Finance dissertation on determinants of capital structure of listed firms in the construction sector in viet nam

Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance FINANCE DISSERTATION ON DETERMINANTS OF CAPITAL STRUCTURE OF LISTED FIRMS IN THE CONSTRUCTION SEC

Dissertation submitted in partial fulfillment of the

Requirement for the MSc in Finance

FINANCE DISSERTATION ON DETERMINANTS OF CAPITAL STRUCTURE OF LISTED FIRMS IN THE CONSTRUCTION SECTOR IN VIETNAM

TRUONG HUU DUC

ID No: 21071811 Intake 5

SUPERVISOR: DR PHAM MANH HUNG

Banking Academy of Vietnam

September 2022

EXECUTIVE SUMMARY

Vietnam's building industry is the largest producer of materials And to this day, the construction industry continues to play a pivotal role by ensuring and bolstering the production and service capacities of all economic sectors This dissertation used the fixed effect model and random effect model with 10-year data (from 2012 to 2021) for 35 construction companies listed on the Ho Chi Minh Stock Exchange to evaluate what a suitable capital structure would be This dissertation makes recommendations to strengthen the capital structures of Vietnamese construction companies based on the findings of the research

ACKNOWLEDGEMENTS

Prior to anything else, I would want to express my thanks to my supervisor, Dr Pham Manh Hung, for his unwavering support of my master's studies and research, as well as for his patience, encouragement, excitement, and vast knowledge His assistance was invaluable during the research and writing of this dissertation For my master's studies, I could not have asked for a greater supervisor and mentor

In addition to my supervisor, I would like to extend my deepest and most sincere gratitude

to all the teachers and friends who have provided me with highly useful information Without their instructions and assistance, it would not have been possible to complete this dissertation successfully

Lastly, I'd like to thank my family and loved ones, who have always encouraged and motivated me to complete this dissertation

Truong Huu Duc

STATUTORY DECLARATION

I affirm that this is the result of my own study These are analyses, evaluations, and outcomes based on the fundamentals of the discipline, the information sources, and the data acquired from the primary sources of business reports Please be certain that the topic's content has been acknowledged and the citation information has been supplied

