The effects of capital structure on firm performance and firm transparency a study of firms listed in ho chi minh stock exchange (hose)

THE EFFECTS OF CAPITAL STRUCTURE ON FIRM PERFORMANCE AND FIRM TRANSPARENCY: A STUDY OF FIRMS LISTED IN HO CHI MINH STOCK EXCHANGE HOSE In Partial Fulfillment of the Requirements of th

THE EFFECTS OF CAPITAL STRUCTURE ON FIRM PERFORMANCE AND

FIRM TRANSPARENCY: A STUDY OF FIRMS LISTED IN HO CHI MINH STOCK

EXCHANGE (HOSE)

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

EFFECTS OF CAPITAL STRUCTURE ON FIRM PERFORMANCE AND FIRM TRANSPARENCY: A STUDY OF VIETNAMESE ON-GOING FIRMS LISTED IN

HO CHI MINH STOCK EXCHANGE (HOSE)

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

In Finance

by

Mr Tran Le Duy ID: MBA06006 International University - Vietnam National University HCMC

Acknowledge

To complete this thesis, I have been benefited from the following people:

First of all, I would like to express my deepest gratitude to my advisor, Dr Le Vinh Trien, for all his support and guidance without that I could have not been able to complete this thesis I also wish to extend my sincere thanks to the lecturers of the Master of Business Administration program at International University for their passionate sharing and the members of the Examination Committee for taking time and giving valuable comments to improve this study

I would like to thank my friends and classmates at MBA06 for having been beside me over the past two years of the program I would also express my gratitude to my managers and colleagues in Treasury Division – Mekong Hosing Bank H.O for facilitating and supporting me during thesis time

Last but not least, I dedicate this work to my parents and my brother for their unceasing encouragement and endless support My special thanks to my wife who has always been my source of joy and love in life during the good and hard times

Ho Chi Minh City, April 2014

Tran Le Duy

I would like to declare that, apart from the acknowledged references, this thesis either does not use language, ideas, or other original material from anyone; or has not been previously submitted to any other educational and research programs or institutions I fully understand that any writings in this thesis contradicted to the above statement will automatically lead to the rejection from the MBA program at the International University – Vietnam National University Ho Chi Minh City

Table of Contents

CHAPTER 1 - INTRODUCTION 6

1 Background 6

2 Problem statement 8

3 Research Question 11

4 Research Objectives 11

5 Research Methodology 12

6 Limitation and scope of the research 13

7 Research Significant 14

8 Research structure 14

CHAPTER 2 – LITERATURE REVIEW 16

1 Traditional capital structure theories 16

1.1 Trade-off theory 17

1.2 Pecking order theory 17

1.3 Agency cost 18

2 Previous studies related to capital structure 18

2.1 Positive relationship between capital structure and firm performance 18

2.2 Negative relationship between capital structure and firm performance 19

2.3 Mixed results of capital structure and firm performance 20

3 Role of financial transparency 20

4 Econometric model and Hypotheses of the study 21

4.1 Variables of the study 21

4.1.1.Performance variables 21

4.1.2.Independent variables 22

4.2 Hypotheses of the study 23

4.3 Econometric model 23

CHAPTER 3 – DATA AND METHODOLOGY 25

1 Data 25

2 Model and Variables 26

3 Research method 27

3.1 Descriptive Statistics 28

3.2 Correlation Analysis 28

3.3 Regression Analysis 29

CHAPTER 4 – FINDINGS AND DISCUSSION 30

1 Descriptive statistics 30

1.1 Descriptive statistics for the whole data set 30

1.2 Descriptive statistics per industries 31

1.3 General look of year by year 33

2 Correlation statistics 34

3 OLS regression analysis 36

CHAPTER 5 – CONCLUSION 40

1 Summary 40

2 Implications 43

3 Limitations and further researches 45

References 47

Appendix 51

CHAPTER 1 - INTRODUCTION

1 Background

Firm‟s investment resources were financing basically from internal resources which include common stock, prefer stock and retain earnings in generally called equity capital External resources consist of short and long-term debts and bonds issuance For financial or non-financial firms, choosing an optimal proportion between debt and equity financing is one of the most important financial decisions Adjusting a reasonable proportion of debt can help the firm reduce an overall cost of capital, take advantage of tax shield, obtain benefits of financial leverage and also increase the firm value

