Determinants of capital structure for listed construction companies in vietnam

UNIVERSITYOFECONOMICS INSTITUTE OFSOCIAL NETHERLANDSPROGRAMMEFOR VIETNAM-M.AINDEVELOPMENTECONOMICS DETERMINANTSOFCAPITALSTRUCTUREF ORLISTEDCONSTRUCTION COMPANIESIN... Nguyễn Thị MỹKhán

UNIVERSITYOFECONOMICS INSTITUTE OFSOCIAL

NETHERLANDSPROGRAMMEFOR

VIETNAM-M.AINDEVELOPMENTECONOMICS

DETERMINANTSOFCAPITALSTRUCTUREF ORLISTEDCONSTRUCTION COMPANIESIN

UNIVERSITYOFECONOMICS INSTITUTE

NETHERLANDSPROGRAMMEFOR

VIETNAM-M.AINDEVELOPMENTECONOMICS

DETERMINANTSOFCAPITALSTRUCTUREF ORLISTEDCONSTRUCTION COMPANIESIN

VIETNAM

Athesissubmitted inpartialfulfilmentoftherequirementsforthedegreeofM A S T E R

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certifythattothebestofmyknowledgeandhelpreceivedinpreparingthisthesisandallsourcesusedhavebeenacknowledgedinthisthesis.”

NGUYỄNTHỊMỸKHÁNH

Thep r o c e s s o f w r i t i n g a t h e s i s i s a c o l l a b o r a t i v e e x p e r i e n c e i n

v o l v i n g t h e supportandhelpsfrommanypeople.Iwanttoexpressmygratitudetothosewhog i v e methetremendoussupporttocompletethisthesis

Iamdeeplyi n d e b t e d t o myp a r e n t s a n d myh u s b a n d f o r t h e i r i n v a l

u a b l e supportandconstantencouragement.Frommyearlychildhood,myparentsalway

st e a c h mevaluablelessonsontheimportanceoflearning.Theboundlessloveofmyparen ts haveaccompaniedwithmeasIcontinuemylongjourneyonthepathwayofintellectualacquisition

E c o n o m i c D e v e l o p m e n t ,

U n i v e r s i t y o f Economics(HCMC),mysupervisor,forhisvaluablesuggestionsduringthetimeIw r i t e thisthesis.Hiswideknowledge,excellentadviceandlogicalwayofthinkingh a v e providedmeagoodbasisinpresentthisthesis

Inaddition,myspecialthanksshouldsendtoDrTrươngĐangThuyfortheirhelpandsharingoftheirresourcestocompletethisthesissuccessfullyandintime

Finally,Itakeaprideinmyselfforworkingveryhardtofinishthisthesis.Ir e a

l i z e t h a t a f t e r e a c h s u c c e s s s t o r i e s , t h e r e i s a p r o c e s s o f l o t s o f h a r

d w o r k s , difficulties,obstaclesandovercoming.EveninthehardesttimewhenIwritethisthesis,Ialwaysbelievethatgreateffortswilleventuallytobepaidoff.Thankforthegreattimetolearnandtogrowup

Nguyễn Thị MỹKhánh

November2013

LISTOFTABLES 1

ABSTRACT 2

CHAPTERI.INTRODUCTION 3

1.1ProblemStatement 3

1.2 ResearchObjectives 4

1.3 ResearchQuestions 5

1.4ResearchMethodology 5

1.5 Researchcontribution 5

1.6 ResearchStructure 6

CHAPTERII LITERATURER E V I E W 7

2.1 Keyconcepts: 7

2.2 Theoreticalreview 8

2.2.1 Trade-offtheory 8

2.2.2 Peckingordertheory 10

2.3 Determinantsofleverage: 12

2.3.1 LeverageandTangibility 13

2.3.2 LeverageandProfitability 15

2.3.3 LeverageandSize 16

2.3.4 LeverageandGrowth 17

2.3.5 LeverageandLiquidity 18

2.4 Empiricalstudiesreviewondeterminantofleverage: 19

2.4.1 Empiricalevidencesfindingfromtheworld: 19

2.4.2 EmpiricalevidencesfromVietnam 20

CHAPTERIII.RESEARCHMETHODOLOGY 23

3.1 Overviewtheconstructionindustryin Vietnam: 23

3.2 Dataanddescriptionvariable 25

3.2.1 Data 25

3.2.2 Descriptionvariable 26

3.2.2.1 DependentVariable 26

3.2.2.2 ExplanatoryVariables 27

3.3 Methodofestimation 28

3.3.1 Fixedeffect(FE)estimator 29

3.3.2 Randomeffectestimator(RE): 29

3.3.3 Hausmanspecificationtest 30

3.4 Hypothesis 30

CHAPTERIV EMPIRICALRESULTS 32

4.1 DescriptiveStatistic 32

4.2 EmpiricalResult 34

4.2.1 Hausmantest 34

4.2.2 Fixedeffectsmodel(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 andPrivateFirmComparison 41

4.3.1 DescriptiveStatistic 41

4.3.2 Determinants ofFinancialLeverage 42

CHAPTERV.CONCLUSIONAND RECOMMENDATION 44

5.1 Conclusion 44

5.2 Policyrecommendation: 46

5.2.1Recommendationsforconstructionfirms: 46

5.3 Limitation: 49

REFERENCEAPPENDI

X

LISTOF TABLES

Table2.1Summaryofleveragedeterminant 18

Table3.1Variable, Descriptionandexpected sign 28

Table4 1 D e s c r i p t i v e S t a t i s t i c s o f L e v e r a g e , s h o r t t e r m l e v e r a g e , l o n g -t e r m leverageandExplana-toryVariableswi-thcons-truc-tionfirms 33