I accept full responsibility for this Council and School commitment

Hanoi, September, 2022

Truong Huu Duc

TABLE OF CONTENTS

CHAPTER 1: INTRODUCTION 1

1.1 Motivation 1

1.2 Research method, objectives and questions 3

1.3 New contribution 4

1.4 Dissertation structure 4

CHAPTER 2: LITERATURE REVIEW 6

2.1 Theoretical Framework 6

2.1.1 The theory of capital structure from the traditional point of view 6

2.1.2 Modern theory of capital structure (M&M theory) 7

2.1.3 Trade-off theory 9

2.1.4 Pecking order theory 11

2.2 Experimental studies 12

2.3 Research gap 14

CHAPTER 3: DATA AND METHODOLOGY 16

3.1 Research data 16

3.2 Measurement of variables 16

3.2.1 Dependent variable 16

3.2.2 Independent variables 16

CHAPTER 4: ESTIMATION RESULTS AND MAJOR FINDINGS 24

4.1 Descriptive statistics 24

4.2 Correlation matrix 25

4.3 Diagnostic tests and define regression models 26

4.3.1 VIF test for multicollinearity 26

4.3.2 Breusch and Pagan Lagrange multiplier test 27

4.3.3 Hausman test 27

4.3.4 Modified Wald test for groupwise heteroskedasticity 28

4.3.5 Wooldridge test for autocorrelation 29

4.3.6 TLEV model robust 29

5.2 Balance between current assets and short-term liabilities 35

5.3 Improve business efficiency 36

5.4 Invest more in existing assets 37

5.5 Enhance the function of financial managers in organizations 37

CHAPTER 6: CONCLUSION 39

REFERENCES 41

LIST OF TABLES

Table 1:Symbols and definitions of variables ……… 22

Table 2: Descriptive statistics……… 24

Table 3: Correlation matrix……… 25

Table 4: VIF test for multicollinearity……… 26

Table 5: Breusch and Pagan Lagrange multiplier test ……… 27

Table 6: Hausman test……… 28

Table 7: Modified Wald test……… 28

Table 8: Wooldridge test……… 29

Table 9: TLEV model results……… 29

Table 10: Final estimation result……… 30

CHAPTER 1: INTRODUCTION

1.1 Motivation

In the present market economy, capital is recognized and conceptualized as the sum of all starting values applied to subsequent business activities This notion relates not only to capital as an essential input for manufacturing businesses but also to the continual engagement of capital in the enterprise's production and commercial operations throughout its existence Therefore, capital is the most important component in all manufacturing and economic activity Capital enables firms to develop production and operations, acquire equipment, and fulfill other future goals Therefore, firms must have good capital management and utilization in order to protect and expand capital, thus insuring their growth and vitality Depending on the unique circumstances of each business, the capital structure will change as a result of the influence of the macroeconomy, the growth of each industry, and the culture or religion Therefore, contemporary financial research focuses on the influence of factors impacting the capital structure or the ability of financial organizations to deploy financial leverage Based on how these factors interact with the capital structure, organizations can decide whether to use a loan or equity to simplify the production business They can also suggest ways to make sure that financial leverage works well and that the value of an enterprise's assets is maximized

Over the years, some developed nations have conducted research on the theory of new modern capital structures, while developing nations have either paid little attention to it or have focused on it only on a general level for businesses without conducting extensive research for specific industries, such as the construction industry A developed nation is

one that meets its infrastructural needs To do this, there is little doubt that the construction sector is essential This discipline contributes to the establishment of the required infrastructure for each unit, organization, and society as a whole Then, other sectors of the new economy have several favorable circumstances for growth It is possible to say that the building sector has always played a crucial role It determines the size and technological sophistication of the economy In addition, it serves as the most effective economic regulating instrument The construction sector is the major producer of materials in Vietnam And to this day, the building industry continues to demonstrate its vital role by assuring and assisting in strengthening the production and service capacities of all economic sectors Not only is guaranteeing the ratio, balance, and rationality of production capacity for economic development in industries, regions, and economic zones a vital duty for the construction industry, but so is ensuring the proportion, equilibrium, and rationality

of production capacity in these areas Nevertheless, the building sector also generates circumstances that increase the quality and efficiency of social activities, citizen living, and national security while also making major contributions to economic earnings According

to the socioeconomic development strategy report for the period 2012–2020, construction

is an economic sector with a vital strategic position and role in the process of national construction and development, accounting for 5% of GDP annually However, in addition

to the achievements of Vietnam's building sector, its enterprises have faced several obstacles In recent years, the construction industry has been negatively impacted by the COVID-19 epidemic, variations in interest rates and inflation, and government

analyze the factors affecting the capital structure of construction companies Therefore, this research into the factors influencing the capital structure of construction companies listed

on Vietnam's stock exchange aims to produce scholarly contributions that will assist firms

in making capital management decisions

Due to these factors, the author chose to examine "Determinants of Capital Structure of Listed firms in the Construction Sector in Vietnam" in order to determine what a good

capital structure for listed businesses in the construction industry would be

1.2 Research method, objectives and questions

Using OLS regression, pooling data, fixed effects, and random effects methodology, a vast amount of literature has explored the nature of capital structure, capital structure differences, optimal capital structure, and the causes of capital structure at the business, industry, and country level Some of these contemporary scholars have proposed cross-sectional studies including massive collections of publicly accessible data The purpose of the study is to examine the elements that have a substantial impact on the capital structure and to develop some conclusions based on your results This provides a clear direction and findings regarding the financial structure of Vietnamese construction firms In addition, this study might provide a summary of the numerous arguments for and against capital structure, as well as the factors that influence capital structure Next, an inquiry into the nature of the relationship between the firm's capital structure and the financial metrics that indicate the company's characteristics that influence that structure Using the quality economy model, we will evaluate and analyze the impact of numerous variables on the

capital structure of construction enterprises listed on the Vietnamese stock exchange To achieve all of these objectives, this study intends to provide answers to the research questions First, it must be determined whether firm-specific characteristics influence the capital structure of publicly traded Vietnamese construction firms The second issue is whether the impact weights of the factors that influence the capital structure of Vietnam-listed enterprises are significantly different from one another

