The Impact Of Capital Structure On Firm Performance Evidence From Retail Companies On The Vietnam Stock Market, 2023.Pdf

STATE BANK OF VIETNAM MINISTRY OF EDUCATION & TRAINING HO CHI MINH UNIVERSITY OF BANKING ********************* Vo Minh Tin THE IMPACT OF CAPITAL STRUCTURE ON FIRM PERFORMANCE EVIDENCE FROM RETAIL COMP[.]

*********************

GRADUATION THESIS MAJOR: BANKING AND FINANCE

CODE: 73 4 02 01THE IMPACT OF CAPITAL STRUCTURE ON FIRM PERFORMANCE: EVIDENCE FROM RETAIL COMPANIES

ON THE VIETNAM STOCK MARKET

VO MINH TIN STUDENT CODE:050606180340

HQ6-GE04

Supervisor: Dr NGUYEN THI NHU QUYNH

HO CHI MINH CITY- 2023

ABSTRACT

The thesis titled "The impact of capital structure on firm performance: Evidence from retail companies on the Vietnam stock market" is based on previous research related to capital structure and other factors affecting firm performance The scope of the study is 25 Vietnamese retail companies in the period 2015-2022 The research aims to examine the relationship between capital structure and firm performance in the retail industry in Vietnam and provide evidence on the impact of capital structure on the development and success of companies in this sector

The research topic utilizes multivariate regression models to analyze the impact

of various independent variables on the efficiency of business operations The dependent variable in the models is the return on assets (ROA), and the independent variables include capital structure (CS), liquidity (LIQ), firm size (Size), tangible assets (Tang), business growth (GROW), economic growth (GDP), and inflation rate (INF) The regression models used in the study include Pooled-OLS, Fixed Effects Model (FEM), Random Effects Model (REM), Feasible Generalized Least Squares (FGLS), and System Generalized Method of Moments (S-GMM) Along with the models already mentioned, statistical tests were used to determine a comprehensive and statistically significant model.The estimation results of the models indicate that the variables CS, SIZE, LIQ, and GDP positively impact business efficiency In contrast, the variables Tang and INF have a negative impact Furthermore, the variable GROW does not show statistical significance in the study

Based on the research results, the study contributes to providing suggestions and policy implications for retail companies to enhance business efficiency

Keywords: Capital structure, Firm performance, S-GMM, Retail companies,

Vietnam Stock market

TÓM TẮT

Khoá luận có tựa đề "Tác động của cấu trúc vốn đến hiệu quả hoạt động doanh nghiệp từ các doanh nghiệp bán lẻ trên thị trường chứng khoán tại Việt Nam" dựa trên các nghiên cứu trước đó liên quan đến cấu trúc vốn và các yếu tố khác ảnh hưởng đến hiệu suất doanh nghiệp được thực hiện trên các doanh nghiệp Nghiên cứu tập trung vào 25 công ty bán lẻ Việt Nam trong khoảng thời gian từ năm 2015 đến năm 2022 Mục tiêu của nghiên cứu là xem xét mối quan hệ giữa cấu trúc vốn và hiệu suất doanh nghiệp trong ngành bán lẻ Việt Nam, và cung cấp bằng chứng về tác động của cấu trúc vốn đối với sự phát triển và thành công của các công ty trong lĩnh vực này

Bài nghiên cứu sử dụng mô hình hồi quy đa biến để phân tích tác động của các biến độc lập khác nhau lên hiệu quả của hoạt động kinh doanh Biến phụ thuộc trong các mô hình là lợi nhuận trên tài sản (ROA), và các biến độc lập bao gồm cấu trúc vốn (CS), thanh khoản (LIQ), kích thước doanh nghiệp (Size), tài sản vật chất (Tang), tăng trưởng kinh doanh (GROW), tăng trưởng kinh tế (GDP) và tỷ lệ lạm phát (INF)

Các mô hình được sử dụng trong nghiên cứu bao gồm Pooled-OLS, Fixed Effects Model (FEM), Random Effects Model (REM), Feasible Generalized Least Squares (FGLS), và System Generalized Method of Moments (S-GMM) Cùng với các mô hình

đã được đề cập, các kiểm định thống kê được sử dụng để xác định một mô hình toàn diện và có ý nghĩa thống kê Kết quả ước lượng của các mô hình cho thấy rằng các biến

CS, SIZE, LIQ và GDP có tác động tích cực đến hiệu suất kinh doanh Ngược lại, các biến Tang và INF có tác động tiêu cực Ngoài ra, biến GROW không cho thấy ý nghĩa thống kê trong nghiên cứu

Trên cơ sở kết quả nghiên cứu, bài viết góp phần đưa ra các đề xuất và hàm ý chính sách cho các công ty bán lẻ nhằm nâng cao hiệu quả hoạt động doanh nghiệp