In 1958, theory of capital structure originated by Modigliani and Miller said that under the perfect capital market, assumption no bankrupt cost, without taxes, the firm‟s value is independent with the structure of the capital However, in 1963, considering corporate tax, Modigliani and Miller modified their conclusion that under

a perfect capital condition, with tax-deductible interest payments, firm value and capital structure are positively related Other theories such as the trade-off theory (Myers, 1984), pecking other theory (Myers and Majluf, 1984) and the agency cost theory (Jensen and Meckling, 1976) support for the relevance of capital decision to firm value in imperfection which exists bankruptcy cost, agency cost, tax shield, information asymmetry, etc… in the real world As a result, the firm should maximize its value by examining its capital structure or financial leverage decisions from its impact on the firm

Corporate transparency and information disclosure are important elements of corporate governance, investors‟ confidence and investment flows The firms that do not adopt good transparency and information disclosure policies may suffer agency costs, defined as the value reduction in welfare experienced by the shareholders It is more likely that in a firm where a weak transparency and disclosure policy is practiced, managers may use their information advantage to pursue their self-interests

(Chen, Chung, Lee and Liao, 2007) Therefore, firms are able to control and reduce

the agency costs by increasing corporate transparency; might also be able to increase the shareholders‟ value, the goal of financial management In addition, firm financial transparency is very importance channel for access to external financing since it provides to investors and shareholders generally whole firm‟s financial activities However, in prior literatures argued and found evidence suggesting that the usefulness

of financial information is reduced in private firms compared with public firms (Ball and Shivakumar 2005; Burgstahler et al 2006)

Vietnam joined the WTO on 7 November 2006, and was recognized as an official member of this organization on 11 January 2007 Joining the WTO has opened up great opportunities for goods and services in Vietnam with vast market, including 155 member countries, accounting for 97% of global GDP After 5 years of joining the WTO, Vietnam's economy has grown strongly in all fields, particularly in the field of trade and services However, after WTO accession country was faced with the problems The biggest challenge is the increasing competitive pressures, including

on the domestic market due to our country should take steps to open their markets to foreign firms At the same time, so was connected with the international market to the volatility of world impacts on Vietnam faster and stronger The enterprises from

Vietnam should have some preparation steps such as restructuring firm, increasing cooperate governance, recapitalization and even acquisition Vietnamese enterprises

in this integration time need to recapitalize in order to enhance corporate performance

by utilizing effectively financing resource in positive financial investment projects

2 Problem statement

The capital structure referred to firm is a mixture of debt and equity in term capital which firm mobilizes to finance investment projects The most reason that firm chooses debt financing is tax-deductible interest payments Corporations take advantage of tax shield when they finance their investment projects by using debt

long-In addition, accessing to loans is more reachable than equity because cost of equity is more expensive than cost of debt Consequently, creditors have more priority than shareholders when the company in bankruptcy situation However, equity is needed in case corporation wants to increase their level of equity compare with debt in order to remain the health financial status of company Corporations in different industries have different capital structure Proportion between debt and equity differently depends on characteristics and goals of company Since then, each company forms theirs optimal capital structure The optimal capital structure is the one which offers ideally balance debt-equity ratio and minimize cost of capital, and in generally, increase firm value

In fact, debt financing is really profitable when the company uses it effectively

in their investments and creates profit more than interest payments Because when level of debt financing reaches to some points that will be arising other costs It also influences firm‟s investments and accordingly decreases firm value Aggarwal and