Table4.2HausmanTest 35

Table4.3:ResultofFixedeffectsregressioninconstructionsector 36

Table4.4Summaryofleveragedeterminants 37

Table4.5DescriptiveStatisticsof PublicandPrivateFirms 41

Table4.6RegressionResultof Publicand PrivateFirms 42

Thiss t u d y e x p l o r e s t h e d e t e r m i n a n t o f c a p i t a l s t r u c t u r e o f V i e t n

a m l i s t e d c o n s t r u c t i o n 2012.Tangibility,pr ofitabi li t y, size,growthandliquidityuseasindependentvariables.Totalleverage,short-termleverageandlong-

companiesusingpaneldatafortheperiodof2007-termleverageweredependentvariable.Theresearchf i n d s thatalltheselectedindependentvariablesweresignificantlyassociatedtoatleastoneoftheleverageratiosexceptprofitability.Profitability seemstohavenosi gn if i cant effecttothe

capitalstructureofVietnameseconstructionlistedfirms.Ap o s i t i v e significantrelatedtoleverageandtangibilityandgrowthvariables;an e g a t i v e relationshipbetweenleverageandliquidityalsosupportedtheimplicationo f pec ki ng ordertheorywhile a positive sig ni fi ca nt ofs i ze variable con fi rm ed top r e d i c t i o n o f tradeo f f theory.Thes t u d y a l s o f i n d s thatt h e r e a r e d i f f e r e n t i n d e t e r m i n a n t s ofcapital structurebetween publicandprivate firmsinconstructionin d u str yabouttheprofitabilityandgrowthvariables.Size,profitabilityandliquiditye f f e c t toleverageofpublicfirmswhilesize,growthandliquidityhavearelationtoleverageofprivatefirms.Publicfirmstendtousemoredebtthanprivatefirms

1.1ProblemStatement

CHAPTERIIN TRODUCTION

Capitalstructureisnotanewareatostudy.Fromthefirstresearchofcapitalstructure

researchest r y toidentifydeterminantsofcapitalstructure.Buttheresultsarestillanargumentp r o b l e m infinancialandinconsistentamongresearchersatdifferentcountriesandd i f f e r en t industries.Myers(1984)alsoshowedthat“theaveragedebtratiowillvar

yf r o m industrytoindustrybecauseassertrisk,assettypeandrequirementforexternalf u n d alsovarybyindustry”.InVietnam,thereareonlyalimitednumberofstudieso n determinantof

capitalstructureamongVietnamfirms.Someofthesestudiesjustf o c u s e d o n l i s t e d firms( D z u n g Nguyene t a l 2 0 1 1 ) o r smalla n d mediums i z e enterprises(SME)(Nguyen,TranDinhKhoi2006)a n d theempirical resultsalsoh a v e conflictswiththeresultsfrommanyotherresearchesintheworld

Corporatef i n a nc i n g meanst h a ta l l t h e m o n e y economyexpressed t h r o

u g h mobilizingandusingcapitalinordertomaximizethevalueofcompany.Inthere,cap ital structureistheratiobetweendebtandequitytofinancefortheenterprise.Specifyingthecapitalstructureisanimportantissuenotonlyforthemanagerbuta l s o f o r t h e f i n a n c i a l o f f i c e r t o b u i l d u p t h e l o g i c a l f u n d i n g p o l i c y t

o e n s u r e t h e illiquidandtosalvagetheeffectofdebtmargintoupgradethevalueofthecompany.Int h e p r o c e s s o f a c t i v i t y t h e e n t e r p r i s e s h a v e t o f a c e t h e i m p

o r t a n t d e c i s i o n s suchasinvestment,finance,dividingdividend,etc.Eachdecisioneffectst o thevalueandthecapitalstructureoftheenterprise.Decisionsinvolvingcapitalstructurearevitalf o r e v e r y b u s i n e s s o r g a n i z a t i o n M a n a g e m e

n t h a s t o c a r e f u l l y e n s u r e thattheircapitalstructuredecisionsmaximizetheirfirmvalue

However,inordertoac hie ve optimalcapital structure, the ma nage r hast oconsiderhowfactorsaffecttocapitalstructureoffirms.Therearemanyempiricalstudiesaboutthedeterminantofcapitalstructure,eachresearchdisperseindifferent

fieldso f economy.B u t t h e r e s e a r c h o f determinanto f c a p i t a l s t r u c t u r e o f c o n

s t r u c t i o n sectorisalmostlimited.Inotherword,constructionsec to r isspecialbusinessa r e a , t h e c a p i t a l r e s o u r c e s a r e a p p r o p r i a t e d f o r a l o n

g timea n d firmsd e p e n d t o o mucho n d e b t I n t h e p a s t years,e s p e c i a l l y t h e p

e r i o d f r o m 2 0 0 8 t o 2 0 1 2 , Vietnam

ingeneralandconstructionsectorinparticularisalmostaffectedbyt h e eco no my crisis.T h i s was a bad pe r i o d f o r manyenterprises i n Vietnam.T h e o p e r a t i n g ofconstructionsectorisverydifficultduetothefrozennessofrealestatemarket.S o m e h a d

e v e n b e e n f o r e c a s t e d tog o o u t o f b u s i n e s s orc o m p l e t e l y b a n k r