Keywords: Cấu trúc vốn, hiệu quả hoạt động doanh nghiệp, System Generalized

Method of Moments (S-GMM), doanh nghiệp bán lẻ, thị trường chứng khoán Việt Nam

CONTENTS

ABSTRACT iii

TÓM TẮT iv

LIST OF ACRONYMS x

LIST OF TABLES xi

LIST OF GRAPH xi

CHAPTER 1 INTRODUCTION 1

1.1 REASON OF CHOOSING 1

1.2 THE OBJECTIVE RESEARCH 2

1.2.1 Overall objectives 2

1.2.2 Specific objectives 2

1.3 RESEARCH QUESTION 3

1.4 OBJECT AND SCOPE OF THE STUDY 3

1.4.1 Research object 3

1.4.2 Research scope 3

1.5 METHODOLOGY 4

1.6 CONTRIBUTION OF THE THESIS 4

1.7 THESIS STRUCTURE 5

SUMMARY OF CHAPTER 1 6

CHAPTER 2 THEORETICAL FRAMEWORK AND LITERATURE REVIEW 7

2.1 THEORETICAL FOUNDATIONS OF BUSINESS PERFORMANCE 7

2.1.1 Definition of Firm Performance 7

2.1.2 Measuring the business performance 7

2.2 THE CONCEPT OF CAPITAL STRUCTURE 10

2.2.1 Perspectives on capital structure 10

2.2.2 Indicators proxy for capital structure 11

2.3 THEORETICAL BACKGROUND 16

2.4 EMPIRICAL EVIDENCE ON THE IMPACT OF CAPITAL STRUCTURE ON FIRM PERFORMANCE 22

2.4.1 Foreign studies 23

2.4.2 Domestic studies 27

2.5 THE RESEARCH GAPS 28

SUMMARY OF CHAPTER 2 29

CHAPTER 3 METHODOLOGY 30

3.1 METHODOLOGY 30

3.2 RESEARCH MODEL 38

3.2.1 Explain the variables and develop the thesis hypothesis 39

3.2.2 Independent variable 40

3.3 DATA 49

SUMMARY OF CHAPTER 3 51

CHAPTER 4 RESEARCH RESULTS 52

4.1 DESCRIPTIVE STATISTICS 52

4.2 REGRESSION RESULTS OF THE RESEARCH MODEL 58

4.3 RESEARCH RESULTS AND DISCUSSION 64

SUMMARY OF CHAPTER 4 67

CHAPTER 5 CONCLUSION AND POLICY IMPLICATIONS 68

5.1 CONCLUSION 68

5.2 POLICY IMPLICATIONS 69

5.3 LIMITATIONS OF THE THESIS AND PROPOSING DIRECTIONS FOR FURTHER RESEARCH 70

REFERENCES 72

DECLARATION OF AUTHENTICITY

I declare that this is my independent thesis The data used in the thesis are of clear origin and published following the law The research results, in theory, are my research and analysis, honestly, objectively, and by following the reality of Vietnam These results have not been published in any previous papers

ACKNOWLEDGEMENT

Firstly, I would like to send my profound gratitude to all the lecturers at Banking

university, in the Office of Academic Affairs, and especially to the lecturer of faculty of Finance and the faculty of Banking lecturer while studying for a bachelor‘s degree at the Ho Chi Minh University of Banking

Secondly, I would like to express my sincerest and most profound thankfulness to

Dr Nguyen Thi Nhu Quynh for her guidance and patience in giving me valuable recommendations during my study period I am happy and fortunate to carry out this study under her supervisor

Lastly, I thank my family for their support during my study and life Without

encouragement and sacrifice, I would not have finished this thesis, so I express my special love and gratitude to them In the implementation process, mistakes are inevitable despite consulting, exchanging and absorbing suggestions from teachers and friends With the effort to improve more and more, I look forward to receiving valuable advice from teachers and friends

I sincerely thank you!

LIST OF ACRONYMS

FGLS Feasible Generalized Least Squares

S-GMM Structural Generalized Method of

Moments

Tobin‘s Q the ratio between a physical asset's

market value and its replacement value

LIST OF TABLES

Table 3 1 Summary of hypotheses about the relationship between business

performance and factors 48

Table 4 1 Descriptive statistics of variables 52

Table 4 2 Correlation matrix 57

Table 4 3 Multicollinearity test 57

Table 4 4 Regression results of models 58

Table 4 5 Hausman test 60

Table 4 6 F-test 60

Table 4 7 Modified Ward test 61

Table 4 8 Wooldrige test 61

Table 4 9 Regression result of SGMM 62

Table 4 10 Summary of expected hypothesis and experimental results 67

LIST OF GRAPH Graph 3 1 Research process 37

CHAPTER 1 INTRODUCTION 1.1 REASON OF CHOOSING

The relationship between capital structure theory and firm performance is one of the topics attracting the attention and research of pseudo-researchers in corporate finance for decades The capital structure of a business reflects the extent to which it uses debt and equity to finance its assets The use of More or less debt will affect managers' behavior and financial decisions at their core and, thus, impact the performance of the business (Harris & Raviv, 1991) Therefore, considering the relationship between capital structure and corporate performance is very important because establishing and maintaining an appropriate capital structure will increase operational efficiency and maximize shareholder wealth, which is always the goal of business managers

The study on the impact of capital structure on firm performance is started from the source using data in the developed country Roden & Lewellen (1995) examines the capital structure of 48 firms in the US during the period 1981-1990 and shows the positive relationship between capital structure and firm performance Hadlock &James (2002) argues that firms with high profits will use more debt In recent years, this relationship has also been explored in developing countries develop Majumdar & Chhibber (1999) examine the relationship between capital structure and efficiency The performance of firms in India has shown a negative relationship between corporate debt and profitability

The retail sector in Vietnam has undergone significant development in recent years According to reports from the General Statistics Office of Vietnam, retail revenue has experienced strong growth, with an average annual growth rate of about 10-12% from 2015-2020

According to the recent survey conducted by Vietnam Report, which assessed retail businesses, it was found that 53.8% of retail enterprises in the country have reported achieving or surpassing pre-pandemic levels of business efficiency Ngoc Quynh (2023) states that the growth of the retail sector has significantly contributed to the overall economic recovery, despite global uncertainties Mainly, in the race to recover from the Covid-19 pandemic, the Vietnamese retail market has witnessed the acceleration of numerous companies in applying digitalization to management, operations, logistics, and distribution

According to experts, the retail industry's development trend in 2023 and the coming years is still based on changes in consumer shopping behavior after the pandemic and the application of digitalization across the industry Recent changes in the retail sector, from purchasing behavior, technology, labor models, and the combination of sales channels to the formation of different business models under the impact of Covid-19, create a new face for the retail industry with unique shopping experiences in the future With this potential, the retail industry market is increasingly attractive and highly competitive The author chose " The impact of capital structure on firm performance: Evidence from retail companies on the Vietnam stock market" as the graduate thesis Based on the research findings, the article proposes some policy recommendations to enhance the operational efficiency of retail businesses in Vietnam