Kyaw (2006) pointed out that debt can have both positive and negative effects on firm value so that balancing the agency cost and other costs of debts is to determine the optimal debt structure Particularly, when firms have a huge amount of cash flows, debts would force financial managers more riskily in negative net present value projects, while firms with outstanding debts may not strongly invest even if some projects have positive net present value Therefore, arguments of Jensen (1986), Stulz (1988) and Myers (1993) sent a message that debt has both effects on firm value depending upon firm‟s future investment opportunities

In addition, McConnell and Servas (1995) did a very interesting investigation

of the relationship between firm values, leverage and owners‟ equity of US firms They discovered that firms with high growth or high P/E ratios have the value negatively related to leverage, and vice versa to ones with low growth or low P/E ratios Their evidences support that in low-growth firms, leverage play a role as a monitoring mechanism to enhance firm value, and in high-growth firms may cause under investments and drive down firm value

In particular, Easterbrook (1984) pointed out that firms which are forced to pay out a higher fraction of their cash flow are subject to greater scrutiny because of their need to access external capital and argues that this greater scrutiny benefits firms

by reducing agency problems between shareholders and managers In addition, since more transparent firms are likely to be more efficiently priced, they are also likely to make better investment choices, which make them more valuable on average As a result, the firm benefits when favorable information is generated and is hurt when unfavorable information is generated We show that the cost associated with

unfavorable information exceeds the benefit associated with favorable information, thus transparency is costly and firms will tend to choose lower leverage ratios

In Vietnamese corporations, determining an optimal capital structure and taking advantage of financial leverage is really not effective When the Government implements the contradictory monetary policy due to inflation increase, accessing loans at this point is very difficult but not impossible Besides, joining to the World Trade Organization (WTO), Vietnamese corporations are facing highly competitive pressures from foreigner corporations so that they have to recapitalize, improve corporate governance, and participate in M&A activities to restructure the firm Along with recapitalization activities, Vietnamese enterprises would pay more attentions on financial disclosure and transparency Financial information helps external capital providers a general look about financial activities of company Thus, firm‟s achievements in the past and the incoming tactical investment projects will attract investors

In addition, Vietnam and other 11 countries are negotiating to participate in Trans-Pacific Partnership agreement (also called TPP) According to a recent statistics published by General Statistics Office (GSO), the proportion of Vietnam‟s export to TPP members in 2013 accounted for 39% and import from TPP members was 22% of total imports of Vietnam Vietnam‟s exports about of 1% of total imports of the TPP member countries This demonstrates that TPP is a potential market for Vietnam so that capitalization for enhancing the corporate value in significantly needed in the next periods It also means capital structure decision is very importance for increasing firm‟s performance

3 Research Question

The main objective of this thesis is to investigate the effect of capital structure on firm performance of on-going firms listed in Ho Chi Minh Stock Exchange (HOSE), Vietnam based on a thorough financial statements which officially public in website

of HOSE In addition, the study investigates if there is any relationship between capital structure and financial disclosure and transparency as well as between financial disclosure and performance The research is covered by the following main research questions:

 What is the effect of capital structure on firm performance?

 What is the relationship between capital structure and firm‟s financial disclosure and transparency?

 Is there a relationship between firm financial transparency index and firm performance?

4 Research Objectives

Generally, this thesis is an empirical study of effects of capital structure on firm value of on-going firms (financial firms exclusive) listed in HOSE during the recent economic downturn period (2008-2012) This timeframe is chosen according to accession time when Vietnam officially joins into WTO That time is also easy for researchers to obtain the changes in capital structure then consequently impacts in firm value

The specific objectives of this study were:

- To describe the current status and structure of on-going firms‟ capital listed in HOSE and the relationship between capital structure and firm

- To examine the relationship between firm‟s capital structure and firm‟s financial disclosure and transparency

