The effect of size and growth on leverage evidence in the fishery and real estate industry in vietnam

In particular, the study provides a qualitative and quantitative analysis about relationship between size and leverage, the relationship between growth and leverage in fishery and real e

THE EFFECT OF SIZE AND GROWTH ON LEVERAGE: EVIDENCE IN THE

FISHERY AND REAL ESTATE INDUSTRY IN VIETNAM

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

THE EFFECT OF SIZE AND GROWTH ON LEVERAGE: EVIDENCE IN THE

FISHERY AND REAL ESTATE INDUSTRY IN VIETNAM

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

In Finance

by Mr: Nguyen Manh Thang ID: MBA02032 International University - Vietnam National University HCMC

August 2013 Under the guidance and approval of the committee, and approved by all its members, this thesis has been accepted in partial fulfillment of the requirements for the degree

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Acknowledgement

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

First of all, I would like to express my special thanks to my advisor –Doctor Nguyen Kim Thu – who recommended the research idea to me and for all the enthusiastic instruction and encouragement during the time I do this thesis Besides, I would like to dedicate my gratitude to IU lecturers who communicated abstruse knowledge to me during MBA program, and the members of the Examination Committee for taking time and giving valuable comments to improve this study

I also want to give my sincere thanks to my friends and my classmate who are

my inspiration and always help me release stressful

Last but not least, I want to express my loving thanks to my family who always stand beside me My greatest gratitude is to my wife, Ngan My MBA program in IU - VNU would have not been completed without her love and encouragement

HCM City, August 2013

NGUYEN MANH THANG

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Plagiarism Statements

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 Hochiminh City

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Copyright Statement

This copy of the thesis has been supplied on condition that anyone who consults

it is understood to recognize that its copyright rests with its author and that no quotation from the thesis and no information derived from it may be published without the author’s prior consent

© Nguyen Manh Thang/ MBA 02032/2013

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Table of Contents

CHAPTER I – INTRODUCTION 1

1.1 Rationale 3

1.2 Research objectives 6

1.3 Scope and limitation of the study 7

1.4 Research structure 7

CHAPTER II – LITERATURE REVIEW 9

2.1 Theories and empirical studies that relate to the correlation between size and leverage 9 2.1.1 Pecking order theory 9

2.1.2 Trade off theory 10

2.1.3 Empirical studies 10

2.2 Theories and empirical studies that relate to the correlation between growth and leverage 11

2.2.1 The trade-off theory 11

2.2.2 Empirical studies 11

2.3 Other theories and empirical studies that relate to the correlation between controlled variables and leverage 13

2.3.1 Model of theories 13

2.3.2 Other empirical studies 17

2.3.3 Previous researches in Vietnam 22

2.4 A theoretical model of the determinants of capital structure 23

2.4.1 The model 23

CHAPTER III – DATA AND METHODOLOGY 25

3.1 Sampling design 25

3.2 Data collection methods 25

3.3 Variables 26

3.4 Size: it is the independence variable in the model and measured by Natural Log Turnover 26

3.5 Growth (investment opportunities) 27

3.6 Asset structure 28

3.7 Non-debt tax shield 28

3.8 Debtors 29

3.9 Dummy variables 29

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3.10 Framework: 30

CHAPTER IV - FINDINGS 33

4.1 Descriptive Statistics 33

4.2 Empirical results 35

CHAPTER V –CONCLUSIONS 42

5.1 Summary of the thesis 42

5.2 Limitations 43

5.3 Main implications 43

5.4 Suggestion for future research 44

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List of Tables

Table 1 Production of fishery by area in Viet Nam 4

Table 2: Predicted signs on the proxies for the competing leverage determinants theories 31