1.2 THE OBJECTIVE RESEARCH

1.2.1 Overall objectives

The overall objective of the thesis is to analyze the impact of capital structure on the firm performance of retail companies on the Vietnam Stock market, thereby proposing some related implications to improve the performance of these companies

1.2.2 Specific objectives

The thesis has some following specific objectives to achieve the above overall objective:

Firstly, suggesting the model research on the impact of capital structure on firm performance

Secondly, assessing the impact of capital structure on retail enterprises‘s performance in the Vietnam Stock Market

Thirdly, suggesting related implications to improve firm performance effectively

of retail enterprises listed on the Vietnam Stock Market

Scope of space: According to the Vietstock website, as of May 2023, there are

over 37 companies listed on the stock market in Vietnam Among them, 15 companies are listed on the HOSE (Ho Chi Minh Stock Exchange), seven companies are listed on

the HNX (Hanoi Stock Exchange), and 15 companies are listed on the UPCOM (Upcom Stock Market) The author selected 25 retail companies in this research study based on their market capitalization and financial performance This approach ensured

a significant representation of the retail sector in terms of size, influence, and strong financial indicators

Scope of time: The research is conducted in the period from 2015-2022 The

reason for using this time frame is that the end of 2022 is close to the actual research period, which begins in early 2023 Furthermore, according to the report from the General Statistics Office of Vietnam, the retail sector in Vietnam has experienced explosive growth from 2015 to 2022 During the period from 2019 to 2022, the economy was heavily affected by the COVID-19 pandemic Therefore, selecting the time frame of 2015-2022 provides a comprehensive overview of the retail industry in Vietnam

1.5 METHODOLOGY

The thesis commonly utilized quantitative research methods, including Pooled OLS, Fixed Effects Model (FEM), and Random Effects Model (REM), to analyze the impact of capital structure on firm performance The most appropriate model is selected based on the results, and tests are conducted to examine the accuracy of the model In cases where the model detects heteroscedasticity and autocorrelation, the study employs the Generalized Synthetic Control (FGSL) method to address these phenomena For situations where the model simultaneously encounters heteroscedasticity, autocorrelation, and endogeneity, the study uses the System-GMM (S-GMM) model to overcome these issues These methods help to address the model's inaccuracies and provide more accurate estimation results

1.6 CONTRIBUTION OF THE THESIS

Academic perspective: The research provides empirical evidence on the

relationship between capital structure and firm performance The study also serves as a reference document for those interested in understanding the impact of capital structure

on the efficiency of business operations

In practical terms: Based on the research findings on the relationship between

capital structure and firm performance in the retail industry, the authors provide several recommendations and solutions for businesses to optimize capital resources and enhance operational efficiency

1.7 THESIS STRUCTURE

Besides the Introduction, Acknowledgments, an abstract of research papers, references and appendices, and tables illustrating the content, the research paper is presented in 5 chapters:

Chapter 1: Introduction

Chapter 1 provides an introduction to the research topic and highlights the importance of the study by setting out the main research objectives through research questions and presenting the research methodology used This chapter also emphasizes the contributions of the study to both practical and academic domains

Chapter 2: Theoretical framework and literature review

This chapter presents fundamental theories of the impact of capital structure on firm performance, the theoretical basis of the impact of capital structure, and the relationship between capital structure and firm performance This chapter will also introduce the fundamental theories and presents the literature review

Chapter 3: Research methodology

Chapter 3 outlines the research methodology, research process, and describes the model and variables used in the study It provides a detailed explanation of the research design, data collection methods, and sample selection The chapter also

presents the conceptual framework and hypotheses developed for the study, outlining the relationships between the variables and the expected outcomes Furthermore, it discusses the operationalization of the variables and the statistical techniques employed to analyze the data Overall, Chapter 3 provides a comprehensive overview

of the research methodology and lays the foundation for the subsequent analysis and interpretation of the study's findings

Chapter 4: Research results

Chapter 4 includes descriptive statistics, correlation analysis, and regression modeling It presents the results of the variables in the regression model and provides a detailed analysis and discussion of the research findings, including an examination of correlations and multicollinearity The implications of these findings are discussed concerning the research objectives and relevant literature

Chapter 5: Conclusions and recommendations

This chapter will summarize the essay's main contents from the results obtained and propose some implication policies for the firm‘s manager and policy-market of retail businesses to increase operational efficiency This chapter will also present some thesis limitations and suggest directions for further research expansion

SUMMARY OF CHAPTER 1

Chapter 1 points out the importance and urgency of analyzing the impact of capital structure on retail business performance It also shows the current situation of retail businesses The paper also provides the study's methodology, research questions, layout, and contribution to practical and academic relevance

CHAPTER 2 THEORETICAL FRAMEWORK AND

LITERATURE REVIEW 2.1 THEORETICAL FOUNDATIONS OF BUSINESS PERFORMANCE

2.1.1 Definition of Firm Performance

According to Samuelson and Nordhaus (1985), productive efficiency occurs when society cannot increase the output of one good without reducing the production

of another, which means that economic efficiency exceeds the frontier It limits its production capacity and requires resource allocation optimization to achieve the highest production efficiency in the economy

According to economist Adam Smith (1776): ―Efficiency is the result achieved in economic activity, which is the revenue from the consumption of goods‖ Thus, efficiency is synonymous with the indicator reflecting business results, possibly due to the increased cost of expanding production resources If the same effect has two different prices, in this view, the business is also efficient