- To investigate whether the firm‟s financial transparency index has impact

6 Limitation and scope of the research

In this study, the valuations of non-financial firms listed in Ho Chi Minh stock Exchange (HOSE) are assessed Data will be collected from annual reports of listed companies during period of 2008-2012 The research mainly focuses on financial statements of firm-year observations for the chosen timeframe In additional, the transparency index of listed firm on HOSE may be collected from the most recent year, year of 2012

For collecting the desired samples, the following criteria are considered:

- To ensure the thoroughness of study and the transparency of the data, companies must be listed in HOSE before the year of 2008 and must have uninterrupted operation during the timeframe of study 2008-2012

- Firms operating in banking, financial and investment services firms are excluded from the sample set This can be explained that banks and financial and investment service firms, in fact, have special nature of financial statements differently from other firms, thus an inclusion of banks and financial service firms in this study would potentially create misleading results of this research

- For the purpose of ensuring the coherence of data and under time pressure

of this study, firms that do not have fiscal year ending on 31 December will be excluded from the sample

- Firms with missing annual reports for some year or some data missing in report also will be excluded from the sample

7 Research Significant

The research focuses on bringing an overview of current capital structure of financial firms listed in HOSE during turndown economic period A value in this research is that exploring the research topic for updated data in 2008-2012, while most studies conducted before this timeframe, financial crisis The relationship between capital structure and financial disclosure and transparency will be a new look

non-of effectiveness non-of capital structure The research findings are expected to contribute

to financial managers of Vietnamese firms in HOSE some evidences of the impacts of capital structure to firm performance and firm‟s financial transparency According to results of this empirical study, the managers can use as reference for capital structure decisions in their own particular business; and choose approximately for sharing firm‟s information to shareholders and investors in efficient way in order to attract external capital investment Lastly, the research also contributes to current study source for determinants of firm performance in view of capital structure in Vietnam

8 Research structure

The thesis covers five chapters as follows:

Chapter 1 – Introduction: This chapter provides an overview of the research such as research topic, objectives of the research, methodology employed, scope of study, and the significance of research

Chapter 2 – Literature Review: In this chapter, relevant literature on working capital management and different arguments on the relationship between working capital and firm‟s performance are summarized Previous studies are mentioned and a link to current background of the research issue is introduced

These literatures set the base and rationale for hypothesis and research model formulation at the end of this chapter

Chapter 3 – Data and Methodology: This section explained in detail the selection of data source, variables, model and methodology that are used in the research

Chapter 4 - Results and Discussions: Results from descriptive statistics and regression analysis of data collected are presented and discussed in this section

Chapter 5 - Conclusion: This chapter summaries the research findings and give conclusions on the research topic Implications of research results as well

as their limitations and further recommendations for research are also mentioned in this chapter

CHAPTER 2 – LITERATURE REVIEW

In this chapter, the important theories and studies that are relevant to our study

on the research topic are discussed The writer makes an effort to give a connection of these discussions to the current context of Vietnam to provide a more thorough and practical view on the topic

First we look at some traditional capital structure theories such as MM theorem by Modigliani and Miller 1958, trade-off theory (Myers, 1984), pecking order theory (Myers and Mailuf, 1984), and Agency cost (Jensen and Meckling, 1976), etc… are discussed about the relationship between firm value and capital structure Later on, findings of previous studies are presented and summarized After checking

on the current condition of the local market, the paper suggests a research model on the relationship between capital structure and firm performance with the purpose to validate conclusions of previous authors in the context of Vietnam market

1 Traditional capital structure theories

After the research process around the tile of articles, there are little studies take this subject, whereas the most studies focus on the determinants of capital structure or determining optimal capital structure The roots of capital structure theory refer to more than fifty decades since the seminal work in which presented by Modigliani and Miller 1958 (thereafter called MM theorem) They proved under the perfection capital market assumption that no taxes, bankruptcy and transaction costs that cost of capital dose not effect on capital structure, since then debt irrelevantly has no impacts on firm value In other words, the value of levered firm equals to the value of unlevered firm