stopoperating.T h e enterprisesislackofcapitalresources

tooperatebecauseitisdifficultforthemto borrowmoneyfrombankduetotighteningmonetarypolicythroughcontrollingc r e d i t strictlyandlimitinginsupplymoneyfortheeconomictocontrolinflation T h e interestfromthebankisveryhigh.Shortingofcapitaltoinvestnewproject,nomobilizingexternalresourcesareabigproblemforthefinancialmanagerofc o n s t r u c t i o n firms.Sorestructuringofcapitalstructure

becomesthemostimportantpr o b l em fortheconstructionsectorfirms.Firms needtohavesuitableleveragetoimprovefinancialability,avoidriskoffinancial.Thisresearchwillfindthed e t e r m i n a n t s o f c a p i t a l s t r u c t u r e i n c o n s t r u c t i o n firmsa n d c o n s i d e r i f t r a d e o f f t h e o r y a n d p e c k i n g o r d e r t h e o r y h a v e e x

p l a i n e d c a p i t a l structureofconstructionfirms

1.2 ResearchObjectives

TheobjectiveofthisresearchistostudythefactorsthataffecttothecapitalstructureofVietnam’sconstructionsectorcompaniesinthestageof2007-

2012.Thisstudyalsoexaminewhetherthefinancingbehaviorinconstructionfirmscanb e e x p l a i n bythemainc a p i t a l s t r u c t u r e t h e o r i e s s u c h a s

t r a d e

-o f f the-orya n d p e c k i n g -o rd er t h e -o r y I n -ot he rha nd, t h e rese ar ch a ls -o c-o ns ider st he di ff er enc e indeterminanto f c a p i t a l s t r u c t u r e b e t w e e n p u b l i c a n d

p r i v a t e f i r m s i n c o n s t r u c t i o n industry

Question3 : I s t h e r e a n y d i f f e r e n c e ind e t e r m i n a n t o f c a p i t a l s t r u c t u

r e b e t w e e n p u b l i c andprivatefirmsinconstructionindustryinVietnam?

1.4ResearchMethodology

Thisstudyusesannualpaneldataof49constructionlistedcompaniesinHoChiMinhandHanoistockexchangefortheperiod2007to2012

Tofindtheimpactofindependentvariablessuchastangibility,profitability,fi r

m s i z e , g r o w t h a n d l i q u i d i t y o n l e v e r a g e o f firms,w e usedp a n e l r e g

r e s s i o n methods:F i x e d e f f e c t s o r R a n d o m e f f e c t s w h i c h isd e c i d e dbyH a u s m a n s p e c i f i c a t i o n test

1.5 Researchcontribution

Thecontributionofthisresearchistoidentifythefactorseffectingtocapitalstructureoftheconstructionsectorcompanies.Thisresearchisalsotoprovideanempiricalevidencetotestthefinancialtheoriesinvolvingtrade-

offtheory,peckingo r d e r theorytotheconstructionsectorcompanies.Thisstudyistodistinguishthed i f f e r e n c e indeterminantofcapitalstructureofpublicandprivatecorporationsinco n st ru c t io n industry

1.6 ResearchStructure

Thestructureofthisstudyisdividedintofivechapters.Thefirstchapteristointroducetheresearchwithresearchobjective,researchmethodology,r e s e a r c h contribution,researchstructureandmainquestionsofthestudy.Thesecondchapteri s l i t e r a t u r e r e

v i e w s

I n t h i s c h a p t e r , somekeyc o n c e p t s , majort h e o r i e s , d e t e r m i n a n t s

structureofaf i r m w i l l bep r e s e n t e d T h e t h i r d c h a p t e r presentsr e s e a

r c h methodologyfromt h e o r y f r a m e w o r k todatacollectionmethod.Thenextchaptershowshowtoanalyzedataandresultofeconometricregressions.Thefinalchapterisconclusionso f thisempiricalstudy,suggestrecommendationsandlimitationsoftheresearch

2.1 Keyconcepts:

n a t i o n ofdebt,commonequityandpreferredequity.Itismeasuredbyther at io ofdebttototalassets(alsocalledleverage),ratioofequitytototalassetsorratioofdebttoequity

Theratioofdebttototalassets(orleverage) willbeusedtodefineforcapitals t r u c t u r e i n t h i s study.T h e r e a r e t h r e e typeo f l e v e r a g e -

b a l a n c e s h e e t , economicandembedded.Thefirstdefinitionisbasedonbalancesheetconcepts,t h e seco nd onmarketd e p e n d e n t f u t u r e c a s h f l o w s , a n d t

h e t h i r d o n marketr is k( K a t i a D’Hulster2009).Thisstudyusesthebalancesheetleveragewhichbasingonthebookvalueincompany’sbalancesheettocalculatetheratiodebttototalassets

 Agencycost:J e n s e n a n d M e c k l i n g ( 1 9 8 6 ) d e f i n e d a g e n c y cos

ta s a c o st o f t h e a g e n c y r e l a t i o n s h i p w h i c h i s “ a c o n t r a c t u n d e r whicho n e o r morepersons ( t h e p r i n c i p a l ( s ) e n g a g e a n o t h e r p e r s o n (

t h e a g e n t ) t o p e r f o r m s o m e serviceontheirbehalfofwhichinvolvesdelegatingsomedecisionmakingau th o r it y totheagent”)