Table 3: Descriptive statistics of all variable of entire sample 34

Table 4:Descriptive statistics of all variable of Fishery sector 34

Table 5: Descriptive statistics of all variable of Real estate sector 34

Table 6: Correlation of independent variables 35

Table 7: Redundant Fixed Effect Tests 36

Table 8: Hausman Test result 36

Table 9: Fixed effect model 37

Table 10: Fixed effect model in fishery companies 38

Table 11: Fixed effect model in real estate companies 39

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Abstract

The study analyzes the factors determining the capital structure of the Vietnam enterprises The analysis grounds on M&M, the agency theory, trade-off theory and the pecking order theory In particular, the study provides a qualitative and quantitative analysis about relationship between size and leverage, the relationship between growth and leverage in fishery and real estate industry in HOSE This analysis bases on definition of the expected relationships that one might consider between the referred variables and the total debt ratio In this regard, the analysis will conduct by means of considering a survey of 54 companies in Vietnam where a hierarchical regression model will allow comparison of the hypotheses made

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CHAPTER I – INTRODUCTION

The research provides an explanatory analysis of factors which determine the capital structure of the Vietnamese enterprises by taking into account different theories

In particular, the following theories will be considered: (i) the ‘M&M theory’; (ii) the

‘Agency theory’, (iii) the ‘pecking order theory’ and (iiii) the ‘trade-off theory’

The decision on the capital structure is one of the most debated aspects in corporate finance The decision about the capital structure deals with the best combination of the different financial fund (equity and debt in short term and long term) that minimized the cost of capital without compromising the business plan

There are many studies regarding to the decisions on capital structure and they all focused on two issues: (i) the optimal debt ratio that maximizes the market value of the firm, and (ii) factors that influent financial decision

Indeed, the optimal capital structure is affected by the debt policy of the company The very first theories that explained the effect of debt policy on capital structure is M&M model (Modigliani & Miller, 1958) The main proposition of Modigliani and Miller (1958) is that the value of a company does not depend on its financial structure However, many theories have the converse argument with M&M such as pecking order theory and the trade-off theory, the agency theory

According to agency theory, the financial conflict between the organization and the debt providers lead to two agency relationships Firstly, the managerial relationship established between managers and shareholders, between the owners and the

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management board of the firm Secondly, the borrowing relationship established between the shareholders and the lenders The agency theory suggest that debt policy may reduce agency conflicts that may arise between managers and shareholders In general if the agency costs engendered by the existence of outside owners are positive it will pay the absentee owner to sell out to an owner-manager who can avoid these costs The agency costs will affect the market value of the securities of the company Thus, an optimal capital structure minimizes the total agency costs Furthermore, the benefits and the costs of different capital structures are defined by principal agent conflict of equity holders and debt Jensen and Meckling (1976) and Jensen (1986) reported that firm’s debt had a disciplining effect on scope of action of management

Based on pecking order theory, Myers (1984), Pettit and Singer (1985) said that the board of management prefer internal funds to external funds When there are opportunities for profitable investment, or when financial companies are insufficient, the board of management prefers borrowing, and only uses share issues as a last way to finance because they want to avoid sharing the business opportunities with entrants, since this action transmits negative information to the market (Myers, 1984; Myers and Majluf, 1984) Equity is only issued if internal funds and debt are not available to the firm The Asian case is different, Wiwattanakantang (1999) did not provide a prediction about the relationship between size and debt Indeed, all these studies suggest that size could be positively or negatively related to debt, depending on the relative importance of pecking order Fattouh, Scaramozzino and Harris (2005) found significant nonlinearities

in the capital structure’s determinants of South Korean companies from 1992 to 2001 It could say that the extended version of the pecking order theory included symmetric

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information Yau, Lau and Liwan (2008) test the capital structure in Malaysia from 1999

to 2005 and foundfind a negative correlation between external financing needs and term debt

long-Trade-off theory analyzes the capital structure decisions in a model with taxes, where interest payment on debt shield profits being taxed Bradley and Jarrell and Kim (1984), based on trade-off theory, had been proved that companies increase debt levels until an additional unit of debt equals the cost of debt in which included the costs of a higher probability of financial distress with rising debt levels., firm try to reach this static optimal point, also called target capital structure Bris, Welch and Zhu (2006) argue that the utility of tax shield rises with profitability, lower depreciations and higher tax rates In a study in U.S market, Frank, Murray Z and Vidhan K Goyal (2009) reported a support for the trade-off theory.The report had a result of positive correlation between size and company leverage, the tangible assets