Accordingly, within the scope of the topic, the author follows the point of view: the firm performance of an enterprise reflects the level of taking advantage of resources (labor, equipment, capital, and other factors) to achieve goals Business objectives set

by the enterprise In other words, the performance of an enterprise reflects the relationship between the business results obtained and the costs the enterprise spends to achieve that result The more significant the difference between these two quantities, the higher the efficiency

2.1.2 Measuring the business performance

The performance of the enterprise is assessed by Demsetz and Lehn (1985) by the combination of ROA, ROE, and Tobin's Q Shleifer and Vishny (1988) use Tobin's Q

index with the explanation that this index reflects the market value of stocks and represents the market's assessment of firm performance

Tobin's coefficient Q

Tobin's Q is a financial ratio that measures the relationship between a company's market value and its replacement value The ratio is named after the economist James Tobin (1969), who introduced the concept in a seminal research paper on investment theory

Tobin's Q has been widely cited and used in empirical research to analyze various aspects of firm performance, such as investment decisions, capital structure, and mergers and acquisitions It provides valuable insights into the relationship between market and asset value, helping investors, managers, and researchers better understand firm performance and market dynamics

Research on the impact of capital structure on firm performance has utilized Tobin's Q ratio for measurement and analysis These studies cover various sectors and

countries For example, in the banking sector, Berger and Bonaccorsi di Patti (2006)

focused on the banking industry in Italy Additionally, Erol and Nabi (2016) conducted their research on manufacturing firms in Turkey, while Saeed et al (2017) and Raza et

al (2018) investigated financial firms and listed companies in the Pakistani stock market

Return on assets (ROA)

According to Nguyen Thi Canh (2009), ROA is an indicator that provides investors with information about the after-tax profits generated from total assets, that

is, how much profit after tax will be generated from a dollar of purchases The company is formed from debt and equity capital Both these sources of capital are used

to finance the company's operations ROA shows the efficiency of converting investment capital into profit The higher the ROA, the better because the company is making more money on less investment

Recent studies have focused on the impact of capital structure on firm performance in emerging economies and different countries For example, Smith et al (2019) and Al-Tamimi et al (2018) examined the effects of capital structure on firm performance in European countries and the Gulf cooperation council countries, respectively Li et al (2017) studied the impact of capital structure on firm performance in listed companies in China These studies utilize the Return on Assets (ROA) to measure firm performance

Return on Equity (ROE)

According to Nguyen Thi Canh (2009), Return on equity (ROE), also known as return on equity, is a ratio that reflects the profitability of owners' investments This rate is often compared with the Bank's deposit rate because investors often consider this interest rate as an opportunity cost ROE is an accurate measure to evaluate a dollar spent and how much profit accrues Investors often analyze this ratio to compare with stocks in the same industry in the market; It is a reference when deciding which company to buy shares from The higher the ROE ratio, the more influential the company's management is in using the shareholders' capital, so this index is often an important criterion to consider an investment opportunity in a company's stock

in the Russian stock market, ROE was used to evaluate operational efficiency, and the results indicated a negative impact of capital structure on ROE Similarly, Sharma and Goyal (2019) examined manufacturing companies in India and employed ROE to assess operational efficiency They concluded that capital structure negatively influenced ROE in their study Nnadi et al (2020) researched oil and gas companies in Nigeria and utilised ROE to measure operational efficiency The findings revealed a negative correlation between capital structure and ROE, implying that capital structure affects the financial performance of the companies under investigation

From the criteria that the author mentioned before, the author uses the ROA indicator to measure corporate performance for several reasons:

Firstly, ROA measures the profitability of all business assets, not just limited to equity, as in ROE Additionally, ROE focuses on the profit generated from equity capital If a company enhances its external financing or utilizes debt, ROE may fluctuate without accurately reflecting the actual operational efficiency of the business Secondly, Tobin's Q measures the relationship between the firm's market value and its replacement value, often reflecting the ability to create shareholder value Calculating Tobin's Q is highly complex and requires detailed data on the business's market and replacement values On the other hand, ROA is based on readily available financial data that is easy to collect ROA focuses on the profitability of assets and the efficient utilization of available resources, thereby reflecting the operational management aspect of the business

2.2 THE CONCEPT OF CAPITAL STRUCTURE

2.2.1 Perspectives on capital structure

The concept of capital structure is defined diversely by researchers worldwide According to Myers (1984), capital structure was the choice between debt, equity, and hybrid securities to finance a firm's business operations Abor (2005) viewed capital

structure as a combination of various types of securities Tran Hoang Tho et al (2007) (2007) defined capital structure as a combination of short-term debt, long-term debt, preferred shares, and common shares used to finance a firm's investment decisions Gill

et al (2011) suggested that capital structure is the mix of debt and equity capital a firm utilises in its business activities On the other hand, Nirajini and Priya (2013) defined capital structure as the combination of long-term capital (common shares, preferred shares, bank loans) and short-term debt (trade credits and accounts payable)

These definitions illustrate that capital structure is the arrangement of different sources of funds that a firm uses to finance its business operations and investments This entails selecting and combining debt, equity, and other securities to optimize financial benefits and meet the firm's strategic objectives

Managing capital structure plays a crucial role in the financial management of a business An efficient capital structure can help optimize profitability, enhance debt payment capability, and create favourable conditions for expansion and growth Conversely, an imbalanced capital structure can pose financial risks, limit investment opportunities, and impact the stability of the business

2.2.2 Indicators proxy for capital structure

Capital structure is the combination of debt and equity that a business holds to finance its assets (Geske et al., 2016) Capital structure, considering leverage ratios, is this study's primary variable under investigation According to Nguyen Thi Canh (2009) There are various representatives in the literature to measure capital structure, including the debt ratio (total debt to total assets), the short-term debt ratio (short-term debt to total assets), and, finally, the long-term debt ratio (long-term debt to total assets)