Inthis pa p e r , we use “ l e v e r a g e ” asthe m a i nconcept B es i d e s, wealso considershort-termleverageandlong-

a i n t h e r e l a t i o n s h i p a m o n g o f t h e v a l u e o f company,c o s t ofc a p i t a l a n d leverageoffirm.A f t e r theMillerandModiglianit h e o r y , t h e r e a r e a numbero f theoriesoncapitalstructurethathavebeendeveloped.However,inthispaper,wew i l l c o n s i

d e r t w o p o p u l a r t h e o r i e s i n c l u d i n g t r a d e o f f t h e o r y a n d p e c k i n g o r

d e r theory.Thischapterwillreviewthesetheoriesthatcontributeconsiderablytocapitalstructureofafirm,figureoutwhateachtheorypredictandcomparesomee m p i r

benefitso f d e b t , t h e i n t e r e s t t a x s h i e l d a n d t h e c o s t s w h i c h i n c l u d e t h e f i n

a n c i a l distresscostandbankruptcycost.Thecostoffinancialdistressisthemosti n f l u e n c e d criticalfactorseriousforgrowthfirmswithhigherproportionsofintangibleassets.Theinteresttaxshieldbecomesincreasinglyimportantwithhigherp r o f i t T h

i s taxshieldallowsfirmstopaylowertaxthantheyshouldwhenthosefirmsused e b

t c a p i t a l i n s t e a d o f u s i n g onlytheiro w n c a p i t a l I t i s a t r a d e o f f ofcostsandbenefitsofborrowing,holdingthefirm’sassetsandconstantinvestmentp l a n s Thefirmisguessed

tosubstitutedebtforequityorequityfordebtuntiltheirsf i r m valuearemaximized

FrankandGoyal(2005)arguedthattradeofftheorydividedintotwowaysconsistingo f thes t a t i c t r a d e o f f t h e o r y a n d t h e t a r g e t a d j u s t m e n t b

priced.Consequently,investorsappeartohaveanegativeopinionofnewequityissueoffirmsandthusb o a r d ofmanagersshouldlimitnewequityissueasmuchaspossible

Myers(1984)foundthatthreefactorsincludingcostsofadjustment,debtandt ax e s , andcostoffinancialdistresswouldimpactfinancialbehavioroffirmsunders t a t i c trade-

offtheory.Thistheorypredictsapositiverelationshipbetweentangibleasset s andfinancialleverageandbetweenprofitabilityandfinancialleverage

Empiricals t u d i e s t h a t s u p p o r t t h e t r a d e o f f t h e o r y d o c u m e n t t

h a t c a p i t a l structureisinfluencedbyfirmfactorssuchassize,growopportunity,assettangibilityandtaxr a t e ina mannerconsistentwiththep r e d i c t i o n o f t r a d e o f f hypothesis(RajanandZingales1995,Deesomsakatal2004,FrankandGoyal2005

t c l e a r l y d e f i n e anyt a r g e t debtratiosothereisnot a r g e t

c a p i t a l s t r u c t u r e A c c o r d i n g topeckingordertheoryofcapitalstructure,firmmanagersknowmoreaboutt h e r e a l v a l u e a n d r i s k o f t h e c o m p a n y t h a

n o u t s i d e r i n v e s t o r I n a d d i t i o n , insidersmayhidegoodinvestmentopportunitiestotakeadvantagescomparingtocommoninvestors.Thatistheasymmetricinformationbetweeninsiders(managerso f firms)a n d c o m m o n i n v e s t o r s ( o u t s i d e o f firms)a s e x t e r n a l f i n a n c i n g.A s y m m e t r i cinformationaffectsthechoicebetweeninternalandexternalfinancingan d

bet ween newissuesofdebtandequitysecurities.Thisleadstoapeckingorder,in whichin

vestmentisfinancedfirstwithinternalfunds,reinvestedearningsprimarily;thenbynewissuesofdebt;andfinallywithnewissuesofequity.Newe q u i t y issuesarealastresortwhenthecompanyrunsoutofdebtcapacity,thatis,w h e n t h e t h r e a t o f

c o s t s o f f i n a n c i a l d i s t r e s s b r i n g s r e g u l a r i n s o m n i a t o e x i s t i n g creditorsandtothefinancialmanager.Sothepeckingordertheorycanexplainther e a s o n t h a tmostp r o f i t a b l e companiest e n d t o u s e d e b t l e s s Theyseemlydo n o t n e e d e x t

e r n a l

f u n d Onthecontrary,lessprofitablec o m p a n i e s usemoredebtb e c au s e theydon

o t havei n t e r n a l f un d an d b e c a u s e de b t h a s lo wer f l o t a t i o n a n d i n f o r m a t i o

n costcomparedtoequity

Incontrasttothepredictionoftrade-offtheory,internalfundsandexternalfu nd sa r e u s e d o r d e r l y f o l l o w i n g t

h e c r i t e r i a o f a t f i r s t i n t e r n a l l y w i t h r e t a i n e d e a r n i n g s , debt,andfinallywithanissueofnewequity