1.3 New contribution

In contrast to previously published research, only independent variables that are measured

by the criteria on the financial statements or are quantifiable variables that can be calculated and examined are often employed The research incorporated both kinds of factors This may result in more recent study findings, which may serve as the foundation for providing proposals to enhance capital structure in a timely way that are consistent with reality

Chapter 3: Methodology: Mentioning the sources of data and the research method of the

Chapter 4: Estimation results and major findings: Presenting the estimation results, performing tests to have the most accurate results and interpreting these results

Chapter 5: Policy recommendation: Policy recommendations to improve the capital structure of Vietnamese construction firms

Chapter 6: Conclusion

CHAPTER 2: LITERATURE REVIEW

This chapter presents the conceptual framework and empirical evidence of the investigation The prominent capital structure theories, such as the conventional theory of capital structure, the modern theory of capital structure (M&M theory), the trade-off theory, and the pecking order theory, constitute the conceptual framework In the second section

of the chapter, empirical information about the determinants of capital structure is presented Different academics provide both support and criticism for the theories covered

in this chapter As a result, it is believed that the discussion of the theories and the evaluation of their strengths and flaws would throw light on the theoretical context of the study and assist the researcher in directing future research

2.1 Theoretical Framework

This section provides a concise survey of the theoretical literature on the various capital structure theories However, this is merely a synopsis of the most significant arguments offered over the past fifty years; it is by no means a comprehensive review

2.1.1 The theory of capital structure from the traditional point of view

David Durand's (1952) research is the first to examine the capital structures of businesses, based on the assumptions that the business operates in an environment with corporate income tax, the financial market is imperfect, and the business has potential utilizing debt conceals the danger of financial distress When a company begins to borrow, debt is frequently less expensive than equity

Nonetheless, when enterprises increase the ratio of loan capital to equity, the level of risk also increases, compelling owners to increase profitability and reducing the enterprise's value There exists, according to this theory, an optimal capital structure that maximizes the firm's value and helps to minimize its average cost of capital (WACC)

2.1.2 Modern theory of capital structure (M&M theory)

Modern capital structure theory is based on the theory of Modigliani and Miller (1958), vol

1, which examines the relationship between financial leverage and the value of a company

in both taxed and untaxed environments In a tax-free setting, business value increases Debt-free individuals and businesses are identical In a taxed environment, the value of an asset declines The company has more debt than it is worth, but it does not use financial leverage because it enjoys a tax shield This theory makes assumptions that are not supported by reality, such as perfect capital markets, businesses that operate without paying taxes, and free transactions In the absence of taxation, according to MM theory, with the aforementioned presumptions, the following two statements represent the MM theory's content:

The first statement: The company's core value

From a tax-free perspective, the debt-capital structure (B/S), or how much debt a firm has compared to how much capital it has, has no bearing on the value of the company No capital structure is therefore ideal, and changing the capital structure will not increase the company's worth

The second statement: Capital expenditures

According to the second proposition, there is a positive association between the enterprise's ability to use financial leverage and the required profit factor on equity According to the two authors, the value of the firms will be determined by the asset element rather than the price of the securities issued Through that, the author claimed that after the manager has made up his or her mind to invest, the value of the company won't need to be concerned with the capital structure's development The value preservation rule, which states that an enterprise's overall assets remain constant while being divided into many sections, bears similarities to this theory Under ideal capital market conditions, Modigliani and Miller conclude that the capital structure is fully independent of the value of the business under ideal capital market conditions

The two writers continued their research into the tax factor's influence on determining the capital structure of the company in 1963, and they presented their findings at that time According to this study's author, increasing loan mobilization will increase company value when enterprises are taxed on their income It makes sense that when an organization uses debt, interest costs won't be deducted from taxable income Businesses will then minimize the amount of tax due and distribute some of the corporate revenue to investors The