Debt ratio: This indicator shows how much of a company's established assets are

financed by debt This ratio determines the company's ability to pay its debts The

lower the debt ratio, the more the obligations are secured in bankruptcy—conversely, the higher this ratio, the lower the ability of the business to pay its debts

Several studies have examined the relationship between capital structure and business efficiency, and some have utilized the Debt ratio as a measure of analysis Huang and Song (2018) focused on the relationship between capital structure and financial efficiency using a sample of 1,445 Chinese companies The findings of this study also revealed a negative impact of the Debt ratio on financial efficiency, suggesting that high debt levels can decrease the profitability and earning capacity of the business Another study by Antoniou et al (2008) investigated the relationship between capital structure and business efficiency in 1,324 European companies The results of this study indicated an adverse effect of the Debt ratio on business efficiency, particularly in industries with high levels of competition These studies highlight the significant impact of a company's debt level on its business performance and financial outcomes Using the Debt ratio in these studies provides a clear understanding of the capital structure and its impact on business operations

Short-term debt ratio: This indicator reflects what percentage of the enterprise's

total assets is short-term debt From there, it is clear that the debt situation and the amount of short-term debt that quickly leads to the insolvency of the enterprise are high or low From there, assess a part of the sustainability of the business's financial position

Several recent studies have investigated the relationship between capital structure and firm performance using the Short-term Debt ratio One such study conducted by

Bancel and Mittoo (2017) focused on Canadian-listed companies The findings revealed a negative impact of the Short-term Debt ratio on financial efficiency, particularly in small-sized companies and industries with high volatility This suggests that a higher proportion of short-term debt adversely affects a company's economic performance Similarly, Ali et al (2019) examined listed companies in Pakistan Their study found that the Short-term Debt ratio negatively influenced firm performance, especially in larger companies and highly competitive industries The results imply that excessive reliance on short-term debt can hinder a company's performance and profitability

Additionally, Khan et al (2020) explored the relationship between capital structure and financial performance in Malaysia Their research highlighted the negative impact of the Short-term Debt ratio on economic efficiency, particularly in larger companies and industries characterized by high volatility This suggests that a higher proportion of short-term debt can threaten a company's financial stability and operational effectiveness Overall, these studies emphasize the significance of the Short-term Debt ratio in evaluating the relationship between capital structure and firm performance

Long-term debt ratio: this indicator reflects, in the total debt of the enterprise,

what percentage of the enterprise's total assets is long-term debt Since the repayment period is more extended than short-term debt, this is not as much of a concern for businesses as short-term debt

Some recent studies have examined the relationship between capital structure and business performance, specifically focusing on using the Long-term Debt ratio as a critical measure These studies shed light on long-term debt's impact on businesses efficiency One study conducted by Chen et al (2017) investigated listed companies in

China and found that a higher Long-term Debt ratio had a negative effect on business performance This suggests that a significant level of long-term debt can limit financial flexibility and hinder investment capacity Similarly, Ahmad et al (2019) researched listed companies in Malaysia and discovered a negative relationship between the Long-term Debt ratio and business performance This was especially evident in larger firms and industries with high competitiveness The study emphasized the potential risks associated with high levels of long-term debt, including reduced risk management capability and increased dependence on borrowing Supporting these findings, Li et al (2021) examined listed companies in China Also, they found a negative impact of the Long-term Debt ratio on business performance, particularly in industries with high competitiveness The study highlighted the importance of effectively managing long-term capital structure to ensure overall business efficiency These studies underscore the significance of the Long-term Debt ratio in assessing the relationship between capital structure and business performance They reveal the potential drawbacks of excessive long-term debt, including limited financial flexibility, reduced investment capacity, and impaired risk management

From the formulas for calculating the capital structure ratios mentioned above, the author decides to use the debt ratio as the formula to represent the capital structure

in the research for several reasons:

Firstly, the debt ratio provides an overview of the business's debt level compared

to the total asset value It includes both short-term and long-term debt, helping assess the comprehensive financial situation compared to individual ratios Additionally, the debt ratio reflects the diversity in the debt structure of the business It indicates the proportion of total debt to total assets, regardless of whether short-term or long-term debt This can help understand the dependence on borrowing and the ability to repay debts

Secondly, the debt ratio provides an assessment of the sustainability of the business If the ratio is too high, the company has excessive debt compared to its repayment capacity On the other hand, a lower percentage may indicate a higher level

of financial stability and risk management ability

2.3 THEORETICAL BACKGROUND

The relationship between capital structure and business performance has attracted significant research attention in finance The theories such as M&M, trade-off, and pecking order theories have been put forward to explain the correlation between capital structure and business efficiency

Modigliani and Miller's Theory

The first theory to explain the relationship between firm performance and capital structure is the MM theory, named after Modigliani and Miller (1958) The theory asserts capital structure tends to have no significant effect on firm value In other words, the enterprise value cannot be determined by the share of equity or debt issued; property rights shall instead construe it; therefore, any combination of debt and equity will not be related to firm value

Tax-free environment:

The Modigliani-Miller (MM) theory, developed by Modigliani and Miller (1958), posits that capital structure is irrelevant in a world without taxes According to this theory, the value of a firm is solely determined by the profitability and riskiness of its underlying assets In a tax-free environment, the capital structure, whether financed through debt or equity, does not affect the firm's overall value Perfect capital markets exist under the following assumptions:

 No transaction costs: Buying and selling stocks and borrowing do not incur any fees

 No bankruptcy costs: There are no costs associated with financial distress or bankruptcy for a firm

 Symmetric information: All investors and firms have the same information and evaluate risks similarly

 Equal tax rates: Tax rates are the same for interest and dividend income

 Unlimited borrowing capacity: Firms can borrow at similar interest rates and face no limitations on borrowing

 No market imperfections: No price fluctuations or market factors influence the value of assets and capital

