of the distribution and a favorable impact in the higher half Intangibles and other assets are expected to perform inversely

2.5.2 Related studies in Vietnam

In the years 1998–2001, Nguyen and Ramachandran (2006) investigated the

capital structure of 558 small and medium-sized firms (SMEs) Three of the

independent variables in the study model are the debt ratio (TDR), the short-term debt ratio (STDR), and the long-term debt ratio (LTDR)

According to the findings of the study, Vietnamese businesses mostly rely on short-term loans rather than equity (at the time of the study) The common characteristics taken from the regression findings that impact the capital structure of firms include enterprise size, growth possibilities (positive effect), profitability (negative effect), and tangible assets (reverse effect) This is because short-term debt makes up a large share of total debt and does not always necessitate collateral.Some of the issues with this study include that it only looks at unlisted and small enterprises; the data utilized is untrustworthy; and the study period, which runs from 1998 to 2001, is out of date

VX Vo (2017) investigates the determinants of capital structure in emerging

market, with a collection of market data and accounting data of public firms listed

on the Ho Chi Minh City stock exchange for the period from 2006 to 2015 These data are then used to calculate variables measuring growth opportunity, tangibility, profitability, size and liquidity of a firm In the regression explaining long-term leverage, the coefficient for tangible assets is positive and significant, but negative and significant in the regression explaining short-term leverage The calculated company size coefficients are positive and significant in the long-term debt regression, but negative in the short-term debt regression Furthermore, the study shows that major enterprises favor short-term debt This conclusion implies that larger organizations utilize long-term debt to finance their investments, whereas smaller enterprises employ short-term debt Furthermore, in short-term leverage regression, liquidity coefficients are negative and significant, but in long-term leverage regression, they are positive but negligible This result implies that liquidity issues limit the firm's capacity to borrow in the long run, and liquidity management is a significant issue for the performance of Vietnamese enterprises

Doan Ngoc Phuc (2014) examines the impact of capital structure on the

business performance of Vietnam-listed firms following equitization on two stock

exchanges in Ho Chi Minh and Hanoi from 2007 to 2012 " The author utilizes short-term debt, long-term debt, and total debt as independent variables and ROA and ROE as dependent factors to quantify efficiency At the 1% significance level, short-term debt and total debt have a negative association with ROA and ROE at the 1% significance level, whereas long-term debt, firm size, and growth rate have a positive link with ROA and ROE at the 1% significance level This study's findings

do not support the research hypothesis on the link between short-term debt, term debt, total debt, and company success as evaluated by ROA and ROE This can

long-be explained by the fact that the data was collected during a period of strong inflation The State Bank tightened monetary policy to combat inflation when firms were chronically undercapitalized, causing interest rates to rise and putting a strain

on businesses to make interest payments On the other hand, after equitization, businesses frequently employ short-term debt to pay off long-term debt, exposing the company to solvency risk

Bui Van Thuy et al (2016) conducted study utilizing data from 427 businesses

registered on the Vietnam stock exchange between 2010 and 2014, across 16 industries The research model is estimated using three approaches with Eview data processing software: the OLS regression model (Pooled), the regression model with fixed effects (FEM), and the regression model with random effects (REM) The study's findings indicate that the variables of short-term ratio to total assets (STD), long-term ratio to total assets (LTD), ratio of total debt to total assets (TD), company size (SIZE), and total growth rate assets (GROWTH) influence company performance as measured by the ratio of return on equity (ROE) and Tobin's Q Furthermore, the model's factors influence performance, with variances between industries

To summarize, these empirical investigations conducted both at domestically and overseas have discovered several factor affecting corporate personnel, however the study findings are not entirely consistent Simultaneously, local and international research on the capital structure of the oil and gas sector are restricted, limiting both

the number of observations and the period of the data, as well as the credibility of the data sources given As a result, the author has chosen to investigate the variables influencing the membership of listed oil and gas firms in Vietnam in order to give a more solid foundation for concerns concerning re-membership in the current time

At the same time, periodically update the rationality of capital structure

Table 2.1 - Summary of some empirical studies both at domestic and

international

Authors Research scope Research

Pouraghanjan

(2012)

400 enterprises listed in Tehran Stock Exchange for the period 2006-2010

Pearson correlation

Debt ratio (-), enterprise size (+), tangible asset ratio (+), and growth opportunity (+) all have

an impact on business performance Furthermore, the research findings suggest that by lowering the debt ratio, managers may boost firm profitability while also increasing shareholder

value

Maina

Leonard (2014)

The research sample is enterprises collected at the Nairobi Stock Exchange (NSE) from 2002-2011

Gretl statistics

Capital structure (-) to ROE; Tangible assets (-); Growth opportunities (-); Sales growth (-

) to ROA

Huang and

Song (2006)

1086 Chinese firms from

1994 to 2003

OLS, FEM, and REM

There is a consensual association between company size, fixed assets, and tangible identification with the capital structure

Sorana Vătavu

(2015)

196 companies listed on the Bucharest stock exchange in Romania in the manufacturing sector, 2003-

Pooled OLS, FEM, REM

TANG (-); TAX (+); Inflation (+) with ROA.Tangible assets (-); liquidity (+) to ROE

REM

STDTA (-) to ROA, (+) to Tobin‟sQ, TDTA (-) to TobinQ SIZE, TAX, (+) to ROA, TANG

(-) to ROA

Margaritis and

Psillaki (2007)

12,240 New Zealand enterprises in

2004

DEA

Leverage is positively impacted

by assets and profits Across the distribution, size has a negative impact on leverage and a positive impact on it Other assets and intangibles are likely to perform

2015

GMM

Tangible assets and size (+) with LTDR, (-) with STDR Liquidity (-) with LTDR, (+) with STDR