MM theory applies to the tax situation:

The first statement: The enterprise's value for tax purposes

The author will evaluate how the value of the business will be impacted if taxation results

in a change in the leverage ratio (the ratio of debt to capital) In clause I, it is said that when

a business's income is taxed, the value of the businesses that use debt is equal to the value

of the businesses that don't use debt plus the cost of the tax shelter at the time

The second statement: Costs associated with employing an enterprise's capital for tax purposes

This claim takes into account the possibility that, in the event of no income taxation, there would be a positive link between the profit required on equity and the ability of the business

to use financial leverage And for taxable businesses, the clause poses the same query Based on what the clause says, the profit requirement on share capital will make it easier for the company to use financial leverage

The tax shield's difference from its present price has a positive link with the rise in the proportion of debt capital in the capital structure, which encourages managers of businesses

to borrow more money The benefits of the tax shelter will have to be offset by a number

of other costs when the debt ratio rises, so this statement is only valid in theory If so, increasing the number of borrowing decisions will result in a decline in the company's value This has since served as the foundation for the creation of a new capital structure theory known as the theory of capital exchange

2.1.3 Trade-off theory

The trade-off theory describes the idea of how much equity to fund and how many loans a company will select in order to balance costs and advantages According to the trade-off hypothesis, the enterprise's capital structure is decided by balancing the advantages of the tax shield (caused by tax-deductible loan interest) and the cost of financial exhaustion The

advantages of tax shelters but also the penalty of financial weariness rise when corporations take on more debt As a result, creditors will also demand a higher rate of profitability, raising the cost of using the company's cash The best way to determine an organization's capital structure is to raise its loan debt level until the marginal tax advantage and the cost

of financial exhaustion are equal According to this idea, profitability and tangible fixed assets are thought to have an impact on the capital structure (Castanias, 1983) Debt will be preferred to turn a tax shield into an advantage for businesses with substantial fixed assets that can pay better Many businesses want to use greater debt to take advantage of the tax shield because higher profitability will result in lower bankruptcy expenses The trade-off hypothesis also considers benefits and drawbacks:

The benefit of this theory is that it largely clarifies how the capital structures of various industries differ from one another When the value of physical assets is insufficient to serve

as security for borrowing, firms will prioritize the use of equity rather than loans For sectors with high rates of tangible fixed assets, it will lead to a rise in decisions to call for financing The trade-off theory also investigates the prevalence of companies that undergo

"leverage buy-outs," or LBOs According to the theory, it is advised to enhance the rate of loan utilization for large or long-term firms with a long-term stable foothold in the industry's product market and a high NPV in order to maximize the value of the company Taking into account suggestions for businesses that rely too much on debt, it is necessary

to issue shares to attract investors, find good sources of funding, limit dividends, or sell off business assets to raise enough money for a balanced capital restructuring

The drawback of this theory is that, in accordance with it, the trend of borrowing decreases

as profitability increases since more sources of taxable profits can be deducted, thus raising the value of the company as a result However, the idea of capital restructuring cannot account for situations in which businesses generate extremely high revenue from their operations but their rate of debt utilization is modest and they decline to make use of the tax shelter The pecking-order hypothesis is the further elaboration of this contradiction

2.1.4 Pecking order theory

Although this hypothesis was initially proposed by Donaldson (1961), Myers (1984) carried out comprehensive research on it According to the pecking-order principle, managers should prioritize funding investment opportunities from three different sources: retained earnings of the company, debt, and equity capital, in that order Through the allocation of funding sources' uses, the relationship between debt and profit can be seen to be unfavorable According to the hypothesis, the capital structure is positively impacted by both profitability and growth rates Because retained earnings are insufficient to cover business expenses, corporations will increasingly choose to borrow in order to raise their debt ratios, as seen by the rise in growth opportunities Growth potential and capital structure are inextricably linked in a favorable way As a result of the improved profitability, firms will be in a better position to keep more of their earnings, which will reduce their need for debt Profitability and capital structures have a bad relationship The pecking order theory helps explain some of the factors that influence an organization's choice of funding sources, but it has other problems For instance, it does not include how

taxes, the cost of declaring bankruptcy, or the cost of issuing securities affect a company's debt