In 1963, Modigliani and Miller fixed their previous paper, argue that, assumption

of existing taxes, borrowing give tax advantage, where the interest payment deducted from tax and it will result tax shield which in turn reduce cost borrowing and then maximize the firm performance (Miller, 1977) This means that the firm‟s value increase as debts increases

1.1 Trade-off theory

Myers (1984) considers a contest between two perspectives on corporate debt He calls one of these hypotheses is the trade-off theory, which states that firms balance tax savings from debt against deadweight In general, the trade-off theory of capital structure refers to the idea that a company chooses how much debt finance and how much equity finance to use by balancing the costs and benefits It states that there is

an advantage to financing with debt, the tax benefits of debt and there is a cost of financing with debt, the costs of financial distress including bankruptcy costs of debt and non-bankruptcy costs The marginal benefit of further increases in debt declines

as debt increases, while the marginal cost increases, so that a firm that is optimizing its overall value will focus on this trade-off when choosing how much debt and equity

to use for financing

1.2 Pecking order theory

In addition, the pecking order theory of Myers and Majluf (1984) stated that, due

to adverse selection, firms look to retain earnings, then to debts, and only in extreme situation to equity for financing Firms prioritize their sources of financing, first

preferring internal financing, and then debt, lastly raising equity as a “last resort” Hence: internal financing is used first, when internal fund using for investments is completely depleted, debt should be preferred to equity because of the low transaction cost, tax benefits and other advantages attached to it The proper mixture of debt and equity use in firm will increase the firm value

1.3 Agency cost

More recently, there has been a movement form the traditional tax-bankruptcy cost argument towards a consideration of the agency cost in which indicates potential conflict between shareholders and managers The conflict arises when the shareholders choose the managers as agent of their salves to manage the firm in order

to maximize their wealth However the managers firstly concentrate on the high profitable and risky projects to achieve their interests that presented incentives and rewards, after that concerning of shareholder benefits, all of these lead to maximize the firm value (Jensen and Meckling (1976), Harri and Raviv (1991) and Myers (2001))

2 Previous studies related to capital structure

2.1 Positive relationship between capital structure and firm performance

Holz (2002) found that capital structure related positively to the firm performance, the result ascribes to the willing of firm‟s managers to finance their projects by borrowing and using debts to optimally maximize the performance According to this result, the bank shall examine the feasibility of firm‟s projects before offer the loans until the firms can achieve required returns to meet their obligations On the same

manner, Roberta and Donald (2003) found that financial leverage influences to the expected performance, they explained that low growth firms attempt to depend on the borrowing money for utilizing and investing at the profitable projects, therefore it will increase the firm performance Margaritis and Psillaki (2010) also proved that financial leverage correlated positively and significantly to firm performance

2.2 Negative relationship between capital structure and firm performance

In contrast to the above, there are most of the studies had proved that capital structure related negatively with firm performance Majumdar and Chhibber (1999) stated that level of debt associated inversely with firm performance The creditors who are using the loans as disciplinary tool which bases on the restrictions that impose to prevent firm distribute earnings on the shareholders or impose sufficient collaterals on loans Since then, these restrictions will lead firm adversely on the performance Abor (2005) also noted that various capital structure measurement which represented short-term debt, long-term debt and total debt associated negatively with firm performance Moreover, Rao, Hamed, Al-yahee and Syed (2007) stated that capital structure related inversely on firm performance on Oman firms The relationship refers to high borrowing cost and to the weakness of debt market in Oman economy They suggested that tax savings as a result of using debts are not sufficient to meet cost of debts Krishnan and Moyer (1997), Gleason, Simerly and Li (2000), King and Santor (2008) and Onalapo and Kajola (2010) proved that capital structure also related negatively with the firm performance