Doan Ngoc

Phuc (2014)

Vietnam-listed firms on two stock exchanges in

Ho Chi Minh and Hanoi from

2007 to 2012

TDR and STDR has (-) relationship with profitability

Bui Van Thuy

et al (2016)

427 companies listed on Vietnam stock market in the period 2010-

2014

Pooled ,REM,FEM

LTD, TD (-) to ROE; GROW,

SIZE (+) to ROE

Source: According to author

Summary of chapter 2

Chapter 2 discusses fundamental capital structure theories and variables impacting capital structure The author has also highlighted the primary elements impacting the capital structures of firms through empirical investigations done globally and in Vietnam In the next chapters, these characteristics will be evaluated and selected for inclusion in a regression model to assess their influence on the capital structure

of listed oil and gas businesses in Vietnam

CHAPTER 3: MODEL AND METHODS OF RESEARCH

3.1 Research data

The thesis uses secondary data sources collected from the balance sheet, results of business activities, and cash flow table of 31 oil and gas companies listed on the Vietnamese stock exchange to determine which direction an enterprise's capital structure affects and how it affects business performance Appendix 1 contains the list and particular information about businesses

The thesis uses panel data with 217 observations by using the Stata program to conduct the research The data is taken from the financial statements of 31 oil and gas firms in the Vietnamese market from 2015 to 2021

3.2 Research process

The thesis implements the regression model according to the research process as follows:

Step 1: Descriptive statistics data

The author uses the commands in the Stata program to analyze statistical data using specified criteria such as maximum value, minimum value, mean value, median value, variance, and deviation So, the author can make good choices and, if necessary, use certain statistical criteria to filter study data

Step 2: Selecting regression model

Table data regression utilises three main methods which are Pooled OLS, Fixed Effect Model (FEM), and Random Effect Model (REM) Firstly, the author employs the F-test to select between the Pooled OLS model and the FEM, REM model The core of this test is that the characteristic exists in each cross-unit From here, two cases will occur, if the P-value is less than 0.01, the author will choose the FEM and REM models to run because there is a specific effect through the cross data that makes the Pooled OLS model no longer suitable, and vice versa, with a P-value greater than 0.01, Pooled OLS is the model used for estimation To check the correlation of errors with independent variables, the author performs the Hausman test in the case of using FEM and REM models Similarly to the preceding, a P-

value smaller than 0.01 indicates that the author should use the FEM model, and a P-value greater than 0.01 indicates that the error and independent variable have no correlation, indicating that the REM model should be used

Step 3: Look for flaws in the regression model

After picking one of the three models listed above, defect testing is required to prevent models with flaws and boost reliability In the event of a flaw, such as autocorrelation, the GLS model will be utilized to replace the previous three models

Image 3.2 - Quantitative research process

Image 3.1 - According to author

3.3 Research method

3.3.1 Panel data regression

The general form of the model can be specified as: (Baltagi, 2005)

Υit = α + βΧit + uit

with I designating the cross-sectional dimension and t expressing the timeseries dimension Yit, the left-hand variable, represents the model's dependent variable, which is the firm's debt ratios In the estimate model, Xit comprises the set of independent variable, α is the constant, and β represents the coefficients

3.3.2 Pooled OLS model

The Pool OLS model is a basic regression model that does not take into account the data's time and space dimensions and instead estimates the standard OLS regression As a result, the model's coefficients remain constant throughout time and among enterprises

Υit = α + β2Χ2it +β3Χ3it + uit

With t stands for time, i is the cross unit, uit is the error term

3.3.3 Fixed Effect Model

Fixed effects model (FEM) with the assumption that each unit has its own unique characteristics that can affect the explanatory variables FEM analyzes this correlation between the residuals of each unit and the explanatory variables Thus, the effect of individual characteristics (constant over time) is controlled and separated from the explanatory variables, allowing us to estimate the net effects of the explanatory variables on the dependent variable

Υit = β1i + β2Χ2it +β3Χ3it + uit

With t stands for time, i is the cross unit, uit is the error term, β 1i is intercept term

3.3.4 Random Effect Model

The difference between the REM and FEM is shown in the variation between units

If the variation between units is related to the independent variable - the explanatory variable in the fixed effect model, then in the REM model, the variation between the

units is assumed to be random and not correlated with the explanatory variables (Gujarati, 2011)

Υit = β1i + β2Χ2it +β3Χ3it + uit with β1I = β1 + εi

 Υit = β1 + β2Χ2it +β3Χ3it + uit + εi

With: εi: error component of the cross unit; uit: the combined error component of cross-unit and time series

3.3.5 Testing methods to choose regression model

F-test is to verify between 2 models of FEM regression and Pooled OLS regression,

which model is more suitable in explaining the relationship between variables H0 : Pooled PLS model is suitable

H1: FEM is suitable

If P-value (F) < mean value which mean reject H0, accept H1, FEM is more suitable, vice versa, P-value (F) > mean value which mean accept H0, reject H1, Pooled OLS model is suitable

Consequently, to investigate the approriate model between FEM and REM while

estimate, the author decide to you Hausman test

H0: There is no correlation between the error component of the cross unit and the explanatory variable

H1: There is correlation between the error component of the cross unit and the explanatory variable

P-value < mean value => reject H0, FEM is suitable

P-value > mean value => accept H0, REM is suitable

Multicollinearity test

To strengthen the argument that the model is not multicollinear, the author performs the test through the coefficient of variance When the Variance Inflation Factor (VIF) value of one variable exceeds 10, there is substantial multicollinearity and this variable must be excluded (Hair et al, 1995)

VIF < 2: There is no multicollinear, VIF >2 : there is a chance of multicollinear VIF > 10: There is certainly multicollinear