Thetheoryworksontheassumptionofasymmetricinformationwhichindicates

t h a t m a n a g e r s k n o w morea b o u t t h e i r c o m p a n y t h a n o u t s i d e i n v e s

t o r A c c o r d i n g tothestatesofthetheory,firmspreferfinancingfrom

internalasr e t a i n e d earningstofinancingfromexternalfundsasdebtandfinallyfromanissueofnewequity.Atthetopofthemodel,internalfinanceischosenevenwithstickyd i v i d e n d policies.Ifinternallygeneratedcashflowislessthaninvestmentoutlays,firmswouldmoveawayfrommarketablesecuritiesportfolio.Atthebottom,externalfinanceis r eq ui re d inthefollowing o rd er fromdebt,hy br id securitiestoissuinge q u i t y atlast.Myersdebatesthatitisdifficultf o r a f i r m toa c h i e v e anoptimalcapitalstructurewithitsequityatthetopandthebottomofthe ‘peckingo r d e

r ’ Moreover, theleverage target offirms isdifficultto approachifthefirms

h a v e t w o typeso f e q u i t y a s i n t e r n a l a n d e x t e r n a l T h e r e a r e s e v e r a l a

d v a n t a g e s includingnoflotationcostsandnodisclosureofthefirm’sproprietaryfinanciali n f o r m a t i o n whenthefirmfollowsinternalfunds.Inaddition,usinginternalfundsmaymakenewpotentialinvestmentchancesforthefirmsandincreaseprofitabilitya s aresultofundertakingsuchinvestments

Therearethreefactors

thatpeckingordertheoryisbasedonandthatmustbec o n s i d e r e d byfirmwhenraisingcapital.Firstly,internalfundarecheaptouse(noinsurancecost) and require noprivateinformationrelease

Secondly,debtfinancingi s betterthanequityfinancing.Andlastly,managerstendtoknowmoreaboutthefut ur e performanceo f f i r m t h a n l e n d e r s andinvestors

B e c a u s e o f asymmetrici n f o r m a t i o n , investorsmaymakeinferencesaboutthevalueofthefirmbasedonthee x t e rn a l sourceofca pi tal thefirm chosetor ais e E

x t e r na l financingusingequity i n f e r en c

e-fi r m iscurrentlyovervalued.Financingbydebtinference-e-firmiscorrectlyo r undervalued

Besidestwotheoriesofcapitalstructureabove,therearealsohaveanothertheoriessuchasagencycosttheory,markettimingtheory,signalingtheory,etc.Int h i s study,w e w il l o n l y consider t w o m a i n t h e o r i es t ra de o f f t h e o r y andp e c k i n g o r d

e r theory

tocheckwhethertheyeffecttocapitalstructurechoiceinconstructionlistedfirmsinVietnam

2.3 Determinantsofleverage:

Therearea numberoff a c t o r s thateffect tocapitalstructureof ent er pr ises frommanypreviousresearchers.AccordingtoDeJongatal(2008),therearetwomajortypeofvariableascountry-specificandfirm-

s t r u c t u r e RajanandZingales(1995)examinedthe

determinantsofcapitalstr uc tu re ch oice of p u b l i c firmsin G7cou nt ri esa nd co

nc l u d e d thatmanyvariablessuchascompanysize,assettangibility,firmgrowth,andprofitabilityhavecorrelationw i t h l e v e r a g e B o o t h e t a l ( 2 0 0 1 ) f o u n d consistentrelationsb e t w e e n firms’profitability,assettangibility,growthoptionsandleverage.HarrisandRaviv( 1 9 9 1 ) hasabriefresultfrommanyresearchesthat“leverageincreaseswithfixeda ss et s, non-

debttaxshields,growthopportunities,andfirmsizeanddecreaseswithvolatility,advertisingexpenditures,researchanddevelopmentexpenditures,b a n k r u p t c y probability,profitabilityanduniquenessofproduct”

e c k f o r determinantofcapitalstructureofVietnamlistedconstructionfirms.Profitability,tangibilityandfirmsizeareconsideredthreeoffivefactorsthatmakechangingupto27%ofleverageinmanystudiesbefore(MurrayandVidhan(2007)).

Twom a i n s t r e a m t h e o r i e s : p e c k i n g o r d e r theoryandt r a d e o f f t

h e o r y a r e appliedtobeexplaineddeterminantof firmsinalmostpreviousresearches.C h e n ( 2 0 0 4 ) e x a m i n e d t h e determinanto f c a p i t a l s t r u c t u r e o f C h i

n a

-l i s t e d f i r m f o r t h e p e r i o d from1995to2000conc-ludedthatthe capita-lstructurech o i c es ofChinesefirmss u p p o r t e d a n e w p e c k i n g o r d e r theoryw i t

h s u c h d e t e r m i n a n t a s r e t a i n e d earnings,e q u i t y a n d l o n g

-t e r m d e b -t Someo -t h e r s -t u d i e s a l s o s u p p o r -t e d p e c k i n g o r d e r -theoryinexplainingbetterchoiceofleverage(DeJongetal(2008),N iv o r o z hk i n ( 2 0 0 3 ) ,

F r i e n d a n d L a n g ( 1 9 8 8 ) w h e r e a s o t h e r r e s e a r c h e s a l s o a g u e leverageisconsistentwithpredictionofbothpeckingorderandstatict r a d e o f f t h e o r y (Deesomsaketal(2004),Antoniouetal(2008)).Novorozhkin(2003)sumu p thatpeckingordertheoryexplainsimportantvariationincorporatecapitalstructurechoiceintransitionaleconomies.D z u n g Nguyenetal(2011) concludedt h a t peckingordertheorybetterexplainsfinancingdecisioninVietnamthanTradeo f f theory