2.2 Experimental studies

Levi et al (2008) investigated whether the gender of CEOs and corporate directors influences the price and profitability of mergers and acquisitions Bidders with female CEOs paid a significantly lower premium than bidders with male CEOs Additionally, they discovered that the presence of female board members is inversely connected to bid premiums Bharath et al (2008) explored gender disparities in senior corporate executives' insider trading activity Although both male and female CEOs gain good returns from insider trading, males earn around twice as much as females and engage in more insider trading They discovered that the difference in insider trading behavior between men and women cannot be explained solely by risk aversion

In recent years, many researchers have become concerned with the position of women in business leadership, as women increasingly play a significant role in contributing information, creativity, and talents tackle practical difficulties According to Westphal and Milton (2000) and Carter et al (2003), women have a significant position in business since they consistently give novel and distinct viewpoints when solving difficulties and resolving conflicts of interest In addition, they are able to rectify erroneous information used in the creation of business development strategies In addition, Kramer et al (2007) underlined that female directors are frequently more concerned with employees and business-related concerns, which has a substantial effect on the success of businesses during competitive

periods Competitiveness of the market Catalyst (2004) contends, from the same perspective, that firms perform better when there are women on the leadership team

Niederle and Vesterlund (2007) investigated whether the age gap influences managers' capital structure decisions They concluded that younger managers are more likely than older managers to choose to operate in a more competitive atmosphere However, the authors note that this difference is not a result of increased risk aversion, but rather because young managers are more overconfident and there are age-related changes in performance preferences in a competitive setting

Morton (2002) discovered in his study that there is a considerable correlation between capital structure and the age and experience of top personnel A firm's leverage or debt ratio

is low if its board members are senior and highly qualified They hypothesized that qualified board size would result in intense pressure from the corporate board for management to have a lower leverage or debt ratio, rather than having larger boards

Chen's (2003) study was conducted on 77 prominent Chinese firms whose shares are listed

on the Shanghai Stock Exchange The author has determined, using the trade-off theory and pecking order theory, the elements influencing the capital structure of listed companies, such as profit, growth potential, tangible fixed assets, financial distress costs, and tax shields According to Chen's research, profitability and business size have a negative effect

on the capital structure, while growth rate and tangible fixed assets have a positive effect

on the debt ratio In addition, Chen argues that the pecking order theory explains the research results more effectively than the trade-off theory

Wanrapee Banchuenvijit (2009) conducted research on 81 firms listed on the Stock Exchange of Thailand between 2004 and 2008 The model includes five factors, including the profitability ratio, firm size, ratio of tangible fixed assets, asset growth rate, and operational profit variations Three characteristics are statistically significant at the 1% level, including the Profitability ratio, the negative link between fixed assets and the debt ratio, and the negative relationship between business size and the debt ratio associated favorably with debt ratio

Nguyen Thi Nhu Quynh, Le Dinh Luan, and Le Hoang Vinh (2020) examine the determinants influencing the capital structure of 148 non-financial firms registered on the

Ho Chi Minh City Stock Exchange in Vietnam The Ho Chi Minh City Stock Exchange (HoSE) accepted the short-term and long-term financial leverage ratios for 2011-2018 The leverage ratio is affected in the short term by factors such as profit size, asset structure, and corporate liquidity, as demonstrated by the study Leverage ratio is affected by size, profitability, asset structure, growth potential, and liquidity over the long term; taxes have

no effect on capital structure

2.3 Research gap

All of these studies are undertaken during periods of economic expansion and stability Today, research on the factors influencing the financial structure of Vietnamese enterprises during the COVID-19 outbreak period is scarce, and there are few studies analyzing whether or not these aspects distinguish Vietnamese businesses from the norm In 2020 and