The MM theory assumes perfect capital markets with no transaction costs, bankruptcy costs, or information asymmetry Investors can borrow and lend at the same rate, and all firms have access to the same cost of capital In this idealized setting, investors are rational, and managers act in the shareholders' best interest by maximising the firm's value Therefore, under the MM theory, the firm's value is not influenced by the mix of debt and equity in its capital structure in a tax-free world

Taxable environment

Modigliani and Miller (1963) recognized the impact of tax benefits from debt on firm value in a world with taxes They argued that because interest payments on debt are tax-deductible, the use of debt financing can result in tax shields, reducing the overall tax liability of the firm and increasing its value In this tax environment, the

MM theory suggests that the optimal capital structure involves maximizing the use of debt to take advantage of the tax benefits This view of Modigliani and Miller is controversial

The study by Stiglitz (1974) rejected the hypothesis of no bankruptcy costs and homogeneous profit cycles for firms Ward (1999) examined the capital structure choices of firms in five countries: France, Germany, Japan, the United Kingdom, and the United States, and found that despite similar average leverage ratios across these countries, the capital structure choices of firms varied This variation was attributed to differences in tax policies, agency costs, and asymmetric information between shareholders and debt holders

Therefore, although the theory proposed by Modigliani and Miller does not fully reflect reality, it remains significant as it laid the foundation and paved the way for further contributions from subsequent research in modern financial economics

Trade-off theory

The trade-off theory asserts that firms face a trade-off when determining their capital structure, weighing the potential benefits and costs of debt financing (Kraus and Litzenberger, 1973; Scott, 1976; Myers, 1984) According to this theory, there exists an optimal level of debt that maximizes the firm's value by considering the tax advantages

of debt and the costs associated with financial distress and bankruptcy Myers (2001) argues that as firms use more debt, the tax shield benefits increase, but at the expense

of higher financial distress costs

Graham (2003) stated that debt financing provides tax benefits through interest deductions, reducing the overall tax burden of the firm and increasing its value However, as the level of debt increases, the risks of financial distress and bankruptcy also rise These financial risks come with costs such as higher interest rates, limited access to credit, and missed business opportunities

In summary, the trade-off theory emphasizes the importance of considering both the benefits and costs associated with debt financing when determining the optimal capital structure for a firm It recognizes that no one-size-fits-all approach exists and that the trade-off between tax advantages and financial risks should be carefully evaluated to maximize the firm's value

The pecking order theory

Developed by Myers and Majluf (1984), the pecking order theory argues that leverage enhances the market's perception of value and, thus, leads to increased firm value (Abdullah and Tursoy, 2019) The pecking order theory is an explanation of how firms choose the order of capital utilization through different sources of financing

According to this theory, firms prioritize using internal funds before resorting to external financing, and they prefer using retained earnings before turning to debt The pecking order theory suggests that firms have a tendency to prioritize the use of internal funds, such as accumulated profits or cash flows from operations because these sources of finance do not incur transaction costs and risks associated with borrowing from external sources This helps reduce transaction costs and maintain flexibility and control over the firm's financial activities Myers (1984) presented the specific content

of the pecking order theory as follows:

 Internal Funding: Businesses prioritize using accumulated profits or internal cash flows to meet their capital requirements

 Short-Term Debt: If the business lacks sufficient cash from internal sources, it may opt for short-term borrowings, such as short-term bank loans or credit lines

 Long-Term Debt: If the capital needs are still unmet, the business may explore long-term borrowing options, including issuing corporate bonds or obtaining long-term bank loans

 Preferred Stock: In cases where other funding sources are inadequate, the business may consider issuing preferred stock to existing shareholders or external investors

 Common Stock: As a last resort, the business may consider issuing common stock to existing shareholders or the general public when other funding options are not viable or available

Many empirical studies support this theory Specifically, Zeidan et al (2018) examined the applicability of the pecking order theory to owners of privately held non-listed firms in Brazil The results showed that over 50% of these firm owners preferred

to use internal funds over other sources of financing, including subsidized loans Thus, the pecking order theory applies to small and medium-sized enterprises in Brazil Allini

et al (2018) tested the suitability of the pecking order theory for 106 listed companies

on the EGX stock exchange from 2013-2014 The results revealed that firms with good profitability tend to prioritize internal funds over external sources of financing

Agency cost theory

Agency cost theory, developed through a series of studies by Jensen and Meckling (1976), Jensen (1986), Eisenhardt (1989) and Hart and Moore (1994), states that conflicts of interest exist between stakeholders, such as principals and agents, which creates agency costs for the business Accordingly, the ideal capital structure tends to increase firm value, if possible, to reduce aggregate agency costs Jensen and Meckling (1976) classify agency costs into two categories: agency costs of equity and agency costs of debt The agency cost of equity is generated from conflict between shareholders and managers, while the agency cost of debt is generated from conflict between shareholders and bondholders The agency cost of equity implies that managers prefer personal goals over shareholder interests and growth in firm value (Jerzemowska, 2006) Jessen (1986) argues that in the case of high leverage, managers are under increased pressure to focus more on profitable investments to generate sufficient cash flow to pay interest Berger and Di Patti (2006) and Margaritis and Psillaki (2010) argue that more debt reduces owners' agency costs or persuades managers to act more in the interest of shareholders Managers are less likely to focus

on personal goals (Guizani, 2017) Thus, leverage can positively affect firm value by reducing the agency's cost of equity However, debt can negatively affect firm value because it increases the agency cost of debt (Becker and Stromberg, 2012) Myers (1977) suggested that lenders tend to demand higher interest rates to compensate for the risk associated with high leverage In summary, agency theory expects a significant relationship between capital structure and firm performance

2.4 EMPIRICAL EVIDENCE ON THE IMPACT OF CAPITAL STRUCTURE

ON FIRM PERFORMANCE

In financial management, the relationship between capital structure and firm performance has always attracted the attention and debate of researchers and experts due to its significant role in the development and success of a business organization Therefore, there are two different streams of opinions on this matter

