THE IMPACT OF FOREIGN OWNERSHIP ON CAPITAL STRUCTURE OF FIRMS LISTED ON HOSE

THE IMPACT OF FOREIGN OWNERSHIP ON CAPITAL STRUCTURE OF FIRMS LISTED ON HOSE Ảnh hưởng của sở hữu nước ngoài đến cấu trúc vốn của doanh nghiệp This study was conducted and motivated due to the lack of empirical evidence relating to the effect of foreign ownership on capital structure in emerging countries, especially in the context of Vietnam listed firms. By using the pooled OLS, in order to test about the relationship between foreign ownership and capital structure, thereby using FE and RE models to deal with unobserved heteroscedasticity problems. Although different methods, regressions were applied in this study but all the results are consistent and same as expectation

“THE IMPACT OF FOREIGN OWNERSHIP ON CAPITAL

STRUCTURE OF FIRMS LISTED ON HOSE”

Da Nang City January 2016

Group Members

Le Vinh Quang SB60734Quach Kim Phong SB60697Pham Van Quan SB60407Tran Thi Thao My SB60637Nguyen Ngoc Phuong

Trang SB60743

Supervisor Mrs Vo Hoang Diem Trinh, M Fin

Table of Contents

ACKNOWLEDMENT 5

ABSTRACT 6

LIST OF TABLES 9

LIST OF FIGURES 10

CHAPTER 1: INTRODUCTION 11

1.1 Research background 11

1.2 An overview about foreign ownership in Vietnam 12

1.2.1 Vietnamese listed firms 12

1.2.2 Foreign investment in Vietnamese stock market 12

1.3 Research questions 14

1.4 Research Objectives 15

1.5 Research scope 15

1.6 Research methodology 15

1.7 Data overview 15

1.8 Thesis structure 16

1.9 Limitation 16

1.10 Conclusion 17

CHAPTER 2: LITERATURE REVIEW AND THEORETICAL MODEL 18

2.1 Introduction 18

2.2 Relevant Concepts 19

2.2.1 Capital Structure 19

2.2.2 Ownership Structure 19

2.3 Review of theories 20

2.3.1 The Modigliani and Miller theory 23

2.3.2 The tradeoff theory 24

2.3.3 The pecking order theory 27

2.3.4 The agency cost of theory 28

2.3.5 The market timing theory 28

2.4 Review of empirical studies 29

2.5 Literature gap 32

2.6 Theoretical model and hypotheses development 32

2.6.1 Selected theoretical model 32

2.6.2 Variable description 34

2.6.2.1 Dependent variables 34

2.6.2.2 Independent variables 35

2.6.4 Summary of variables 39

2.7 Conclusion 39

CHAPTER 3: METHODOLOGY 41

3.1 Methodology overview 41

3.1.1 Research philosophy 41

3.1.2 Nature of the research 42

3.1.3 Research approach 42

3.1.4 Research method 43

3.1.5 Research strategy 43

3.1.6 Research progress 44

3.2 Data collection method 45

3.3 Data analysis method 45

3.3.1 Descriptive statistic 45

3.3.2 Pearson’s correlation test 46

3.3.3 Outlier control 46

3.3.4 Multiple regression model 46

3.3.3.1 Different multiple regression models 46

3.3.3.2 Specific regression models 48

3.4 Detections for regression model 49

3.4.1 Detection for multicollinearity 49

3.4.2 Detection for Heteroscedasticity 49

3.4.3 Detection for Autocorrelation 50

3.5 Ethical consideration and Limitations 50

3.5.1 Ethical consideration 50

3.5.2 Limitations 51

3.6 Conclusion 51

CHAPTER 4: DATA ANALYSIS AND FINDINGS 52

4.1 Introduction 52

4.2 Descriptive analysis 52

4.3 Correlation Analysis 53

4.4 Pooled OLS regression analysis 54

4.5 Random and Fixed effect regression 55

4.6 Detection for FEM 60

4.6.1 Multicollinearity 60

4.6.3 Heteroscedasticity 60

4.6.4 Autocorrelation 60

4.6 Results 61

4.6.1 Foreign ownership 61

4.6.2 Control variables 61

4.7 Robustness Analysis 62

4.8 Conclusion 64

CHAPTER 5: CONCLUSION AND RECOMMENDATIONS 65

5.1 Answering the research question 65

5.1.1 Comparing to hypotheses 65

5.1.2 Comparing to research objective 65

5.1.3 Conclusion 65

5.2 Discussion and Recommendations 66

5.2.1 Discussion 66

5.2.2 Recommendations 66

5.3 Direction for further research 67

References 68

Appendices 76

In fact, this thesis would not be successful finished without the support, encouragement aswell as assistance, no matter much or less, direct or indirect of many people During theperiod from the start of study in university so far, we have received a lot of attention andhelp by teachers, family and friends We would like to send our sincere thanks to all FPTUniversity professors and lectures together with knowledge and enthusiasm to impartvaluable lessons for us during studying at school

We would like to send our deepest and greatest gratitude to our supervisor M.Fin VoHoang Diem Trinh All the instruction and motivation given by her were great help incompleting this thesis and we are thankful for these invaluable times as well as being thebest guider in this strenuous journey

Last but not least, our special thanks were extended to our families and friends, especiallyparents Our thanks also go to them for their support, encouragement and belief We willalways appreciate their loves

There are several studies that have focused on diverse linkages of foreign ownership andcapital structure; however, some limitations still exist There are some gaps in theirresearch

Apparently, most previous studies have paid their attention on the impacts of foreigninvestment on firm performance, but there is a lack of research about its influence ondecisions of financing Theoretically, the relationship between foreign ownership structureand capital structure has been established, but there are only a few empirical studies haveexamined this linkage, especially in developing countries such as Viet Nam Therefore,there is limited anecdotal empirical evidence on the influence of foreign ownership oncapital structure, especially in developing countries likes Viet Nam In fact, with the sharpincrease in globalization and foreign investment, equitisation process in Viet Nam, foreignownership has been being a kinds of ownership structure have recently become importantand common

To fulfill these gaps, the research used data from 161 non-financial listed firms on HOSE

in Vietnam during the period 2009–2014 and employed pooled ordinary least squares,random effects and fixed effects regression methods, and the dynamic panel generalizedmethod of moments for analyzing data to examine the linkage between foreign ownershipand capital structure in Viet Nam Although various approaches were applied, all resultswere consistent

Additionally, foreign owners with experience, knowledge and incentives can help firms toreduce agency costs of equity through actively monitoring the management This researchalso supports the argument that one of the greatest concerns of managers is to retain orincrease their control because it provides them with discretion in making decisions oraccessing their private benefits

LIST OF ABBREVITION

Characters

Meanings

CFO Chief financial officer

DOL Degree of operating leverage

EBIT Earnings before interest and taxes

FDI Foreign direct investment

FEM / FE Fixed effects model

FII Foreign institutional investor

FTA Free trade agreement

GDP Gross domestic product

HOSE HoChiMinh Stock Exchange

IMF International Monetary Fund

NPLs Non-performing loans

PPMC Pearson Product – Moment Correlation

REM / RE Random effects model

ROA Return on asset/ profitability

SMEs Small and medium-sized enterprises

SOEs State-owned enterprises

TPA Trans -Pacific Partnership Agreement

VCCI Vietnam Chamber of Commerce and Industry

WTO World Trade Organization

LIST OF TABLES AND FIGURES

LIST OF TABLES

Table 1 Net inflow portfolio equity of foreign investors (USD million) 13

Table 4 Descriptive Statistics of foreign ownership, capital structure and

Table 5 Correlation coefficients between measures of foreign ownership and

bool leverage ratio

54

Table 6 Correlation coefficients between measures of ownership structure and

market leverage ratio

Table 10 The effect of foreign ownership on capital structure – Fixed effect

regression with robust standard error 59

Table 11 Systematic time-lagged regressions of impact of foreign ownership

on capital structure of firms listed on HOSE 64

LIST OF FIGURES

Figure 3 The effect of foreign ownership on capital structure - MLEV 33

Figure 4 The effect of foreign ownership on capital structure - BLEV 34

Figure 5 Four steps in the deductive approach research 42

Figure 6 Research progress 44

Figure 7 Panel data analysis’s conceptual framework 50

CHAPTER 1: INTRODUCTION

1.1 Research background

In the world of increasing globalization, foreign investment is a trend for all companiesover the world Being a strongly emerging developing economy, Vietnam has become anattractive market for investment inflows As a matter of fact, there has been a growingoverseas cash flow into the country In recent years, foreign investment in the industrialsector in Vietnam has established the development and promoting economic growth.Moreover, to be keep pace with the borderless trade as well as pave the way for foreignfunds into domestic companies, Vietnam government has enacted The Law of ForeignInvestment in Vietnam since 1987 Up to now, the law has been amended many times andthe latest amendment is in the beginning of 2014 to extend the maximum rate of foreignownership in domestic commercial bank From this, it is indicated that foreign investmentnot only contributes to the process of integration with the world economy of Vietnam butalso plays a very important role for our country's economy Most of the Vietnamenterprises previously are owned by the state and dependent on the funding from thegovernment However, in the context of economic reform from the mid 80’s onwards, anumber of enterprises were privatized and rapidly developed with the diversity inownership structure such as private ownership, foreign ownership and joint-stockcompanies That is reflected by strong economic growth, the participation in the WorldTrade Organization (WTO - 2007) as well as Trans-Pacific Partnership Agreement and theestablishment of Vietnam stock exchange market in 2000 The prosperity of corporationsdepends greatly on the access to appropriate source of capital such as debt or equity, aswell as determining the optimal capital structure Upon the advancement, Vietnam though

is in lack of the diversity of financial channels and empirical researches which areconsistent with the reality of capital structure so that they can support enterprises to makeappropriate financing decisions

1.2 An overview about foreign ownership in Vietnam

1.2.1 Vietnamese listed firms

The number of listed firms has been increasing noticeably since 2000 Specifically, on thefirst trading day, only two stocks with a total market capitalization of USD 27.95 millionwere listed In the next five years, the growth by number of listed companies was ratherslow However, the situation changed quickly in the period 2006–2013 The number oflisted companies increased sharply from 193 in 2006 to 696 in 2013 (HoChiMinh StockExchange [HOSE] 2013)

An examination of the ownership structure of listed firms reveals that, although theproportion of shares owned by foreign investors in Vietnam is limited to 49% by law(Robinson 2012), this ownership is an essential part of the ownership structure in listedfirms in Vietnam In terms of state ownership, through the privatization programs, theaverage of state ownership dramatically decreased; however, state ownership still accountsfor a significant proportion of listed Vietnamese firms Another point is that the percentage

of foreign and state ownership varies considerably from industry to industry, and from firm

to firm Foreign ownership is significantly higher in healthcare, oil, gas and technology,which also have high performance in both accounting and market value Hence, questionscan be raised regarding whether relationships exist among ownership structure and capitalstructure

1.2.2 Foreign investment in Vietnamese stock market

During the global financial crisis of 2008, the net foreign inflow into the Vietnam equitymarket decreased sharply before recovering in recent years The net foreign portfolioinflow was higher than those of Indonesia, Thailand and Philippines, reaching USD 1.3billion in 2013 (see Table 1) The Vietnam stock market is becoming more and more of anattractive investment channel for foreign investors, and the market expectation is forcontinued growth in foreign portfolio investment inflows in the future This can beexplained by the fact that Vietnam is an emerging market with a high growth rate and thatthe Vietnamese firms are undervalued and considered cheap compared with their regionalpeers in Asia (Rong Viet Securities 2011, 2014)

Table 1: Net inflow portfolio equity of foreign investors (USD million)

(Source: http://data.worldbank.org.indicator)

Among the over one million investors in the Vietnam stock market, foreign investorsaccount for a modest number, around 1% to 2% of total investors However, foreigninvestors play an important role through their trading activities Their volume of markettrading occupied 15% of the HOSE market in the period from 2011 to 2013 (HOSE 2012,2013)

Year Foreign Trading volume Total Trading

Regarding the financial market, although the Vietnamese banking sector has diversified interms of type, size and ownership in recent years, the industry is still concentrated in fourSOCBs, which occupied nearly 50% of the total loan and deposit market in 2013 (VPBankSecurities 2014; VCCI 2013) A noticeable point is that nearly one-third of bank loans isdistributed to SOEs, whereas SOEs account for only around 1% of registered firms Inaddition, SOEs normally have a higher debt ratio than non-state and foreign firms, whiletheir returns are lower and 70% of NPLs of the bank sector were to SOEs in 2012(VPBank Securities 2014) Therefore, this suggests that a firm’s ownership structure mayaffect its ability to access bank loans.

Similarly, Vietnam’s bond market is still dominated by entities that to some extent have arelationship with the state or national government A majority in both number and size ofbonds are issued or guaranteed by the government Only some large joint-stock companiesare able to raise funds by issuing bonds The dominance of SOEs and large corporations inthe corporate bond market may affect SMEs’ ability to access this debt financing option

Vietnamese stock markets have been developing gradually and becoming an importantfinancing channel for corporations The markets are becoming more and more of anattractive investment channel for foreign investors and are expected to gain strongerforeign portfolio investment inflows in the future In addition, it is observed that foreignownership in listed firms is increasing significantly, and increasingly playing an importantrole in listed firms’ performance

1.3 Research questions

The purpose of this research is to study the impact of foreign ownership on the capitalstructure of firms listed on Ho Chi Minh Stock Exchange Authors generate ideas from theresearch question:

Does foreign ownership influence the capital structure of firms listed on HCM StockExchange?

How does foreign ownership affect the capital structure of companies listed on HCM StockExchange?

1.4 Research Objectives

This study pays much attention on investigating the influence of foreign ownership overfinancial leverage Thus, the main objects of the study are

 Clarify the relationship between foreign ownership and capital structure of firms

 To give recommendation about the relationship between foreign ownership and capitalstructure

However, besides foreign ownership, in order to reduce the bias of other factors on theleverage, we also focus on utilize six more variables which are hypothesized to haverelationship with leverage Finally, the best reasonable model would be found

Chapter 2: Literature review

Review all the literature which related to the research questions, preceding relevantresearch and selected theoretical models

Chapter 5: Discussion and recommendation

Present the relevance of answer and recommendations

1.9 Limitation

The research analyzing only based on the data of Ho Chi Minh Stock Exchange, therefore

it cannot reflect the comprehensive outcome and accurate appraisal for whole firms inUPCOM and HNX

Secondly, due to the lack of time for researching, the limited of education and this studyinvestigate the period of five years from 2010 to 2014 Thus, the findings are collectedcannot illustrate clearly and reliable about the impact of foreign investment on capitalstructure

Last but not least, according to theoretically, the variables are independent By contrast inreal life, there are still a relationship between these variables, so some results would havebias effect

1.10 Conclusion

Thanks to the result the political and economic reform, Viet Nam has begun to growrapidly and constitute a large and important role in South-East Asian market Recently,Viet Nam has seen a high growth rates in its GDP, hits five-year high of 6.68% (Office,2015)

Vietnam has had witnessed a high growth rate in its GDP in few recent years andbecoming one of the developing Asian countries that achieved a high growth rate ineconomic Besides Viet Nam also an attractive place for FDI investment thanks to thesupport of many FTA such as TPA, AEC, etc The Vietnam’s economy also has a goodfortune due to strong export performance when compared with other ASEAN countries(Viet Capital Securities 2011) and the profitability expectations of its top firms (GrantThornton 2011)

In addition, the stock market of Viet Nam has been growing gradually and becoming theimportant financing channel for many firms Thanks to some policies and free tradeagreements, the markets are becoming more and more an attractive investment channel forforeign investors Moreover, institutes are expected to gain stronger foreign portfolioinvestment inflows in the future The clearly evidence was given that the value ofinvestment by foreigners in Vietnam stock market so far in 2015 was a net $135.5-millionaccording to Bloomberg data and it will rise significantly with the new regulation (Gulfs-time)

Ultimately, it is reported that foreign ownership in listed firms is growing rapidly, stronglyand occupy more and more important role in listed company structure

CHAPTER 2: LITERATURE REVIEW AND THEORETICAL MODEL

2.1 Introduction

The aim of this chapter is the literature review on the ownership and capital structure, inparticular, the influence of ownership structure on leverage as well as of leverage on firmperformance Agency theory is widely in order to explain the relationship of capitalstructure with ownership structure It states that the structure of ownership can influencesagency costs and subsequently affects capital structure decisions [ CITATION Jen761 \l

1033 ] Meckling and Jensen (1976) claimed that there are two different types of agencycosts The first type is the costs of equity caused by the conflict among shareholders andmanagers Secondly, as the conflict of debt holders and equity holders create the costs ofdebt Managers are widely responsible for their decisions; nevertheless, they do not gainfully from their profit activities Therefore, managers may choose a capital structure offirm to pursue their own interests instead of those of shareholders or debt holders Thistheory also suggests that outside ownership through a monitoring mechanism couldmitigate the conflict between managers and shareholders It implies that different types ofownership could have different effects on the firm’s capital structure decisions

Modigliani-Miller (MM) theory[ CITATION Mod58 \l 1033 ] posits that firm value is notinfluenced by its capital structure However, this theory is based on restrictive assumptions

of a perfect capital market that does not exist in the real world To account for an imperfectmarket, the four main theories that have been suggested as alternatives to MM theory aretradeoff, pecking order, market timing and agency theory The theory of trade-off notedthat a company will trade off cost and benefit of debt to maximize the value of firm Thedebt primarily benefit comes from the tax shield of reducing income through payinginterest (Miller, MH & Modigliani, 1963) The cost of debt is derived from indirecttogether with direct bankruptcy costs through the increase in financial risk (Kim, WS &Sorensen, 1986) (Kraus, A & Litzenberger, 1973) The theory of pecking order (MyersS.C and Majluf N., 1984) (Ross, 1977) proposes that financing follows hierarchy: first ofall is using internal financing, then issuing debt, and equity is issued while no more debtcan be approach The theory of agency cost, developed by (Jensen, M and W H

Meckling, 1976) (Jensen, 1986) and (Hart, O & Moore, 1994), contends that there aretarget conflicts among debt holders, managers, shareholders and an optimal capita structure

to maximize value of firm which helps to minimize total agency costs The last is themarket timing theory This theory describes how firms and corporations in the economydecide whether to finance their investment with equity or with debt instruments (Marsh1982) (Grahan and Harvey 2001)

2.2 Relevant Concepts

2.2.1 Capital Structure

[ CITATION Rou15 \l 1033 ] Capital structure refers to the mix of a firm’s debt andequity’s financing, such as debentures, preference share capital and equity share capitalincluding retained earnings Capital structure is one of the most complex areas of financialdecision making because of its interrelationship with other financial decision variables

Capital structure is the way a firm raising capital to support its operations and futuregrowth by using composition of debt and equity Debt financing and equity financing aretwo main capital sources in business Firms issue more debt bear high risk An optimalcapital structure should be the balance of debt and equity Debt can be classified as longterm debt and short term debt, long term debt includes bonds, long term loan and long-termnotes payable Short term debt consists short term bank loan and account payable Equitycapital usually consist common stock, preferred stock and retained earnings Most firmsemploy the combination of debt and equity to finance their assets to minimize costs ofcapital The formed capital structure is usually referred as leverage

2.2.2 Ownership Structure

The structure of ownership contains a various of definitions Meckling with Jensen (1976)classified this structure in terms of capital contributions that comprise of outsideshareholders (debt holder and equity holder) as well as inside investors (manager)

[ CITATION Raj91 \l 1033 ]Chaganti and Damanpour claimed there are two ways ofclassifying ownership The first distinguishes between those who directly affect firmdecisions and activities—a situation that is called ‘involvement’—and those who do not,which is called ‘detachment’ The second way distinguishes firms that have stocksconcentrated with some shareholders, which is called ‘concentration’, and firms whose

stocks are dispersed to many shareholders, called ‘dispersion’ The crossing of these twoclassifications creates four kinds of ownership: concentrated–involved, concentrated–detached, dispersed– involved and dispersed–detached A point worth noting is thatshareholders whose ownership are more involved and concentrated have a strong influence

on firm performance

[ CITATION Abe10 \l 1033 ] Abel Ebel and Okafor categorized structure of ownership asthe shares percentage which are held by government (state ownership), institution(institutional ownership), managers (managerial ownership), and family (familyownership), foreign investors (foreign ownership), etc [ CITATION Faz11 \l 1033 ]Fazlzadeh stated that this structure has both implications: identity of ownershipconcentration and owners, that is, the complementation of shares owned by managinginvestors

2.3 Review of theories

In general, there are many ways for a firm generating fund for its operation as well asbusiness projects Concerning the source, financing activities are divided into internalfunds and external channels

When the chief financial officer considers raising capital for company, the first source isinternal source which comes from retained earnings That is profit after tax of thecorporation accumulated from year to year Thus, utilizing the available capital isadvantageous because of its low cost The company does not bear the interest for creditors

or pay out the dividend for shareholders

Regarding the external sources, borrowing and equity are two main ways for financing.The former means loans from outside while the other refers to sell shares includingcommon stocks or preferred stocks to get investment for the company However, each type

of source has its own benefit and risk

As borrowing money, the company commits to pay an amount of interest periodically andmake principle repayment at maturity However, the paid interest is tax deductible,resulting in lower cost of capital Lenders get their fixed return and have no additionalincome if the project is successful and money – making In other hand, there are some riskssuch as lower liquidity ratios and higher solvency indexes That is disadvantageous for the

firm due to higher cost of borrowing In addition, the amount of borrowings is in priority topay back in circumstance of bankruptcy.

Notwithstanding, companies have limited liability It means that the promise to repay theprinciple is not always kept If the firm is in deep water, it is allowed to default on debt andtransfer their assets to the creditors

In addition, there exists a kind of debt that can be converted into equity called convertiblebond This kind of bond provides its owner the option in order to transfer to a fixed number

of shares When company’s share price increases significantly, the bond may be converted

to get profit Conversely as the stock price falls, there is no obligation to turn the bond intoequity Owing to that privilege the convertible bond is sold at a higher price or enjoys alower interest rate than ordinary ones

As a matter of fact, a company chooses to issue stocks for fundraising means selling itsownership Unlike debt, there are no principle and no interest while dividend is paid outaccording to corporate policy, business profitability and type of share Yet, paid dividend isnot allowed to deduct from taxable income since it is calculated as an after tax payment

As known, the firm’s net worth is a sum of common stocks and preferred stocks Althoughpreferred equity is considered to be less important than the other, there are certainparticular situations in which it is a useful financing method such as merging with othercorporation Like debt, there is a predetermined payment of return regardless of the annualcompany bottom line and discretion of managers The company has rights not to pay thedividend but no dividend on common shares is paid until that on preferred stocks is settled

If the firm goes bankruptcy, the preferred stock holders take priority over the commonshare holder but queue after the lenders Moreover, it is not allowed to deduct dividends onpreferred share from taxable income, which is one of the dominant deterrents for industrialcompanies to issue preferred [ CITATION Bre00 \l 1033 ]

Other distinguishing character of preferred stock is limited voting rights This is favorablemethod for company to do financing without distributing control with new stake holders

By and large, the combination between debt and equity that a company utilizes to raisecapital for their operation is capital structure The financial manager is responsible formitigating the costs of capital as well as maximizing the company value by choosing aproper capital structure

However, principle–agent problem is worthy to consider The conflict interest betweenowners and managers often has impact on the financing decision Also, the announcement

of new share issued sends a bad signal to public about the profitability of businessactivities While borrowings and debt certificate issuance confirm the confidence inprojects of company managers Besides high financial leverage is too risky because thegreat amount of interest payment will erode the bottom line This causes negative effect onfinancial situation of the company such as liquidity, solvency and valuation ratios

The theory of the Miller’s and Modigliani (1958) “Irrelevance theory of capital structure”paved the way for other models of financial leverage of economists (Modigliani, F., andMiller, M.H, 1958)

Capital structure is defined as dominant controversies of scholars in modern corporatefinance in the latter half of 20th century Up to now, there are four additional widelyacknowledged theories, which from the assumption of perfect market applied byModigliani and Miller, are divergent Firstly, the theory of trade-off anticipates thatcompanies trade off the gain and charge of debt and equity financing together with findingout an “optimal” capital structure when accounting for market imperfections includingbankruptcy costs, taxes and agency spending Other is the theory of pecking order (MyersS.C and Majluf N., 1984) which defends that firms apply a financing hierarchy tominimize the information asymmetry problems among the outsider’s shareholders and thefirm’s managers-insiders

In addition, in 1976, Jensen and Meckling developed a research about agency cost theorywhich has impact on corporate capital structure That explains the conflict interest ofprinciple – agent resulting in the cost for firm to adjust the deviation between two partiesincluding manager – equity holder and debt holder – share holder

Recently, (Baker M and Wurgler J., 2002) have suggested a current capital structuretheory called the “capital structure market timing theory” This hypothesis announces that

to time the equity market, new structure of capital is the additive final result of pastattempts Market timing expresses that companies issue new shares since they areovervalued as well as buy bac shares if they estimate these are underestimated By others,that issuing behavior was well established already In contrary, Wurgler and Baker showthat the influence on capital structure of market timing is extremely persistent

2.3.1 The Modigliani and Miller theory

The modern corporate finance’s theory is pioneered by the research of Modigliani andMiller (1958) about the irrelevant proposition of capital Modigliani and Miller have tolearn about the details of increasing or decreasing capital as a firm borrowing increase ordecrease Proving a feasible theory, Modigliani and Miller initially hold some assumptions

in financial theory as followings:

• Perfect competition in capital markets

• Investors have identical expectation

• Borrowing and lending with low risk

• No agency cost

• Investment decisions are unaffected by financial decisions

Modigliani and Miller (MM) theory includes the first proposition which proves the firm’svalue is unaffected by the capital structure and also the second proposition which explainsincreasing in the cost of equity as a firm increases the proportion of debt financing Bothpropositions are assumed to be excluded from taxes (Source: Modigliani and Miller, 1958)

Figure 1: The Modiglinani and Miller (MM) theory

That research is successively both controversy and clarity As the problem of theory, thecapital structure which is irrelevant can be demonstrate through restrictive assumptions

This paper encouraged considerable research that commit to relaxing the inappropriateness

as an empirical matter or matter of theory also The research has indicated that theModigliani & Miller’s theory fails under various circumstances Transaction costs, agencyconflicts, taxes, lack of separability between operations and financing, investor clienteffects, time-varying financial market opportunities, bankruptcy costs, adverse selectionare elements which are used generally Other factors from this list were employed byalternative model With the variety in ingredients, there are many different theories hasbeen advanced It is beyond the scope of this paper to cover all these

2.3.2 The tradeoff theory

By different authors, the term trade-off theory is applied to give a description about afamily of related theories In that, decision makers managing a company evaluate thevariety costs and benefits of alternative leverage agendas It is showed that an insidesuggestion is received, then marginal cost with benefit are equaled

The first kind of this theory developed out of the argumentation over the Modigliani-Millertheorem Adding corporate income taxes to original irrelevance, it made a welfare for debtand worked for shield earnings from taxes When there is no offsetting debt cost and thecompany objective function is linear, it implied 100% liability financing

Some characteristic of Myers’ explanation of the exchange deserve explanation First offall, its goal is no noticeable directly It might be attributed from evidence but still relies onadding a framework Furthermore, different articles use that frame in various steps Next,

by the theory, there is much more multiplex tax code than being supposed Sincedepending on included tax code features, the different final decisions considering the goalcan be got Thirdly, the cost of bankruptcy defined as deadweight cost more than transferfrom a claimant to another and the costs nature are also special Next, the expenses oftransaction need to take a particular form for the analysis in order to act When theimprovement is larger, the adjustment marginal costs have to raise for alternation the to bestep by step rather than abrupt

When accumulated retained earnings are invested to opportunities which are not reallygood, the BOD may take detrimental actions to the interests of the owners and bringingparticular benefits for themselves A typical example is the board of directors may usesurplus funds to implement the non- acquisition - merger which does not bring value to thecompany, aiming to increase power and their paychecks Or the board might spend a

wasteful or inefficient cumulative value of the owner Michael Jensen (1986) emphasizes:

"The problem is how to pay for the board of directors instead of the lower capital costinvestment or squandered them in the inefficient operation “

Conversely, capital structure employs a lot of debt, with fixed interest payment andprincipal repayment putting pressure on the management of BOD in more effective waythan the company's cash flow That helps regulate the BOD avoiding risky investment,improving in its performance and minimizing conflicts of interest between managers andshareowners

Static trade-off theory

The mentioned theory affirms that companies have best structures of capital, which arefound by interchange the cost against the benefit from the utility of equity and debt Theadvantage of debts tax shield is one of the strong point of debt using By contrast, oneweak point of debt is the potential financial distress cost, especially since a firm depends

on liability a lot

They lead to an exchange already between the tax shield and much more financial distressrisks However, there are more costs and profits included with the benefit of equitytogether with debt

Figure 2: The capital structure (Source: The capital structure puzzle, Myers, 1984)

The other significant cost factor involves agency cost These cost stems from battles ofinterest among the various stakeholders of a company and due to ex-post asymmetric data(Jensen and Meckling (1976) and Jensen (1986)) (Jensen, M and W.H Meckling, 1976).Therefore, incorporate agency costs into the trade-off theory static means that a firmdiscovers its structure of capital by interchange the advantage of debt tax against thefinancial cost distress of large amount debt and the debt cost against the agency equitycost Another function was recommended under the tradeoff holism, then this leads to far

to discuss them all Hence, these discussions end with the declaration that a valuableforecast is that one company sets goal with its capital structure, i.e When the existentleverage ratio departs from the optimal, a company may naturalize the behavior by asolution that delivers leverage rate back to original level

The Dynamic Trade-off Theory

The time role requests to specify a variety of features which are typically rejected and isrecognized by constructing models in single-period system Particularly, the noticeablepoints are the functions of adjustment versus expectation cost In this dynamic theory, aright financial conclusion regularly relies on the margin that the corporate expects in thefollowing period Several organizes willing to pay out funds at that time, while otherschoose raising money If fund is increased, it might take the form of equities or debts.Finally, firms under takes a collection of those actions

Stiglitz (1973) was a special predecessor to modern the theory of dynamic trade-off, whochecks over the taxation influences from a public financing orientation As companiesrespond to adverse dazes contiguously by balancing costless again; companies conversehigh levels of debt to take tax savings pros

To the next period, the models of dynamic trade-off could be applied to identify theoptions values inserted in departing leverage selections Goldstein et al (2001) observedthat firms with not high leverage nowadays might have the consequent option to makeleverage grew up By those assumption, that option in the future is served in order todecrease the otherwise leverage optimal level it the current time Again, due to transactioncosts, if corporates optimally finance in periodical manner, the liability ratio of most oforganizes will turn from the optimum nearly all the period In this theory, the leverage offirm answers more about long-run value change and less about short-run equity fluctuation

Overall, a definite idea is fairly in dynamic trade-off models In the future, the financialoptimal today choice relies on what is trusted to be optimal Furthermore, it might be thebest to pay them out or to raise money When new funds are increased, it can be important

to increase them in the frame of equity or debt In each situation, the pertinent examinationfor the company in the current time will be helped to pin down by what are estimated to bethe best in the following period

2.3.3 The pecking order theory

The pecking order theory is essentially depending on the great concern about asymmetricinformation that affect the investment decisions and financial decisions of the business.Because management board knows more future information than the external investors sothe new investor will require a high discount in time firm issue stocks It brings about thecost of external financial sources become more expensive As a result, when enterprisesneed equity capital, they usually use the source of internal funds first (company retainedtheir profits), next is bonds and the last option is issuing new shares capital

The research of Myers and Majluf (1984) has shown that the financial trends of behavioraldeviation stems from asymmetric information It is clear that their analysis has two mainpoints Firstly, the cost of the new release depends on external financing It includesmanagement costs, insurance costs and the cost under the price of the new shares All thesethings make the administrators consider issuing new share When the current net value ofstock higher than net present value of investment activities, the benefit form the new sharesrelease must be guaranteed Secondly, the facilitation of the issuance debt must be greaterthan issuing equity capital

Based on the study by Ross (1977) and Myers (1984), the pecking order theory explainsthe different debt ratios between companies in a sector Furthermore, asymmetricinformation makes investors always think they know little information than the chieffinancial officer (CFO) about the prospects, potential and value of the company Therefore,they always act to protect themselves in the market by the direction that alwaysundervalued newly issued shares, increase or reduction in dividends and high valuationwith shares, increasing the dividend payout ratio or debt (Frank and Goyal 2007).Enterprises issuing debt securities or equity securities usually follow the trend of priority

as internal financing, mainly retained earnings, then the issuance of debt and finally whenthe funding sources have been exhausted, it released new capital stock If enterprises

comply with the pecking order theory, the firms will not have the optimal capital structureand will prioritize the use of the internal funding.

2.3.4 The agency cost of theory

An additional study on capital structure is the theory of agency cost which was created by(Jensen, M and W H Meckling, 1976) They came up with a new explanation which isdeviated from the M& M assumption Moreover, this costs are associated with theseparation of owners and management Managers do not have ownership in a firm so theyare less likely to act at the shareholders’ best interest but their own well-being As beingaware of the risk, stake holders take actions to alleviate the costs The appearance of amechanism to address the difference in interest caused the agency cost There are threecomponents of agency costs:

• Monitoring costs by the principle are the expense incurred to supervise the performance

of managers as well as make reports to stake holders and pay salary to board of directors

• Bonding costs by the agent are the expense incurred by management to ensure themanagers are acting at shareholder’s best interest

• Residual loss occurred as a loss of owners’ well-being due to a divergence in the agent’sdecision

In the research, it is implied that strong corporate governance will reduce the agency cost.After that, these costs increase the equity cost and decrease the firm value Also, it issuggested that the higher the use of debts relative to equites, the greater the monitoring cost

of firm and, hence, the lower the cost of equities

Apart from the divergent interest between manager and shareholder, the agent principleproblem is also about the conflict of benefit between debt holders and equity holders

2.3.5 The market timing theory

According to the market timing theory, the low-debt enterprises have tendency to increasecapital when the value of their money is high, on the contrary, the high-debt companiesincline to advance capital when value of their money is low Nearly all the capital structure

as a result of successive attempts to adjust the stock market The market timing theory isnot with an optimal capital structure so that the financial decisions adjust more to themarket that constitute capital structure over time

In the study by Marsh (1982) provide the evidence that selecting the British firm is issuingnew debt and new equity It can be explained by the fluctuation of the stock price on themarket in the previous period In the research of Graham and Harvey (2001), the financialexecutives conceded that they are trying to be involved in the stock market at the righttime Moreover, two-thirds of them said that issuing or purchasing shares usually depends

on the value of corporate shares which are undervalued or overvalued compared with thevalue of that shares For the study, the problem is really important to consider the fundingdecision Banker and Wurgler (2002) concluded that the capital structure is the cumulativerevenue released through the past attempts to enter the equity market Welch (2004) alsoclaimed that shocks in the stock price creates a lasting effect in the capital structure andfunding decisions of the business If a company intends to release a new common stockwhen stock market values fall below book value Welch also presented that the firm haveaction as opposed to actual market conditions and expectations of person to enter themarket which aims to rebalance the capital structure towards the target capital structure

2.4 Review of empirical studies

In emerging markets, because of booming foreign investment inflow, the influence offoreign investors on firms’ activities is increasing (Vo 2011); however, little research hasbeen conducted using a detailed dataset to examine the link between foreign ownership andthe capital structure decisions of a firm Most studies in this area posit that there is anegative relationship between foreign ownership and debt level, except for the studies ofZou and Xiao (2006) and Gurunlu and Gursoy (2010) These studies hypothesized apositive effect of foreign ownership on capital structure; nevertheless, contrary to theirpredictions, their study findings indicate a negative association between foreign ownershipand capital structure

(Vo 2011) This paper investigates foreign ownership in the Vietnam stock market from

2007 to 2009 employing a rich and detailed dataset From the perspective of informationalasymmetry, the paper examines the relationship between the foreign ownership level andattributes of Vietnamese listed firm in Ho Chi Minh City Stock Exchange The findings ofthe paper indicate that foreign investors have preference for large firms, firms with highbook-to-market ratio and firms with low leverage

More specifically, Zou and Xiao (2006) believed that in emerging markets foreigninvestors normally face more severe information asymmetry than other investors and that

foreign investors often have a diversified portfolio in which the percentage of shareholding

in each firm is generally low Therefore, the power of foreign investors to monitormanagement is not sufficient, forcing firms to use more debt as a further managementmonitoring mechanism Nonetheless, in their investigation of the financing behavior ofChinese public listed companies from 1997 to 2000, Zou and Xiao (2006) did not find asignificant influence of foreign ownership on capital structure

Li, Yue and Zhao (2009), conducting research in non-publicly traded Chinese firms from2000-2014, found that foreign ownership, measured as the fraction of ownership by foreigninvestors, is negatively related to all measures of leverage, including total debt, short-termdebt and long-term debt divided by total assets This result was explained by two factors.First, firms with high foreign ownership have more diversified financing channels toaccess capital than others because of their reputations and relationships Second, in China,foreign-owned firms normally have lower corporate tax rates than others; therefore, theytend to use less debt because of the low of tax-shield saving

Gurunlu and Gursoy (2010) contended that foreign investors normally suffer more types ofrisks, including country risk, currency risk and business risk, than domestic investors As aresult, foreign investors are motived to minimize their risk by influencing the operations offirms in which they have invested through bringing not only their capital but also theirtechnology and ability to access new capital markets Therefore, it was expected that firmswith high foreign ownership could use more debt because foreign investors help them toaccess more and cheaper debt from new creditors However, when testing the effect offoreign ownership on capital structure using multivariate regression analysis with a dataset

of 143 non-financial firms listed on the Istanbul Stock Exchange from 2007 to 2008,Gurunlu and Gursoy (2010) found that foreign ownership (percentage of shares owned byforeign shareholders) is significantly negatively related to long-term leverage Theyexplained this result by a reason that the need for external financing like debt of firms withhigh foreign ownership decreases due to the equity contribution from foreign investors

Huang, Lin and Huang (2011), investigating Chinese listed firms in the period from 2002

to 2005, reached the same outcome as Li, Yue and Zhao (2009); nevertheless, theyexplained that foreign owners, which are mainly institutional investors, have considerableexperience in monitoring managers Specifically, institutional or foreign investors havebetter access to information and better knowledge for interpreting this information on firm

performance (Al-Najjar & Taylor 2008) As a result, foreign ownership helps to control theoverinvestment problem of managers or reduces the agency cost between managers andshareholders Therefore, foreign ownership and leverage may serve as substitutes incontrolling managerial self-interest (Moon 2001)

An alternative view that leads to a similar conclusion is that there is a negative signal infirms with a high debt level because these firms could face financial difficulties in thefuture (Tong & Ning 2004) Therefore, foreign investors prefer firms with a low debt ratio.Consequently, it is widely agreed that firms with high foreign ownership tend to use lessdebt The research specifically analyzes how ownership has affected on capital structure ofselected manufacturing companies listed on Colombo Stock Exchange during the period

2009 -2011 The study employed mean analysis, correlation analysis and multipleregression models to find the conclusion Based on the panel data methodology, empiricalresults show that a few number of shareholders have a larger share holding (70% shareholdings on manufacturing companies)

Aroob S Tamim (2011) examined the effects of foreign ownership on capital structure inthe emerging economies context This research also employed panel data analysis for aunique set of non-financial (services and industrial) firms listed on Amman StockExchange (ASE) over the period from2005 to 2009 It provided empirical evidenceindicating that foreign ownership is significantly negatively related to total leverage based

on book value of assets and short-term leverage based on each of book value of assets andmarket value of equity, demonstrating that firms with foreign shareholdings are becomingless reliant on external cash financing The results show that capital structure is affected byfirm’s size, profitability and liquidity

In contrast, there is a perspective that foreign shareholding can impose a positive influence

on debt borrowing (Hussain and Nivorozhkin, 1997) This research examines the capitalstructure of listed firms in Poland during the early years of the establishment of WarsawStock Exchange from 1991 to 1994 Firms with foreign ownership perform better thanfirms with domestic ownership In this context, Hussain and Nivorozhkin (1997) affirmthat foreign owned firms on average exhibit a significant higher debt ratio than theirdomestically owned counterparts in the host country

The research of N.Sivathaasan (2013) specifically analyzes how ownership has affected oncapital structure of selected manufacturing companies listed on Colombo Stock Exchange

during the period 2009 -2011 This research also found out how share holdings of foreignand domestic holders are distributed among different portfolio sizes Correlation analysisindicates a strong positive relationship between foreign ownership and leverage But, thisassociation is insignificant This finding is consistent with Hussain and Nivorozhkin(1997), indicating foreign shareholding can impose a positive influence on debt borrowing.

2.5 Literature gap

There are several studies that have focused on diverse linkages of foreign ownership andcapital structure; however, some limitations still exist There are some gaps in theirresearch

Apparently, most previous studies have paid their attention on the impacts of foreigninvestment on firm structure, but there is a lack of research about its influence on decisions

of financing Theoretically, the relationship between foreign ownership and capitalstructure has been established, but there are only a few empirical studies have examinedthis linkage, especially in developing countries such as Viet Nam Therefore, there islimited anecdotal empirical evidence on the influence of foreign ownership on capitalstructure, especially in developing countries likes Viet Nam In fact, with the sharpincrease in globalization and foreign investment, equitization process in Viet Nam, foreignownership has been being a kinds of ownership structure have recently become importantand common

To fulfill these gaps, the research used data from 161 non-financial listed firms on HOSE

in Vietnam during the period 2010–2014 and employed pooled ordinary least squares,random effects and fixed effects regression methods, and the dynamic panel generalizedmethod of moments for analyzing data to examine the linkage between foreign ownershipand capital structure in Viet Nam Although various approaches were applied, all resultswere consistent

2.6 Theoretical model and hypotheses development

2.6.1 Selected theoretical model

In this research, the group used the model of Meltem Gurunlu and Güner Gursoy (2010) as

a reference to build up a theoretical model, BLEV and MLEV play a role of independent

variables while other factors, foreign ownership (FO) as the primary explanatory variableand other variables such as SIZE, ROA, DOL, TNG, CAPEX, LIQ as control variables.

Figure 3: The effect of foreign ownership on capital structure - MLEV

(Source: The influence of Foreign ownership on Capital structure of Non-financial firms:

Evidence from Istanbul Stock Exchange)

Figure 4: The effect of foreign ownership on capital structure – BLEV

(Source: The influence of Foreign ownership on Capital structure of Non-financial firms:

Evidence from Istanbul Stock Exchange)

2.6.2 Variable description

2.6.2.1 Dependent variables

In the literature review of the capital structure, it is investigated to have used manydefinitions to define the leverage, which embracing the total liabilities to total assets (Li,2009), long term debt to total assets (Bhabra 2008; Zou & Xiao 2006) and total debt tototal assets [ CITATION Ber97 \l 1033 ]( Harvey 2004) This research uses the total debt

to total assets ratio for the main result explanation

This ratio evaluates the interest of shareholders in liquidation According to Rajan andZingales 1995, the total liability such as account payable, which purpose is used fortransaction not financing Hence, this index has a tend to overstate the level of leverage

Leverage is the rate between debt and total assets of the company It indicates thepercentage of debt in total assets When the firm faces liquidation this ratio could alsowork for measuring the level of level of protection for creditors As leverage is high showsthat a firm takes competitive strategy for investing its long-term growth by issuing debt.Due to the increasing interest expense, this raises earning volatility of a company

In the dependent variables, there are two main measures of capital structure including bookleverage and market leverage when book leverage is the ratio of debt and book value ofassets which reflects assets already in place, on the other hand, with market leverage which

is accounted for by not yet in place assets (i.e by the present value of future growthopportunities) [ CITATION Mye77 \l 1033 ]

Despite of book leverage, market leverage is forward looking, by this rate, it reflects futurepredictions (Frank and Goyal, 2009) Koller et al (2010) present that if market leveragewas extremely high in combination with strong current interest coverage, it shows thepossibility of future risks in sustaining current debt levels Sub measures of both leverageinvolve those based on total as well as liabilities To calculate the book leverage measure,find out the ratio of total liabilities divided by the summation of total liabilities and bookvalue of assets Besides that, market leverage measures are made as a rate of total liabilitiesdivided by the summation of total liabilities and market value of equity

Totalliabilities + Book value of total equity

Totalliabilities +M arket value of total equity

2.6.2.2 Independent variables

2.6.2.2.1 Primary explanatory variable

Foreign Ownership (FO)

The main explanatory variable which this research aims to investigate is foreign ownership(FO) For the final results, foreign ownership is defined as the proportion of shares owned

by foreign shareholders It refers to the complete or partial ownership/ control of a business

in a country by individuals who are not citizens belonged to that place, or by companies

whose headquarter are in common According to Clause 5 Article 3 of Investment Law

2005, foreign investors are organizations and individuals to make capital investment inVietnam This investment is classified into two different types including foreign directinvestment (FDI) and foreign indirect investment

Based on Clause 2 Article 3 of Investment Law 2005, FDI is a form of investment in whichinvestors provide capital and join in the investment management activities While FII is aform of investment through the purchase of shares, stocks, bonds and other valuable paper,securities and investment funds through financial institutions in which intermediateinvestors are not involved in those activities directly

FO=The number of shares hold by FO/total shares

H1: There is a negative relationship between the proportion of ownership held by foreign ownership (FO) and Book Leverage (BLEV)

H2: There is a negative relationship between the proportion of ownership held by foreign ownership (FO) and Market Leverage (MLEV)

2.6.2.2.2 Control variables

Profitability (ROA)

Firm profitability is found as the rate of earnings before interest and tax divided by totalassets Investors are mostly concerned with company's profitability which can be measured

in various differing dimensions To measure the profitability, calculate the ratio of return

on sales and the other is return on investment (ROI) which has different forms like (ROA)return on Assets, (ROTC) return on total and (ROE) return on equity [ CITATION Ger99 \l

1033 ] Profitability can be estimated as return on assets which is the ratio of net income tototal assets Many studies have used ROA as a measure of profitability including[ CITATION Pro92 \l 1033 ] ,[ CITATION Lin96 \l 1033 ] By an analysis of assetturnover and profit margins, future firm profitability could be determined [ CITATIONFai01 \l 1033 ]

Rao (1989) records a negative association between profitability and debt to equity ratio,which explained that a grow up in profitability due to small interest payments on debtsmakes a decline in leverage Antoniou et al., (2008) proves that the leverage rate goesdown with the increase of a company profitability, and notices that the degree andeffectiveness of profitability as a cognitive factor is dependent on the country's legal and

financial traditions Furthermore, the influence of profitability on leverage divergesconsiderably across industries [ CITATION Deg09 \l 1033 ]

On the one hand, most study have advocated tangibility asset is positively related toleverage [ CITATION Alt06 \l 1033 ]; [ CITATION Khe102 \l 1033 ]; Gurunlu andGursoy, 2010) On the other hand, Sheikh and Wang (2010) research on the Pakistani firmsand then they conduct a negative relationship with two variables

Tangibility= ¿Assets

Total Assets

Capital Expenditure (CAPEX)

Capital Expenditure had been found that the expenditure creates the potential benefit Theyare used for measured a level of growth in an investment In theory, when a company has aproject with profitability, it is supposed to depend on debt financing to develop regardless

of borrowed amount Nevertheless, due to the imperfect market in real, the exterior fundinghas tendency to be higher than interior funding It probably may make the companyindisposed to be supported by external sources of debt

There are some studies had been researched by Long, Malitx (1985) and Gurunlu, Gursoy(2010) suggest a positive relationship with two variables between capital expenditure andbook leverage Calculating the capital expenditure by subtracting new Property PlanEquipment from old Property Plan Equipment then adding Depreciation

Capital Expenditure=New PPE−old PPE+ Depreciation

Degree of operating leverage (DOL)

A degree of operating leverage (DOL) prefer to be a type of leverage ratio describes theeffects of using a level of certain operating liabilities of the company, creating earningsbefore interest and taxes (EBIT) Leverage activities related to the use of a proportion offixed costs to variable costs in the operation of the enterprises The higher the degree ofoperating leverage, the more volatile the EBIT figure will be relative to a given change insales, all other things remaining the same The formula of DOL is calculated as follow

1033 ], including natural log of net sales By this situation, the trade-off theory anticipates

as a positive relationship between the size of the firm and its leverage The reasoning ofthis theory is based on the fact that larger companies possess low default risk which leads

to higher leverage on the contrary, pecking order expresses that being better known, largerfirms could access to capital easily and so an inverse relationship exit between the firmsize and the ratios of leverage It is worth noting that most empirical studies support thetrade-off theory [ CITATION Fra09 \l 1033 ] In this study, natural logarithm of net sales isused

¿Natural logarithm of net sales

Liquidity (LIQ)

According to Diamond (1991) he assumes that firms have the high credit rating, it meansthese firms have high ability to payback debt and particularly total debt Conversely, firmswith low credit rating prefers the long-term debt

In this study, liquidity is considered current ratio that measure the availability of liquidassets to a company To appraise this ability, the liquidity ratio takes the consideration intothe relative between the total assets and the total liabilities of the company The currentratio is also known as the working capital ratio

The formula for calculating the liquidity ratio of company:

Current Ratio=Current Assets /Current Liabilities

2.6.4 Summary of variables

Book leverage BLEV Ratio of book value of debt to the summation of book

value of total debt and book value of equityMarket Leverage MLEV Ratio of book value of debt to the summation of book

value of total debt and market value of equityForeign ownership FO Percentage of shares owned by foreign shareholders

Firm size SIZE Size of firm is measured by natural logarithm of net sales

Profitability ROA Profitability

operating leverage

DOL Degree of operating leverage is defined as a ratio of

change in EBIT to change in net salesTangibility TNG Ratio of fixed assets to the total assets

Capital Expenditure CAPEX Ratio of capital expenditures to total assets

Liquidity LIQ Ratio of current assets to current liabilities

Table 3: Variables used in this study

2.7 Conclusion

Several theories and studies have focused on diverse aspects of foreign ownership.Empirical evidence shows different and contradictory results on this relation and indicatesthat it depends significantly on the specific circumstances In addition, most previousstudies relating to capital structure investigated determinants of capital structure decisions [CITATION Boo01 \l 1033 ]; [ CITATION Fra09 \l 1033 ]; [ CITATION Hua06 \l 1033 ]; [CITATION Pan01 \l 1033 ]; [ CITATION Tit88 \l 1033 ] [ CITATION Tia07 \l 1033 ]and [ CITATION Jos07 \l 1033 ] argued that there is a lack of empirical evidence about theeffect of foreign ownership on capital structure, especially in emerging economies Theseabove issues motivate new studies on the relationship between foreign ownership andcapital structure

The relationship between ownership structure and capital structure has been establishedtheoretically, but there are limited empirical studies examining this linkage (Bokpin &Arko 2009; Brailsford, Oliver & Pua 2002; Friend & Lang 1988; Margaritis & Psillaki2010; Ruan, Tian & Ma 2011) Additionally, studies that link ownership structure withcapital structure only attempt to identify determinants of capital structure Jiraporn and Liu(2008), Nigel and Sarmistha (2007), Brailsford, Oliver and Pua (2002) and Margaritis andPsillaki (2010) have argued that investigating this relationship in depth could provideimportant insights into the decisions on capital structure Therefore, one of the main