2.3 Mixed results of capital structure and firm performance

Weill (2008) investigated the effect of financial leverage on firm performance in seven European countries The empirical study summarize that financial leverage related positively and significantly on firm performance in Italy and Spain, whereas negatively and significantly in Germany, France, Belgium and Norway, but insignificantly in Portugal Cheng, Liu and Chien (2010) used threshold regression model on 650 Chinese firms (2001-2006) The results revealed that debt ratio and firm value positively when debt ratio between 53.97% and 70.48%, while debt ratio more than 70.48% negatively relationship Eventually, Li Weng, Wang and Zhou (2008) proved that financial leverage related negatively with return on asset, but positively with return on equity

3 Role of financial transparency

Rajan and Zingales (1998) argued that financial market imperfections have an impact on development and growth Financial transparency helps alleviate market imperfections in several ways First, high quality information can help managers identify good projects or investment opportunities Second, financial transparency helps corporate control mechanisms in preventing managers from expropriating wealth from investors or creditors (Fama and Jensen 1983) Third, financial transparency can impact economic performance by reducing adverse selection, liquidity risk, and information risk (Diamond and Verrecchia 1991; Leuz and Verrecchia 2000; Easley and O‟Hara 2004)

Financial information is an important means of reducing information asymmetries and monitoring managers to make them more accountable (Fama and Jensen 1983; Diamond and Verrecchia 1991) Healy and Palepu (2001) also discussed how financial information can reduce agency costs by providing principals with an effective monitoring tool Specifically, better information improves the monitor‟s ability to relate managerial decisions to firm performance (Hope and Thomas 2008)

A number of empirical studies provide evidence of how financial information can be used by outsiders to monitor the activities of managers For example, Biddle and Hilary (2006) find a positive association between financial reporting quality and investment efficiency

4 Econometric model and Hypotheses of the study

4.1 Variables of the study

4.1.1 Performance variables

The performance measurement plays important role in managing of the firms to identify the position in which firm optimally use capital structure to increase the firm performance In literature review, measurements of profitability using as indicator which express of performance such as return on equity (ROE), return on asset (ROA), earnings to stock price and gross profit margin ratio In this research, firm performance is dependent variable which measured by ROE

4.1.2 Independent variables

The empirical study implies four independent variables to identify what is the impact of capital structure on firm performance that includes:

- Financial leverage: the main variable is considered to express the capital

structure which measure by dividing the book value of total liabilities to the book value of total assets (King and Santor (2008), Ghosh(2007), Weill (2008) and Margaritis and Psillaki (2010))

- Financial transparency: The variable expressed the sharing of firm‟s

financial information to outsiders under consideration of capital structure The financial transparency index of each company in each year is measured by scorecard questionnaires (according to Vietnam Corporate Governance Scorecard 2012, IFC)

- Tangible assets: it considers as control variable and measured by dividing

the net fixed assets to total assets (Roberta & Donald (2003), Weill (2008), and Magaritis and Psillaki (2010))

- Firm size: it is a control variable in which measured by natural logarithm

of total assets (Onaolapo and Kajola (2010) and King and Santor (2008))

- Firm growth: It is measured by calculating the difference rate in the book

value of total assets

4.2 Hypotheses of the study

- Fist hypothesis: Under the stable economic, the firm‟s capital structure

effects significantly on firm performance

- Second hypothesis: Under the stable economic, capital structure has

negative impact on financial disclosure and transparency

- Third hypothesis: Under the stable economic, there is a relationship

between financial transparency index and firm performance

4.3 Econometric model

The study tried to investigate the previous hypotheses by using ordinary least squares model to determine what is the effect of capital structure on firm performance and on firm financial transparency index The study builds general multi-regression model as following:

Yi,t = αi + βiXi,t + ei,tWhere:

Yi,t: dependent variable for firm i in year t

αi: constant coefficient for firm i

βi: slope coefficient of independent variables for firm i

Xi,t: independent variables for firm i in year t

ei,t: standard error of firm i in year t

Based on the previous model, following two equations demonstrate the effect of capital structure on firm performance and on firm financial transparency index which implies two measures of performance: return on equity and transparency index