Positive Perspective:

Studies on the relationship between capital structure and firm performance have consistently shown a positive correlation between these two factors Nasimi's (2016) research on companies listed on the London Stock Exchange has provided evidence that capital structure has a positive impact on business performance This can be attributed to the effective utilization of debt capital, allowing firms to benefit from tax advantages and enhance their investment and expansion capabilities Furthermore, empirical studies conducted in developed countries, such as those by Abor (2005), Berger and Di Patti (2006), Gill et al (2011), and Riaz et al (2021), have also demonstrated a positive effect of capital structure on firm performance These findings highlight the importance of maintaining an optimal capital structure in achieving business efficiency

Negative Perspective:

Some studies (e.g., Javed et al., 2014; Chadha and Sharma, 2016; Le and Phan, 2017; Vieira et al., 2019) have found a negative relationship between financial leverage and firm performance These findings could be attributed to firms using excessive financial leverage, exceeding their debt repayment capacity and experiencing financial burdens This can lead to a decrease in the efficiency of the company and an increased risk of bankruptcy Therefore, carefully evaluating the costs and risks associated with capital structure is crucial to ensure balance and effectiveness in a firm's business operations

2.4.1 Foreign studies

Research on the relationship between capital structure and firm performance has attracted significant attention worldwide Numerous studies have been conducted in various countries to examine how a company's capital structure influences its operational effectiveness By exploring the findings and methodologies employed in these studies, we can better understand the relationship between capital structure and firm performance in an international context

Kajananthan and Nimalthasan (2013) studied the relationship between capital

structure and performance of 25 listed manufacturing companies in Sri Lanka from

2008 to 2012 The author used descriptive statistics to analyze correlation and regression to find the relationship between debt-to-assets ratio, debt-to-equity ratio (a measure of capital structure), gross profit, net profit, and return on equity Ownership and return on assets (measurement of business performance) The results showed that the debt-to-equity ratio negatively impacted GPR, NPR, ROE, and ROA The debt-to-asset balance positively affected GPR, NPR, and ROE and hurt ROA The author recommended that businesses make prudent financial decisions, limit the use of a lot of financial leverage, try to use retained earnings for projects, and use leverage as the last option together The article used many dependent variables to evaluate the performance while using only two independent variables, which quickly led to the phenomenon of omitted variables; the research sample was also relatively small, with only 100 observations

Sorana (2015) studied the relationship between capital structure and performance

of 196 companies listed on the Bucharest stock exchange in Romania operating in the manufacturing sector during the eight years 2003-2010 The article and implementation

of descriptive statistics, correlation analysis and regression analysis according to the least squares method, fixed effect model, and random effect model Using variables ROA and ROE to measure efficiency Enterprise performance, variables Debt Ratio,

Short-term Debt Ratio, Long-term Debt Ratio to Total Assets, and Possible Equity Ratio implement the enterprise's capital structure And the control variable was fixed assets over total assets The results showed that total debt, short-term debt and good fixed asset ratio harm ROA and ROE; enterprises almost did not use long-term debt The article used relatively few independent variables in the context of high taxes and inflation in Romania strongly affecting the performance of enterprises

Dawar (2014) explored the effects of capital structure on firm performance in

India, using panel data regression with a fixed effects model (FEM) for data collected from 78 firms representing different economic sectors of India (excluding financial firms, banks), listed on the Bombay Stock Exchange (BSE) in the period 2003-2012 The results showed that capital structure negatively affects firm performance (measured by ROA, ROE) in India

Riaz et al (2021) analyzed the impact of debt on the behaviour of 167

manufacturing firms in G7 countries between 2007 and 2018 Through GMM regression, the study determined that profitability had a significant positive relationship with the capital structure of enterprises, regardless of whether it was the ratio of total debt, short-term debt or long-term debt

Saeedi and Mahmoodi (2011) studied the relationship between capital structure

and performance of 320 firms listed on the Tehran Stock Exchange (TSE), 2002-2009 The study used four performance measures (including return on assets, return on equity, earnings per share EPS and Tobin's Q) and three capital structure measures (including the ratio of long-term debt, short-term debt and total debt to total assets) The results showed that, on the one hand, firm performance, as measured by EPS and Tobin's, was significantly positively related to capital structure; on the other hand, a negative relationship between capital structure and ROA was found Furthermore, there was no significant relationship between ROE and capital structure

Azeedz et al (2015) studied the effect of financial leverage on the performance

of 200 companies listed on the US stock exchange in 10 years, from 2003 to 2012 in the previous period (2003-2006), during (2007-2008), and after the crisis period (2009-2012), significant changes occurred The research showed a negative relationship between the period's financial leverage (debt-to-equity ratio) and ROA Period before the economic crisis (2003 – 2006) and after the economic crisis (2009 -2012) Specifically, when the debt-to-equity ratio increased by 1%, ROE decreased by 0.362% (before the financial crisis) and 1.13% (after the economic crisis)

Salim and Yadav (2012) studied the impact of capital structure (measured by

short-term, long-term and total debt-to-asset ratios) on operating performance (measured by ROA, ROE, EPS and Tobin's ratios) Q) of 237 Malaysian companies listed on the Bursa Malaysia Stock Exchange, during the period 1995-2011 The results showed that the performance of the business, as measured by ROA, ROE and EPS, had

a negative relationship with capital structure In contrast, Tobin's Q ratio had a significant positive relationship with short-term and long-term debt ratios

Chadha and Sharma (2016) studied the impact of capital structure on the

financial performance of 422 manufacturing enterprises listed on the Bombay Stock Exchange (BSE) from 2003-2013 Return on assets (ROA), return on equity (ROE), and Tobin's Q were proxies for the business's financial performance The results showed that financial leverage does not impact ROA and Tobin's Q ratios but had a significant negative relationship with return on equity (ROE)