ThisresearchwillconcentrateonbothPeckingorderandtradeofftheoriestof i n d whetherwhichtheoryisapplicabletoleverageofconstructionfirminVietnam.Peckingordertheo

f i r m becauseaccordingtotradeofftheory,firmsshouldtakemoredebttoinheritt a x shielddeduction,however,inreality,therearesomefirmswithhighprofittakelessdebt.Thistheorycan’texplainforthat.Peckingordertheoryproposesfirms’h i e r a r c h yoffinance:retainedearnings,debtandequity.Theimpactofeachfactort o leveragewillbeexplainedaccordingtothe

h tangibility.Incontrast,iffinancialdistresshappened,intangibilityassetsaremore

Accordingto Myers(1984)inpecking or de rtheory,ahi gh tangibleasse

termd e b t B o o t h e t a l ( 2 0 0 1 ) investigatedthedeterminant’sc a p i t a l s t r u c t u r e

o f 1 0 d e v e l o p i n g c o u n t r i e s a n d f o u n d g e n e r a l l y n e g a t i v e correlationbetweentotaldebtratioandtangibility.Healsosuggestedtheexistenceo f p o s i t i

v e b e t w e e n l o n g

-t e r m d e b -t a n d -t a n g i b i l i -t y o f a s s e -t s R a j a n a n d Z i n g a l e s ( 1 9 9 5 ) , MurrayandVidhan(2007)alsofoundtheresultsupportingpeckingordert h e o r y andtradeofftheorythatleveragehaveapositiverelatedtotangibility.Thes t u d y ofAntoniou(2002)isaboutthedeterminantofcapitalstructureinEuropeanco un tr i es f

l u e , itiseasyforittoborrowmoneyfromthebank.Thisstudy

takesfixedassetstototalassetsasindependentvariable,sothefirsthypothesisisconductedforther e l a t i o n s h i p betweentangibilityandleverageasfollow:

Hypothesis1 : T h e r e w i l l b e p o s i t i v e r e l a t i o n s h i p b e t w e e n t a n g

i b i l i t y a n d leverage

2.3.2 LeverageandProfitability

Ther e l a t i o n s h i p o f l e v e r a g e a n d p r o f i t a b i l i t y isc o n t r a d i c t i o

n inthepr ed i ct io n oftheories.Peckingordertheory(Myers&Majluf(1984))suggestedanegativer e l a t i o n s h i p b e t w e e n p r o f i t a b i l i t y a n d l e v e r a g e

B e c a u s e o f asymmetrici n f o r m a t i o n c o n d i t i o n , c o s t o f c o l l e c t i n g i n s i d e c

ap i t a l w i l l b e alwaysl o w e r t h a n o u t si d e capital.Firmmanagersprefertofinanceinternallythanfinanceexternallybyu s i n g r e t a i n e d e a r n i n g s E s p e c i

a l l y , firmsw i t h h i g h e r p r o f i t a b i l i t y w i l l h a v e moreretainedearningsthanfirmswithoutorlessprofitability.Sofirmswillusethisr e s o u r c e t o f i n a n c e i t s o p e r a t i

o n w i t h o u t d e p e n d i n g o n e x t e r n a l off u n d t o a v o i d p r o b le m o f c h a n g i n g i

n t e r e s t r a t e o r p r e s s u r e o f paymenta t d u e day,s o l e v e l o f ratio ofd e b t willbelower J e ns e n (1986)predicteda neg at ive r e la t i o n s h i p i f t h e marketforcorporatecontrolisineffective.Someempiricalstudiesalsosupportedan e g a t i v e relationshipbetweenprofitabilityandleverage(FrankandGoyal,2009),

( H u a n andSong,2006),

(TongandGreen2005).RajanandZingales(1995)forG7countries,Wald( 1 9 9 9 ) i n d e

v e l o p e d c o u n t r i e s a l s o f o u n d a n e g a t i v e correlationb e t w e e n leverageandprofitability

Contraryt o peckingordertheory,tradeofftheorys u p p o r t e d apositiverelationshipbetweenleverageandprofitability.Firmshaveatargetdebtratioandattempttoachievethisratioforhavinganoptimalcapitalstructurebybalancingthec o s t andbenefitofdebt.Anydecreaseincostofdebtallowsfirmtoadjusttargetdebtratio.Thefirmsusemoredebtwillhaveadvantagefromtaxshield.FrankandGoyal(2009)suggestedthatexpectedcostoffinancialdistressislowforprofitablefirmsthusfindingtaxshieldmorevaluable.Philipetal(2003)confirmthatafirmw i t h highprofitabilitymaycreatebeliefinlender,soitiseasyforthemtoborrowm o n ey thanfirmswithlo

Nivorozhkin(2003,2005)suggestedthattaxshieldsarereallysignificantforfirmswithhigherandstableincome

Inc o n t e x t o f Vietnam,t h e r e s e a r c h o f D z u n g Nguyene t a l ( 2 0 1

1 ) a n d NguyenT r a n D i n h K h o i ( 2 0 0 6 ) a l s o c o n c l u d e d t h a t p r o f i t a b i l

i t y h a s a n e g a t i v e r e l a t i o n s h i p withallmeasureofcapitalstructure.Theseresultsupportedthepecking

ordertheorythatfirmpreferstousetheinternalsourceoffinancetodebt.Itseemst h a tpeckingordertheoryismoresuitabletoexplainforleverageofVietnamfirms.S o wehypothesizewithpeckingordertheorythat:

Hypothesis2 : T h e r e w i l l b e a n e g a t i v e r e l a t i o n s h i p b e t w e e n l e v e r

a g e a n d p r of i t ab i li ty

2.3.3 LeverageandSize

Theoreticalpredictionshowscontradictionviewsaboutrelationshipbetweenleverageandsize