ROEi,t = αi + β1LEVi,t + β2TANi,t + β3FSIZEi,t + β4FGROi,t + ei,t

TRANSi,t = αi + β1LEVi,t + β2TANi,t + β3FSIZEi,t + β4FGROi,t + ei,t

ROEi,t = αi + β1TRANSi,t + β2TANi,t + β3FSIZEi,t + β4FGROi,t + ei,t

Where:

ROEi,t: return on equity for firm i in year t TRANSi,t: transparency index for firm i in year t LEVi,t: financial leverage for firm i in year t TANi,t: tangible assets for firm i at year t FSIZEi,t: size of firm i at year t

FGROi,t: growth of firm i at year t

CHAPTER 3 – DATA AND METHODOLOGY

1 Data

The research uses the database of firms listed in Ho Chi Minh Stock Exchange (HOSE) during the period of 2008-2012 Financial data extracted from mainly financial reports that issued by firms at end of each years Addition, as explained in previous chapter, the following criteria are considered in deciding sample set:

- Firms must be listed in HOSE before the year of 2008 and must have uninterrupted operation during period of 2008-2012

- Firms operating in banking, financial and investment sectors are excluded from sample set

- Firms that do not have fiscal year ending in 31 December will be excluded

- Firms with missing reports for some years or firm with missing data in the report will also be excluded from the sample set

- For the firm‟s financial transparency index, we may collected data through questionnaires for year of 2012

From the database of over 200 firms listed on HOSE, we have conducted sample set of 106 firms which meet the requirements of research sample as discussed above The study uses a panel set of 530 firm-year observation from these 106 firms over a 5 year period from 2008 to 2012 The sample of study consists of ten categories of industry: manufacturing (41), aquaculture and construction (23), real-estate and transportation (16), mining, medicine, energy, oil-gas and service (26)

Data are collected from published financial reports on firms‟ websites or other broker„s website such as: www.vcb.com.vn, www.cophieu68.com, www.fpt.com.vn

To ensure the validity of data, financial reports must be audited by a qualified auditing company Those fail to meet this requirement would be not considered from the sample study

Table 1: Number of selected firms by sector

Mining, medicine, energy,

oil-gas and service

(Source: Author)

2 Model and Variables

The research focuses on the impact of capital structure on firm performance and

on the firm financial transparency index Hence, from the model suggested in the end

of Chapter 2, return on equity regressed against financial leverage as main component

of capital structure and firm‟s specific characteristics (tangible assets, firm size and firm growth)

Model 1: ROEi,t = αi + β1LEVi,t + β2TANi,t + β3FSIZEi,t + β4FGROi,t + ei,t

Model 2: TRANSi,t = αi + β1LEVi,t + β2TANi,t + β3FSIZEi,t + β4FGROi,t + ei,t

Model 3: ROEi,t = αi + β1TRANSi,t + β2TANi,t + β3FSIZEi,t + β4FGROi,t + ei,t

Table 2: List of variables and calculation method

Return on equity ROE = Net income / Total equity

Transparency

index

TRANS index measured by scorecard questionnaires (according

to Vietnam Corporate Scorecard 2012, IFC)

Tangible assets TAN = Net fixed assets / Total assets

Firm size FSIZE = ln(Total assets)

Firm growth FGRO = The difference rate in the book value of total assets

(Source: Author)

3 Research method

This section is going to explain which techniques applied in the study There are three main methods of data analyses will be used Firstly, the descriptive statistics used to bring an overview of characteristics of data set This step is necessary for having an overall knowledge of sample‟s main characteristics before conducting main analyses Any outliers and abnormalities in the set could be identified through descriptive statistics and support for researchers‟ decision making Secondly, the Pearson correlation analysis is carried out to find out if there is existence of correlation among variables in the model This step helps to better understand the potential problem that may lies in the model The researcher may decide to remove an independent variable form the model or even revise the whole model to better serve the aim of study Finally, regression analysis is employed to investigate the relationship between dependent and independent variables in the model The

regression method, Ordinary Least Square (OLS) is carried out to support for the investigation and provide better information of the study