Vieira et al (2019) studied the factors affecting the corporate performance of 37

non-financial companies in Portugal in the period 2010-2015 using GMM regression; structural discovery research capital had a significant negative effect on corporate performance when represented by Tobin's Q; however, this result was not essential when the dependent variable is ROA and ROE ratios

Ullah et al (2020) analyzed the role of capital structure on the financial

performance of 90 textile and garment enterprises listed on the Pakistani stock exchange from 2008-2017 ROE ratio is a measure that represents the financial performance of an enterprise In contrast, the two ratios were total debt to total assets and total debt to equity measured capital structure The results showed that capital structure measures significantly negatively impact the ROE ratio With better corporate governance by putting more pressure on management, institutional investors could reduce the leverage risk, capital risk and overall cost of capital of the business, helping

to improve the enterprise's financial performance and economic stability

Tailab (2014) conducted research on 30 companies in the energy industry in the

US within nine years, from 2005 to 2013 This study aimed to study the impact of capital structure on performance The study used multivariable regression, with dependent variables: ROA and ROE and independent variables: SDR, LDR, TDR, Debt-to-equity ratio and firm size variable The results show a negative relationship between capital structure (TDR) and performance, while the ratio of SDR is positive with ROE

Luca (2014) studied the relationship between capital structure and performance

of 120 enterprises (including 79 manufacturing enterprises and 41 service enterprises) listed on the Italian stock exchange during the period Period 2007-2011 Within each industry, enterprises were divided into three groups according to their size: large enterprises, medium enterprises and small enterprises Implemented multivariate regression model and obtained the following results: Firstly, the performance of enterprises in the manufacturing industry was higher than that in the service industry Large enterprises performed better than small and medium enterprises Second, a positive relationship exists between capital structure (TDR, LDR, SDR) and ROE performance for manufacturing medium and small service enterprises ROA was negatively correlated with TDR and SDR for medium-sized enterprises in the

manufacturing industry and prominent in the service industry A negative correlation existed between TDR and SDR with ROE for small and large manufacturing firms The results of the impact of capital structure on firm performance by industry group and size in Italy were not the same

Chaleeda et al (2009) investigated the effect of capital structure on the

performance of 259 firms from 9 business lines listed on the Bursa Malaysia Stock Exchange from 2000-2015 The study used Tobin's Q to represent enterprise value Capital structure was measured by leverage (short-term debt to total assets, long-term debt to total assets, total debt to total assets and total debt to total equity) The results showed that short-term debt on total assets and long-term liabilities on total assets positively correlated with enterprise value However, total debt to total assets harmed firm value

2.4.2 Domestic studies

The relationship between capital structure and firm performance has attracted significant attention in numerous studies in Vietnam Below are some studies that analyze the impact of capital structure on firm performance in Vietnam

Do Van Thang et al (2010) studied the relationship between capital structure

and the representative variable of liabilities/equity and enterprise value with the representative variable of Tobin's Q The authors used unbalanced panel data of 159 non-financial enterprises and banks listed on the stock market Ho Chi Minh City with

407 samples observed in the period from 2006 to 2009 The research results used the Pooled OLS method: Enterprise value was related to capital structure In addition, the results also showed that when the debt/equity ratio increases and was less than 105%, the value of the enterprise increases in the same direction as it Still, when the ratio of debt/equity rises more than 105%, the result was advice-versa The authors conclude

that the enterprise value is most significant when the optimal capital structure (equity/equity ratio) is 105%

Le and Phan (2017) Studied the impact between capital structure and corporate

performance of listed non-financial enterprises in Vietnam in 2007-2012, using the Pool OLS, FEM, REM and population estimation model (GMM) The study examined the linear and non-linear relationship between capital structure and performance The results showed a negative correlation between capital structure and performance in these enterprises

Ngo Van Toan and Vu Ba Thanh (2016) studied the impact of counterattacks

on the performance of 144 listed companies in Vietnam from 2010-2015 The author used performance measures such as indexes (ROE, ROA, Tobin's Q, EPS and PROF)

as dependent variables Measures of capital structure (LUTDTA, STDTA and TDTE) were independent variables Variables SIZE, TANG and GROW were the control variables for the model The results showed that the performance measured by EPS has

a positive relationship with TDTE The important ROA ratio was reversed with TDTE ROE and EPS ratios had a positive relationship with TDTE Separate collection per share EPS had a negative association with LTDTA, and ROE had a positive relationship with LTDTA

Nguyen and Nguyen (2015) studied how capital structure affects the

performance of 147 enterprises on Hose from 2006-2014 Research results show that leverage had a negative impact on corporate performance The author also used Short-Term Quantity and Duration to explore the effect of limited duration; however, there was no difference between short-term and long-term

2.5 THE RESEARCH GAPS

Reviewing recent empirical studies in Vietnam, the author finds that the number

of studies on capital structure and corporate performance at the overall level is relatively wealthy and have something in common that is found to have a negative

relationship (Le and Phan, 2017; Nguyen and Nguyen, 2015) Recent studies explore the negative impact of financial leverage on the performance of firms in the food and healthcare, public utilities, and industrial sectors Still, there is no empirical research on retail businesses, one of the growing industries in Vietnam in recent years Therefore,

in this study, the author evaluates the impact of capital structure on the performance of retail enterprises in Vietnam

SUMMARY OF CHAPTER 2

In this chapter, the thesis has raised the basic concepts of corporate performance, the theoretical foundations of capital structure, and the research of domestic and international scholars on capital structure On the performance of enterprises, other factors such as company size, revenue growth rate, liquidity and macro factors such as economic growth and inflation rate, etc., also affect the business performance This chapter is the fundamental premise for the author to continue to work on the next chapter