Thepeckingordertheoryspecifiesthatlargerfirmdisplaylowerinformationa s y m

m e t r y w i t h f i n a n c i a l marketa n d a r e a b l e t o i s s u e moree q u i t y c o m p a r e d tos

m a l l companies.M o s t

largecompaniescanreachnon-bankdebtfinancingwhilesmallercompaniesareoftenunabletoaccessit.Peckingordertheorypredictedan e g a t i v e correlationbetweenleverageandsizebecauselargercompaniesarewellk n o w andhavelongerhistoryofaddingretainedearningstotheircapitalstructure( F r a n k a n d Goyal2 0 0 9 ) S o f i r m s w h i c h u s e r e

InVietnam,thestudyofNguyenandRamanchara(2006)foundsignificantlyp o s i

t i v e relationshipbetweenfirmsizeandallmeasureofcapitalstructure.Largerfirmswillusemoredebttofinancetheiroperationandsmallerfirmswillusetheiro w n e

lessdebt.Dzung(2012)alsosuggestedthatSizeisnegativerelatedtoshort-termleverageandpositiveassociatedw i t h

long-termleverage.Therefore,inthisresearch,therelationshipbetweenfirmsizeandleverageispredictedtobepositive

Hypothesis3:Tradeofftheorysuggestedapositiverelationshipbetweensizea n d leverage

Peckingordertheory predictedapositiverelationshipbetween growthandleverage.AccordingtoMyerandMajluf(1984)informationasymmetrywillraise

2.3.5 LeverageandLiquidity

Trade-offt h e o r y s u g g e s t e d a p o s i t i v e r e l a t i o n s h i p b e t w e e n l i q u i d i

t y a n d leverage.Firmswithhighliquidityratiomayborrowmoredebtbecausetheyhaveab i l i t y tomeettheirliabilitiesobligation.ThisideawassupportedbyZera(2008)a b o u t UKlistedcompanies1998-2007

In contrastto tradeoff theoryregarding liquidity,according topeckingordertheory,thereisanegativerelationshipbetweenliquidityandleveragebecausefir

availableinternalfundtoborrowing.Deesomsaketal(2004)suggestedthattherew

as anegative relationship betweenleverageandl i q u i d i t y f or a l l c o u n t r i e s t h

e y s t u d i e d Theyst ate d t h a t t h e i r l i q u i d assets were tended touse tofinancetheirinvestmentinpreferenceto

raisinge x t e r n a l d e b t I n V i e t n a m , s u p p o r t i n g t h e i d e a s l i q u i d firmsp r e

f e r t o u s e accumulatedcashandliquidassetsratherthantoresorttoexternalfinance,DzungNguyenetal(2012)alsofoundanegativerelationshipbetweenliquidityandtotalleverageandshort-

termleveragewhichsupportedpeckingordertheory.Sointhisstudy,itishypothesizedthat:

Hypothesis5:Thereisanegativecorrelationbetweenleverageandliquidity.Table2.1Summaryofleveragedeterminant

-Source:bytheauthor

2000.Thestudydeterminesfourelementsthatinfluencetheleverageoffirmsincludingtangibility,firms i z e ( l o g a r i t h m o f s a l e s ) , profitabilitya n d g r o w t

h o p p o r t u n i t y A c c o r d i n g totheregressionresult,correlationbetweenleverageandtangibility iss i g n i f i c a n t l y positiveandthesameforrelationbetweenleverageandgrowthopportunity.Theserelationshipsareconsistentwithdescriptionoftrade-

offtheoryandagencycosttheory.Incontrast,correlationsbetweenprofitabilityanddebt,fir

ms i z e a n d l o n g t e r m d e b t a r e n e g a t i v e T h e s e r e l a t i o n s h i p s a r e s i m i l

a r t o p e c k i n g termdebt, theleveloflong-termdebtislowerthanthelevelofdevelopedcountries

i p betweenfinancialleverageanditsdeterminantsandconsistency withc a

p i t a l

structuretheoriesincludingtrade-off,peckingorderandagencycosttheory.T h e determinantsofcapitalstructureareidentifiedinthisstudyastangibility,firmsize,profitability,growthopportunityandvolatilityofearnings

TheresearchofBoothetal(2001)analyzedthecapitalstructurechoicesofcompaniesi n 1 0 d e v e l o p i n g c o u n t r i e s i n c l u d i n g I n d i a , P a k i s t a

n , T h a i l a n d , Malaysia,Turkey,Zimbabwe,Mexico,Brazil,JordanandKoreaintheperiod1980

to1 9 9 0 T h e r e s u l t oft h i s p a p e r a l s o s u p p o r t e d p e c k i n g o r d e r theorya

termdebt.T h i s paperalsofoundthatthetypeofvariablesaffectedtodebtratioindevelopingc o u n t r i e s isalsosignificantindevelopedcountries

RajanandJingales(1995)examineddeterminantofcapitalstructureofG7c o u n t r i e s (Germany,France,Italy,ỤK,Japan,CanadaandUSA).Thisstudyfoun

da s i g n i f i c a n t r e l a t i o n s h i p b e t w e e n l e v e r a g e a n d p r o f i t a b i l i t y , t a n g

i b i l i t y , s i z e a n d growth prospect.Leveragehasapositiverelatedtosizeandassettangibility

The researchofBaharuddinetal (2011) examinedthe debtandequitystructurefortheconstructionenterpriseslistedintheBursaMalaysiamarketover

t h e

p e r i o d from2001to2007.Theyusedebtratioasdependentvariablewhichwascalculatedbytotaldebttototalassetswhileindependentvariablearesize,growth,a s s et t a

n g i b i l i t y a n d p r o f i t a b i l i t y T h e r e s u l t s h o w e d t h a t t h e r e isa s

i g n i f i c a n t negatively relationshipbetweenprofitabilityanddebtratiowhileassetstangibility,s i z e andgrowtharepositively significantcorrelatedtodebtratio.Thisstudyalsof o u n d thatconstructioncompaniesdependheavilyondebtfinancingcomparedtoe q u i t y financingforexpansionandgrowth andprofitwillreducewhent he enterpriseusesmoredebt

2.4.2 EmpiricalevidencesfromVietnam:

TheresearchofNguyenTranDinh Khoi andRamachandranNeelakanta

in2006studieddeterminantsinfluencingthecapitalstructureofsmallandmedium

– sizeenterprises.Thedatainthisstudycomesfrom558SMEsinwhich176SMEsa r e stateownand382areprivateavailablefromtheCompanyRegistrationDepartmentof

Investmentovertheperiodof1998-2001.Al l ofdataareunlistedfirms.The resultshowedthatSMEsemploymostlyshort

ownSMEshavehigherdebtratiot h a n p r i v a t e S M E s T h e d e t e r m i n a n t s o f

S M E s c a p i t a l s t r u c t u r e h a v e a p o s i t i v e related togrowth,firmsize,businessriskbutnegativerelatedtotangibility.P r o f i t a b i l i t y hasnosignificanteffecttothecapitalstructureofVietnameseSMEs.Itimpliesthatp r o f i t a b i l i t y isnotimportantfactorinhelpingfirmsaccesstobankloansinVietnam

Dzunge t a l

( 2 0 1 2 ) a l s o e x p l o r e d t h e d e t e r m i n a n t s o f c a p i t a l s t r u c t u r e o f listedVietnamfirms.Theycollecteddataof116non-

onwithGMMmodelwasusedinthisresearch.SimilartothestudyofNguyenTran

DinhKhoia n d RamachandranNeelakanta(2006),thisresearchfoundthatVietna

meseenterprisestilldependmuchmoreonshort-termdebtasfinancingsourcesthanlong– termdebt.T h e resultofthisstudyalsosuggestedthatprofitabilityandliquidityn

e g a t i v e l y r e l a t e d t o l e v e r a g e w h i l e g r o w t h a n d s t a t e o w n e r s h i p p o

s i t i v e l y a s so ci a t ed withleverage.Tangibilityandsizevariableshaveapositivecorrelatedwi th l o n g - te r m l e v e r a g e b u t n e g a t i v e i m p a c t o n s h o r t -

t e r m l e ve r a g e a n d h a v e n o a f f e c t t o t o t a l l e v e r a g e A m o n g t h e s e f a c t o r

s , t a n g i b i l i t y a n d p r o f i t a b i l i t y h a v e a s t r o n g l y impactonleverageratio.Liquidityhasonlyrelatedtototalandshort-termleveragea n d noi m p a c t onl o n g -

t e r m l e v e r a g e T h e s e r e s u l t o f t h i s s t u d y a l s o indicated“PeckingordertheorybetterexplainsfinancingdecisioninVietnamthantradeofftheory”

Ther e s e a r c h o f C u o n g ( 2 0 0 8 ) s t u d i e d a b o u t t h e d e t e r m i n

a n t s ofc a p i t a l structureofVietnamprocessingseafoodcompanies.Hefoundthatfir

msize,p r o f i t a b i l i t y a n d g r o w t h h a v e a p o s i t i v e r e l a t e d t o l e v e r a g e a

n d f i r m s i z e i s t h e

aremostfirmsprefertouseshort-termdebtratherthanlong-termde b t s P e c k i n g o r d e r t h e o r y is b e t t e r thantradeofftheorytoexplainfinancingdecisioninVietnam.

CH METHODOLOGY

Thischapterconcludedfourmainsections.Thefirstsectionistoovervie

wt h e constructionindustryinVietnam.Thesecondsectionwillpresentthesourceofdataanddescriptionvariableswithdependentandindependentvariables.ThethirdsectiongivessomemethodsusingtoregressdatasuchasFixedeffectsandRandomE ff ects.HausmantestisalsopresentedinthissectioninordertochoosebetweenfixedeffectsandRandomEffects.Thelastsectionwillintroducesomehypothesisw h i c

economic

Fromt h e j o i n i n g WTOi n 2 0 0 7 , theV i e t n a m e c o n o m i c d e v e l

2012.However,i n2011,Vietnam’srealGDPannualgrowtheasedfrom5.9%to5.0%in2012−thes l o w e s t r a t e s i n c e 1 9 9 9 T h e i n d u s t r y s e c t o r , i n c l u d i n g c o n s t r u c

t i o n , w h i c h r e p r e s e n t e d 42%ofthetotalGDPin2012,roseby4.52%annually(source:statistico f ConstructionMinistry)

Currently,a c c o r d i n g t o t h e s t a t i s t i c o f C o n s t r u c t i o n M i n i s t r y, a s o f 3 1 / 1 2 / 2 0 1 2 , thereareabout 55,870enterprises operatingin construction sectorin2 0 1 2 i n c r e as e 1 4 6 % comparedt o 2 0 1 1 ( 4 8 , 7 3 3 e n t e r p r i s es

) a n d t o t a l numbero f n e w registerfirmsare15,925corporations.Inthere,totalnumberofprofitablefirms