2021, the epidemic affects the whole global economy, including Vietnam, and the social

and activities What factors influenced the capital structure of the construction sector, one

of the industries severely impacted by labor and raw material shortages, during this period? The purpose of this study is to determine what has altered the capital structure of Vietnamese construction firms over the past ten years, particularly during the last two years

of the COVID-19 outbreak, and to propose recommendations based on these findings

CHAPTER 3: DATA AND METHODOLOGY

3.1 Research data

The research sample consists of 10-year data (from 2012 to 2021) for 35 organizations listed on the Ho Chi Minh Stock Exchange Information from stock exchanges and securities firms is the source of the collected data According to the author, these are trustworthy information sources The study's data was gathered and analyzed from the financial statements and financial information of construction firms registered on the Ho Chi Minh Stock Exchange These businesses' financial statements have been audited and have been prepared in accordance with the Vietnamese accounting standards system

3.2 Measurement of variables

3.2.1 Dependent variable

Capital structure is measured by the debt to equity ratio (Rafique, 2010) In previous research, such as (Al Shammari et al., 2007, Ali et al., 2004), the capital structure is examined using the Debt to Assets or Debt to Equity ratios For this study, the Debt to Assets ratio was used to measure capital structure This ratio measures the proportion of a company's assets financed by debt rather than equity It demonstrates a company's ability

to build and create assets over time

3.2.2 Independent variables

The research is enriched by considering seven various influenced viewpoints of the capital structure of construction industry firms in terms of business size (SIZE), liquidity (LQ),

return on assets (ROA), company growth (GROW), fixed asset structure (TANG), CEO age (CEOAGE) and CEO gender (GENDER)

FIRM SIZE (SIZE):

In today's worldwide economy, businesses with a wide range of operations typically have

a competitive advantage The size of the company is one of the first pieces of information that international investors require about a business According to Titman and Wessels (1988), "large firms have easier market access and can borrow money on more favorable conditions." Therefore, the majority of businesses tend to increase their size to maximize this benefit In 1995, when Rajan and Zingles' research on the corporations of the G-7 countries was published, it was discovered that huge organizations are more diversified and hence have a lower probability of going bankrupt; therefore, large companies should utilize more debt Small-scale businesses, according to Ahmed Sheikh and Wang (2011), must incur higher borrowing rates in order to obtain external financing because this is a prerequisite for investors to examine the business Large, diversified corporations are less susceptible to insolvency In addition, "senior" corporations generate greater prestige on the loan market, resulting in reduced debt agency charges The trade-off theory predicts, as

a result, that mature enterprises will employ very little debt In contrast, the argument of pecking order theory is distinct Investors are frequently quite interested in information on high-profit companies, including investment opportunities and operational situation Thus, larger companies are frequently scrutinized by external investors, reducing the information asymmetry relative to smaller firms (Meyers, 1986) According to Rajan and Zingales (1995), such businesses are more likely to issue new stock and have lower debt-to-equity

ratios Numerous international and Vietnamese empirical studies, such as Serrasqueiro, Z.; Caetano, A (2013); Bas et al (2009); Huang and Song (2002); Tran, have supported this claim (2008)

H1: The link between business size and leverage is positive (+)

LIQUIDITY (LIQ):

The pecking order theory states that corporations choose internal funding over external capital As a result, companies can establish liquidity buffers from retained earnings If a company has sufficient liquid assets to support investments, it will not need to raise financing from other sources Therefore, it is anticipated that liquidity will have the inverse relationship to leverage In this analysis, the current ratio is determined by comparing current assets (short-term assets) to short-term liabilities as a measure of liquidity Numerous scholars, including Deesomsak et al (2004), Myers and Majiluf (1984), and Ozkhan (2005), concur with this negative impact of liquidity on leverage (2001) In Vietnam, a study conducted by Tran (2008) demonstrated a positive correlation between liquidity and leverage

H2: The link between the current ratio and leverage is negative (-)

RETURN ON ASSETS (ROA)

The profitability of a business can be determined by looking at its return on total assets (ROA) Profitability can have both positive and negative impacts, according to the trade-