1.1 Rationale

In the fishery industry, approximately four million people are employed in the fisheries sector in Viet Nam According to Post harvest and Marketing Component, FSPS in 2009, in Vietnam, around 8.5 million people (10% of the total population) derive their main income from fisheries industry

Following European Union Economic and Commercial Counselors report, 2008, fishery sector in Vietnam accounts for 5.8% of national GDP, 7.8% of export turnover and 10% of the labor force This sector maintained an impressive production growth rate

of 12% per year for the last twenty years and contributed to economic growth, reducing

 Decision No.358/QD-TTg on 29 May, 1997 on preferential taxation on the

Exploitation of marine products in offshore areas,

 Decision 332/QĐ-TTg to approve the project on Aquaculture Development Toward 20201

Following Mr Le Van Quang, CEO of Minh Phu Fishery Corporation Joint Stock Company, there were 30% of total fishery companies bankrupted, 40% are in agony, 20% operate without profit, only 10% of enterprise are operating with profit However, those still living companies are also get into difficulty in manufacturing and business when debt on fishery enterprises are increasing day by day

Expect that other things are constant, firms in fishery industry with larger size and higher growth rate will have higher leverage; and the impacts of size and growth on leverage in fishery industry is stronger than those in real estate industry

Considering the situation of real estate industry, currently, the real estate industry

is facing with the difficulties in borrowing from banks since the excess supply in real estate and the bad debt problem caused in the banking industry The government restricts bank loans that flow to the real estate industry in Circular No 13/2010/TT-NHNN

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Real estate loans totaled VND203 trillion (approximately US$9.7 billion) by the end of August 2012 Indeed, bad debts in real estate industry reach nearly 5 percent of the overall bad debts2

Despite of the current barriers imposed on Vietnamese companies in accessing bank loans, it is relatively easier for companies in fishery industry to borrow from banks due to the supporting of debt policy and tax supporting policy from government Meanwhile, with the other industries, especially with real estate industry, the government has tightened policies and does not support for loaning from the financial institutions

Because of the differences in the debt policy supporting from government with fishery industry and real estate industry, the researcher wants to find out what cause this difference Among many factors that effect on leverage, size and growth are very important therefore this research aim to studied the relationship between two factors size, growth and leverage in fishery and real estate industry From that, suggest better debt solution for enterprise in these two industries Besides, the author also wants to research about the effect of other factors such as Debtor, Non-debt tax shield, asset on these two industries

1.3 Scope and limitation of the study

The thesis focus on 54 companies in real estate and fishery sector from

2010-2012, in which has 18 companies from fishery and others from real estate sector The research also has 162 observes totally Source of data is collected by website of stock company such as Cophieu683 However, this research is still short of explanation variables such as: age of the firms, profitability, risk, state ownership, …

1.4 Research structure

This research includes five chapters

Chapter 1 gives the background and justifies the rationales of conducting this study

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Source: cophieu68.com

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Chapter 2 reviews key theories and empirical studies related to the correlation between size and leverage and related to the correlation between growth and leverage in fishery and real estate industry

Chapter 3 discusses the model used in this research and explains the relationship between dependent and independent variables

Chapter 4 discusses the consequence of the regression

Finally, chapter 5, the conclusion will summary all results mentioned in chapter

4, also the implications, limitation and suggestion for future researches

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CHAPTER II – LITERATURE REVIEW

The aim of this chapter is to examine previous studies on determinants of capital structure Furthermore, base on this chapter that we could test effective leverage to companies and find the differentiation of government incentives between fishery and real estate industry, in which is the fishery easier to access bank loans than the real estate

2.1 Theories and empirical studies that relate to the correlation between size and leverage

2.1.1 Pecking order theory

The pecking order theory by Myers (1984) is relied on two assumptions The first assumption presents asymmetric information between outside investors and managers It implies that due to information problems, outsiders don’t recognize the real value of the firm Of course, they will observe the action of managers as signals to this value The second assumption is the managers with their action in the interest of existing securities holders and lead to issue securities when these are over valuable4 The combination of issue expenses and price reductions would increase the cost of external funds that relate

to internal funds, and lead to preference the firms latter This implies that internal funds

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are not enough to meet the financial needs of the firm so that external debt is better than external equity because it is also less exposed to mispricing and less risky

2.1.2 Trade off theory

The trade off theory suggests that the optimal debt level is where the financial source with the marginal benefit is equal to its marginal cost There is difference between them, however, constituting the benefits and costs of debt by among researchers’ point of view One benefit of debt is bondholders who do not have voting rights from the existing shareholders’ point of view Hence, the external debt is more attractive in relation to external equity as small or tightly controlled firms that their owners forced to constrain or give up control The control consideration, which is noted

by Glen and Pinto (1994), may be relevant to the firm’s capital structure decisions in emerging markets with the durable tradition of family ownership

2.1.3 Empirical studies

However, Titman and Wassels (1988), Rajan and Zingales (1995), and Wiwattanakantang (1999) do not provide a definite prediction in the nature of the relationship between debt and size In fact, all these studies note that size of firms could

be relative to debt negatively or positively This depends on the relative importance of trade off and pecking order consideration For size reflects diversification, trade off consideration support a positive sign between debt and size because large firms with the diversification are less likely to fall into financial distress costs In contrast, firm size reflects the ability to access information of the firm, asymmetric information and

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pecking order consideration would result in a negative relation between size and debt Titman and Wassels (1988), Rajan and Zingales (1995), and Wiwattanakantang (1999) support trade off theory with positive sign on size

The general result of Rajan and Zingales (1995), Wiwattanakantang (1999), and Hussain (1997) finds that size and leverage are strongly and positively related, but with regard current and future profitability is strong and opposing signs in Korea and Malaysia

The approach with the suggestion in Hussain (1997) and in Rajan and Zingales (1995) is that the theoretical determinants of capital structure are better than understanding of institutional effects

2.2 Theories and empirical studies that relate to the correlation between growth and leverage

2.2.1 The trade-off theory

The trade-off theory can be tested cross-sectional and used proxies for tax and the potential of financial distress costs For instance, the proxies should be associated with low debt ratios; business risk is measured by the volatility of earning (or market value) Intangible assets are measured by high expenditures on R&D (research and development) and marketing, and valuable future growth opportunities

2.2.2 Empirical studies

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Tobit separated models5 estimated for a sample of the list, non-financial firms in G-7 countries from 1987 to 1991 The results indicated that the degree of tangibility of assets is positively correlated with leverage, but it is always negatively correlated with debt and growth opportunities

Myers (1977) argued that due to the asymmetric information, firms with high leverage ratios have the tendency to undertake activities Contrary to the interests of debt-holders, that means under-invest would be economical in profitable projects Therefore, it can be argued that firms that have the growth opportunities that are proxy

by the ratio of the market value to the book value of total assets tend to have low leverage ratios Regarding the relationship between growth opportunities and leverage Titman and Wessels (1988), Chung (1993) and Barclay et al (1995) find a negative relationship, Kester (1986) does not find any significant relationship

Smith and Watts (1992) emphasized the empirical importance of the investment opportunities, tend to borrow less today We have concentrated in two main reasons: Firstly, growth opportunities are intangible assets, which are likely to be damage in financial distress cost or bankruptcy; Secondly, issuing risky debt undermines the firm’s incentives to invest in the future

Nowadays, financial research has some factors that explain debt ratios cross section Large and safe firms with tangible assets would tend to borrow more than small and risky firms with tangible assets Besides, most firms with high profitability and

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The Tobit model is a statistical modelthat suggested by James Tobin (1958) to describe the relationship

between a non-negative dependent variable and an independent variable (or vector)

2.3.1.1.1 M&M theory with no taxes

Capital structure theories are regarded to explain how the debt-equity mix in the capital structure of firm influences its market value The motivated content is consistent with Modigliani and Miller (1958) and their proposition that the firm’s value is independent from its mix of debt and equity and it is completely irrelevant to how the firm select to arrange its finance

2.3.1.1.2 M&M theory with taxes

One of part control considerations is an added benefit of debt financing in which interest payments on debt are tax deductibles M & M (1963) noted that the interest payments are deducted at the profit firm which tax is charged, therefore, the corporation tax liability will be deducted in its payments In addition, firm have substantial tax shields from the depreciation, inspire of this source will be less benefit from leverage Each firm does not have the same tax rate, so the higher is the tax rate, the greater does

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the incentives borrow Firms with lower risk of financial distress will borrow more than firms with a higher risk of financial debt

2.3.1.2 Financial distress cost

Financial distress costs are the costs associated with bankruptcy, and they are the costs incurred in liquidating assets such as administration and legal expenses Liquidation costs are higher if the value of asset in liquidation is less than its current using value, but intangible assets such as human capital, brand names, or trademarks have no value on its’ liquidation Thus, liquidation costs for those assets will be high For firms has the high liquidity, with heavy relying on intangible assets, debt will be less attractive than other firms because the effective assets cannot be sold Brealey and Myers (2000) showed that an obvious bankrupt firm might incur distress costs in a position of financial difficulties The costs may be lost reputation, employee talent, growth opportunities6, or manpower migration will be occurred when the firm becomes well - known in case of financial distress For short term, financial distress should be an important disadvantage of using debt and its costs would be concerned for the corporate tax advantage of debt

Financial distress costs, however, partly base holding on the type of asset It is the ability of equity holders to expropriate debt holders’ assets by risk-shifting actions and it depends on the asset structure of firm Viswanath and Frierman (1995) noted that

a particular asset might be altered by risk-shifting behavior that directly related to

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For firms that rely heavily on intangible such as employee talent or growth opportunities, debt will be less attractive, “Financial leverage and capital structure policy”, Fundamental corporate finance, ninth edition, pp 530

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tangibility of assets with the cash flows’ variance to generate from it For instance, such intangible assets, the skills of lawyers of a law company are tangible because it is difficult to identify the type of cases because these lawyers work in the firm Otherwise, such land, it is a tangible fixed asset, but it is non-tangible because it is related to monitor the way in using land Therefore, the ease with the variance of cash flows from the use of this asset may be altered

From the above debates, the risk shifting behavior by equity holders may be higher for firms that have many intangible or tangible assets Nevertheless, asset substitution or risk shifting is not only the agency cost of debt, and the cost associated with under investment when owners may not be willing to invest in good opportunities

or projects Most of equity holders want to receive higher dividends than creating cash flows from the firms because that may be available to pay out the payment list Hence, under-investment with asset substitution, is an agency cost of debt, which may reduce the benefits of debt in controlling the agency cost of equity

2.3.1.3 Agency theory

Agency theory by Jensen and Meckling (1976) will imply for the trade off theory

of capital structure In the capital structure, there are many benefits of using debt, but at least there are four agency-related First of all, conflicts of interests between managers and external shareholders may be controlled by debt Especially, higher extent firm debt

of capital structure imply that managers hold a great equity of the firm, which reduces agency problems by aligning the managers’ interests with interests of external equity Secondly, managers will waste in their poor investment decisions Jensen (1986) noted

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that higher level of debt implies a commitment to pay more cash This will constrain at least using fund in their decision Thirdly, the tendency of managers is making over investment and taking more advantages than their self-interests They could be controlled by lenders and debt covenants such as bank monitoring Cole, Wolken and Woodburn (1996) reported that more than 60 percent of the dollar amount of small business credit outstanding took the bank loans form7 Fourthly, Harris and Raviv (1990) suggested that debt in the capital structure would generate information valuable in monitoring agency behavior by its self-interest reason Managers are usually force to liquidate the company or provide published information to the firm, which could tend to liquidation for action from point of view of investors Debt obligations will trigger an investigation in the firm Through legal expenses and disruption to operation, the investigation generates information to investors and implements more major changes and more efficient operation policy

Agency theory anticipates that debt should be reduced conflicts between managers and external shareholders, because of increasing the fraction of ownership of management and paying out cash of a commitment interest Moreover, debt is more valuable because of restricting managers’ freedom, and of course, default on debt will trigger information and change the policies There are agency-related costs to debt due

to conflicts of interests between debt and equity-holders of levered firms Such conflict

is over risk levels and it is referred to the problem of asset substitution or risk shifting Especially, debt in the capital structure triggers moral hazard problems by promotion of

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owners to complement investments riskier than those anticipated by debt holders By the way, the projects will be gain accrue to shareholders if they are successful Otherwise, the costs will be shared all securities holders The capital structure with debt becomes more expensive, constraining and less available for a future of financial source8

2.3.2 Other empirical studies

Singh (1995) examined corporate financial pattern of the top 100 listed manufacturers in each of 10 developing economies from 1980 to 1990 The results are as follows:

Making comparison with firms in developed countries, firms in developing countries base more on outside sources to finance growth

Source of external finance is used more relatively as equity by firms in developing countries compared with firms in developed countries

Firms in developing countries compared with those in developed countries are not supported by the data

Nevertheless, the Singh’s study focused on the largest listed firms, but it did not care about the question of size and unlisted firms

By using cross sectional, Ordinary Least Squares (OLS) procedure, Bradley, Kim and Jarrell (1984) have investigate the trade off theory’s validity with approximately 800

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Risk shifting behavior causes the cost of debt to increase as debt-holders price such tendencies to their requirement of annual return Moreover, risk-shifting behavior tend to debt becoming a more constraining form of finance as debt covenants incorporate conditions aimed to prevent such behavior Furthermore, risk shifting behavior could cause in lost reputation, which might lead to difficulties in obtaining further debt finance

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US Companies from 1962 to 1981 Especially, the study measures the importance of financial distress, tax and agency cost in influent the debt decision In addition, the non-debt tax shields with depreciation and investment tax credits inversely measure the tax advantage of debt

The results in the research of Bradley, Kim and Jarrell (1984) confirmed the extent of the estimated coefficient on the variables measuring investment on advertising and R&D, earning volatility was negatively signed and significant Moreover, target debt ratios were really relative to industrial classification when regulated companies were even excluded from the sample9 Target debt levels were positive and significant related to the presence of the non-debt tax shields, measured depreciation and tax credits Bradley, Kim and Jarrell (1984) tried to reconcile the level of tax credit and depreciation It may be a presence of the assets’ type held by the firm Particularly, this

is noted that high levels of tax credits and depreciation may reflect asset tangibility because it is the type of assets that tend to generate them

Alderson and Betker (1995) used data of 88 US firms, which were re-organized under Chapter of the Bankruptcy Code from 1982 to 1993 This selection procedure allows liquidity costs to be measured directly as the apart of going-concern value that would be lost if the firm liquidated

Rajan and Zingales (1995) noted that the ratio of total liabilities to total assets reflects what is left for shareholders in the case of liquidation Therefore, this broadest

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Bradley, Jarrell and Kim (1984) is used to examine a standard ANOVA, where leverage is regressed on industry dummies and finds that a strong positive relation between leverage and regulated firms include electric, telephone, gas and airlines have positive coefficients with high t-ratio

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measure of debt ratio is especially appropriate in the study of Alderson and Betker (1995) that used a sample of firms with narrow escaped liquidation, but Titman and Wessels (1988) showed that the debt level was not aggregated and was separately measured as the level of convertible debt, short-term debt and long-term debt This served different theoretical implications on each source of debt finance10 Titman and Wessels (1988) used analytic technique and 500 US manufacturers from 1974 to 1982

Titman and Wassels (1988) finds that most estimated coefficients on the explanatory variables in short and long-term debt regression incurred the predicted signs and the results supported to the pecking order theory that base on what transaction costs and information asymmetries influence the choice of funds of the firms Moreover, profitability firms with sufficient internal funds tend to have less debt in the market value of their equity It showed that the significant negative coefficients are on the profitability variable Although Titman and Wassels (1988) found the proxies for pecking order theory but did not the results for trade off proxies Therefore, non-debt tax shields, tangibility of assets, growth opportunities, volatility of earnings are not important in determining capital structure of firms Titman and Wassels concluded that the failure of supporting finding for trade off theory might be by measurement problems

Similar to Titman and Wassels, Rajan and Zingales (1995) determined that capital structure is still unresolved if this may due to institutional finance or to inaccurate proxies

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Alderson and Betker (1995) has separate regressions for different types of debt Especially, private debt

to total debt, secured debt to total debt and convertible debt to total debt are regressed on a constant, firm size, liquidation costs The study perform significant negative relations between liquidation costs and both secured to total debt and private to total debt

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Similarly, Wiwattanakantang (1999) focused on an emerging economy such as Thailand His study was an OLS cross sectional regression analysis of 200 non-financial firms and listed on the Thai stock exchange in 1996 The study was contributed to the capital structure debate by assessing agency-related influences on the trade off theory of debt Particularly, this suggests that due to agency-related costs of debt, firms with alternative mechanisms in controlling the equity costs of equity should use less debt-controlling device

Furthermore, Wiwattanakantang (1999) suggests that an alternative explanation was based on agency theory Thus family-owned firms may choose high debt ratios and

it not maintained their voting power but in order to reducing agency cost associated with conflicts of interest between minority shareholders and controlling11

Jordan, Lowe and Taylor (1998) focus on 200 small and medium sized (SMEs)

UK firms from 1989 to 1993 The result supported pecking order theory by reflecting proxies included cash flow, profitability, and a measure of the importance of access to outside finance There was an important evidence to support the assets structure of firm that was influenced by competitive strategies as innovation Nevertheless, there is no evidence that firm size, diversification, or growth influenced the debt ratio of small and medium sized (SMEs) firms Risk was strongly and positively related to debt meanwhile the effective tax rate was strongly and negatively related to debt

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Wiwattanakantang suggests that conflicts of interest between controlling and minority shareholders may

be arised from wealth expropriation This operation may be done through payments of the cash flows of the firm to controlling shareholder or trading with other firms in which the controlling shareholder is at term that are advantageous for those firms In cases, when the controlling shareholder is a family, conflicts may arise if the family ensures the jobs for its members In contrast, this may not be in the best interest of minority shareholders Hence an agency-related explanation for high debt in tightly controlled firms, then the debt will be in reducing conflicts of interest between minority and majority shareholders

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Hussain (1997) studied two samples of under 100 of the largest listed manufacturers from Korea and Malaysia for the period of 1980 and 1990 The observations were approximately 800 firms in the case of Korea and approximately 500 firms in Malaysia The explanatory variables were the familiar size, taxes, profitability, and industry dummies Furthermore, these variables included future profitability as measured by the PE ratio and dependency on retained earnings With that optimistic, firms expected high profitability base more heavily on equity This result is a negative relationship between future profitability and leverage In contrast, firms had accumulated high levels of RE (retained earnings) tend to use more debt because they had high cash position and better opportunities to access debt Thus Hussain (1997) noted a positive estimated coefficient on the RE variable

Similarly, Hirota (1997) studied a sample of Japan He run cross sectional OLS regressions of total debt to capital for some of years 1977, 1982, 1987, 1992 by a pooled regression for all years His study used about approximately 400 to 500 non-manufacturing and manufacturing firms in these years The total observations were over

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Hirota (1997) suggested explanatory variables that included the traditional variables as well as specific institutional and regulatory proxies As we know that the tradition variables are type of assets, non-debt tax shields, growth opportunities, profitability, risk and size The regulatory and institutional variables in the relationship with the main bank are the proxies for appropriate factors in Japanese business environment Furthermore, other explanatory variables in Hirota (1999) were the spread between dividend and interest rate of firms, which were allowed to issue equity These

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variables measured the important agency conflicts and in especially the agency problem

of free cash flow and financing decisions influence of managers that relied on how much cash the firm has to pay interest rates related to dividends Thus, the more different between interest rate and dividend yield; the more motivated the manager issue equity rather than debt This implication indicated a negative relationship between debt and the spread between the dividend yield and the interest rate to be negative in all regressions and significant in half of years These supported the idea that Japanese managers tend to actions as predicted by agency theory

2.3.3 Previous researches in Vietnam

Do Xuan Quang and Wu Zong-Xin (2013) attempted to explore firm elements in the context of an emerging economy like Vietnam using Multivariable Regression Analysis used with cross-panel data collected from non-financial firms listed on Ho Chi Minh Stock Exchanges in the period 2009-2012 The authors based on pecking-order theory to explain basically the impact of classical firm elements such as growth, profitability, tangibility and firm size on capital structure of Vietnam firms In the article, the authors provided a positive relationship between growth opportunity and capital structure The explanation was that, for firms in Vietnamese market, short-term debt issued mainly for financing business activities, which is more suitable

Nguyen and Ramachandran (2006) explored the capital structure of 558 small

and medium sized enterprises (SMEs) for the period 1998-2001, while Biger et al.(2008)

explored a larger sample of 3,778 mainly unlisted enterprises for 2002-2003 This body

of evidence indicated that Vietnamese firms relied mostly on short-term bank loan rather

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than equity since equity markets were nascent in the periods covered by the research With respect to the determinants of capital structure, commonly observed factors in the international empirical literature like size, profitability are applicable to Vietnam Moreover, Nguyen and Ramachandran (2006) showed positive impact of firm size on capital structure Nevertheless, the impact of growth and tangibility raised some contrasting evidence They found that firm growth is positively associated with short-term debt as high growth firms have high demand for working capital Further, tangibility had a negative relationship with gearing According to Nguyen and Ramachandran (2006) this was due to the dominance of short-term debt in total debt,

which did not necessarily require collateral Biger et al.(2008), added that Vietnamese

banks paid more attention to liquidity than tangibility because they were mainly granting short-term loans

2.4 A theoretical model of the determinants of capital structure

2.4.1 The model

Based on the previous empirical studies and the capital structure theories above, Harris and Raviv (1991) and Green, Prasad and Murinde (2001) used a generic model of capital structure as follows:

(LEVERAGE) i,t = α + β 1 (FIRM SIZE) i,t + β 2 (SIZE*DUMMY REAL ESTATE)+ β 3

(GROWTH) i,t + β 4 (GROWTH *DUMMY REAL ESTATE)+ β 5 (ASSETS) i,t + β 6

(TXSHIELD) i,t + β 7 (DEBTORS) i,t + μ i,t (2.1)

LEVERAGE is the ratio of total liabilities to total assets;

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FIRM SIZE is the natural log of total assets (SIZE);

GROWTH is the percentage increase in total assets during the 2 years up to the current year;

ASSETS is given by the fix assets ratio to total assets;

TXSHIELD is a presence of non-debt tax shield measured by the ratio depreciation to total assets;

DEBTORS is the debtors ratio less creditors to total assets

The model of Equation (2.1) can be alternatively expressed in logarithmic form In case the natural logarithms are taken of the explanatory variable and the dependent variable that will assume only positive values

(LEVERAGE) i,t = α + β 1 (FIRM SIZE) i,t + β 2 (SIZE*DUMMY REAL ESTATE)+ β 3

(GROWTH) i,t + β 4 (GROWTH *DUMMY REAL ESTATE)+β 5 (LOGASST) i,t + β 6

(LOGTAX) i,t + β 7 (DEBTORS) i,t + μ i,t (2.2)

All the variables were defined as above but LOGLEV was the natural log of LEVERAGE; LOGASST was the natural log of ASSETS; and LOGTAX was the natural log of TXSHIELD A detailed description of all variables in Equation (2.1) and (2.2) is performed in the Appendix B

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CHAPTER III – DATA AND METHODOLOGY

In this chapter, the research model will be built upon selected independent variables and dependent variable LEV Before going to this important part, the sample and collection methods will be introduced

3.1 Sampling design

This study investigates the factors that determining the leverage of Vietnamese companies listed on HOSE for the period 2010-2012 Especially, the study evaluate growth opportunities in fishery and real estate industry Therefore, sample is collected included 18 fishery companies and 36 real estate companies (see Appendix A) The requirement is that all companies must have annual financial reports from 2010-2012 in order to calculated leverage, size, growth, debtors, tax-shield

These two industries were chosen to evaluate the effect of size and growth on leverage because both industries are signification of capital structure Actually, many factors have affected in leverage as debtors, assets, tax shield are considered as controlled variables

3.2 Data collection methods

The secondary data will be used in this research

Firstly, the researcher collected audited annual financial statements from the period 2010-2012 in website of 54 companies in both fishery and real estate sector Secondly, data of 3 years in balance sheet and income statement of listed companies on HOSE by website of Cophieu68 Furthermore, state-owned companies will be gathered