3.1 Descriptive Statistics

The aim of descriptive statistics is to provide better understanding on the characteristics of the sample data Within the context of this part, indicators such as mean, median, medium and maximum values are chosen to measure the central tendency whereas standard deviation represents the dispersion of the studied sample Through this part, outliers such as abnormal figures may be identified and removed from the proposed model if necessary Moreover, the descriptive statistics also plays

an important role in this research since the results of the step such as the facts and figures of Vietnamese firms are revealed and discussed

3.2 Correlation Analysis

After descriptive analysis step, Person correlation analysis is done to explore the correlation between capital structure and firm‟s performance This analysis is useful for finding association between dependent and independent variables and also for pairs of independent variables as well However, the technique only allows for testing

on pairs, it could not support to test the correlation of one specific variable in the context with all other variables Therefore, it is very necessary to continue with the regression analysis in the next step

3.3 Regression Analysis

Ordinary Least Square regression is the linear regression technique applied for large data set with the purpose to find out the cause and effect relationship between variable without considering individual across time periods In the context of this research, the date collected for 106 firms from different sectors and through five years period, hence is large enough for conducting OLS regression In addition, the purpose

of this research is to investigate the impacts of capital structure on firm performance and on firm transparency index It also means that the impact of financial leverage in which is main component of capital structure is not different from industry sectors and through five year period Hence, the OLS regression is appropriated for this research model

To conduct regression analyses, three designed models shall be run in which the independent and dependent variable are being alternated for each model while keeping control variables constantly Since, apart from capital structure, firm‟s specific characteristics such as tangible asset, firm size and growth also contributed to firm performance

CHAPTER 4 – FINDINGS AND DISCUSSION

This chapter provides empirical findings obtained from the analyses which we discussed in Chapter 3 The writer used the Eview version 8.0 to conduct those analyses More importantly, the rationales behind those findings will be discussed to dig deeper into the study

1 Descriptive statistics

1.1 Descriptive statistics for the whole data set

The descriptive statistics of the collected variables is presented in the Table 3, which shows the mean, median, standard deviation, minimum and maximum value of different variables in the model during the period from 2008 to 2012 Total observations come to 106 x 5 = 530 firm-year observations Where it is noted from the Table 3 that the average financial leverage is 45% approximately with the standard deviation of 22% and this percent considers moderate for the firms As well

as the descriptive analysis indicates that the minimum percent of financial leverage is 3%, whereas the maximum value reached is about 110% in which is very high This denoted that there is high variation in using financial leverage

With regard to return on equity, the average return reached 14% and these percent

is very low in comparing of the high return in which is 234% There are significant gap between the minimum and the maximum values in the percent of financial leverage which are -187% and 234%, respectively It refers to some firms achieve large losses and this also indicates to weakness of firm performance in generally About the financial transparency index of firms in year of 2012, the average score of

transparency index is approximately 18 The score is relatively acceptable when the highest score of 25 and the lowest one is 8

Table 3: Descriptive statistics of 106 non-financial listed firms (2008-2012)

(Source: Author, *Trans index for 2012 only)

1.2 Descriptive statistics per industries

The classification to industries is based on the HOSE‟s classification published for year 2012 and the latest version of Industry Classification Benchmark (ICB) launched

bu Don Jones and FTSE in 2005 Details of the classification could be found in Appendix 3 Thus, from the sample set of 106 non-financial firms listed in HOSE in period of 2008-2012 we have a set of four groups comprising of: manufacturing (41 firms), aquaculture and construction (23 firms), real-estate and transportation (16 firms) and Mining, medicine, energy, service, retail, oil-gas (26 firms)

By breaking down the data set into groups by industries, we have a descriptive statistics table as below: