ON THE DETERMINANTS OF CAPITAL STRUCTURE: AN EMPIRICAL STUDY OF VIETNAMESE LISTED FIRMS

There exists or not an optimal capital structure to every business and if so, how its af-fect to value firm is always an argumentative topic in the financial community over the past decades. Capital structure has been an important focus point in the literature since Modigliani and Miler (1958) have published their seminal research article, entitled “The cost of capital, corporation finance and theory of investment” in the American Economic Review. The M&M theory on capital structure claims that in an efficient market and in the absence of taxes, bank-ruptcy costs, and asymmetric information, the value of a firm is independent of capital struc-ture.Several theories have been developed in the attempt to arrive at one that is able to ex-plain the financing behavior of companies as well as establishing whether an optimal capital structure exists. Theories such as agency theory (Jensen & Meckling, 1976) trade-off theory (Modigliani and Miler, 1963) and Pecking order theory (Myer & Majluf, 1984; Myer, 1984), with the latter two being the most dominant, have been developed and used in the attempt to explain companies’ capital structure. The trade-off theory advances that the choice of capital structure in a firm is a result of a trade-off theory between the benefits of debt, such as those arising from interest debt tax shields, and the costs of debt, such as indirect and direct bank-ruptcy costs (Myers, 1984), whereas the pecking order theory state that companies prefer the cheapest source of funding, which due to information asymmetry, means companies prefer internal to external funding as well as debt to equity funding (Myer & Majluf, 1984). Numerous studies have carried out empirical tests of capital structure theories, trying to establish whether they could explain the capital structure of company as well as figuring out which determinants were important when considering companies’ capital structure in de-veloped countries and developing countries.By learning about the situation of Vietnam businesses, I recognized Vietnam busi-nesses does not focus on building the capital structure consistent with its business, while en-terprises in developing countries, it is the first issue to decide for the formation and develop-ment of a business.To build an appropriate capital structure, Vietnam companies need to understand in such conditions, their capital structure is subject to the impact of these factors. Our main ob-jective is to contribute to help Vietnamese businesses build an optimal structure, so I choose research question “Indentify factors that affect the capital structure, inspection in Vietnam”. This study used data from 88 non-financial companies listed on the Ho Chi Minh Stock Exchange from 2008-2012, including 88 firms has largest market value by industry. All financial data of 88 companies are derived from the financial statements on the website of these companies.

JEAN MOULIN LYON 3 UNIVERSITY VIETNAM UNIVERSITY OF COMMERCE

MASTER FINANCE AND CONTROL

THESIS

ON THE DETERMINANTS OF CAPITAL STRUCTURE:

AN EMPIRICAL STUDY OF VIETNAMESE LISTED FIRMS

Supervisor: Prof Duc Khuong NGUYEN

Hanoi 2013

TABLE OF CONTENTS

Acknowledgements 1

LIST OF FIGURES 4

Executive Summary 5

1 INTRODUCTION 7

1.1 BACKGROUND 7

1.2 RESEARCH OBJECTIVES 8

1.3 OUTLINE STRUCTURES 8

2 LITERATURE REVIEW 9

2.1 CAPITAL STRUCTURE 9

2.2 CAPITAL STRUCTURE IN FINANCIAL THEORY 10

2.2.1 THE TRADE-OFF THEORY 10

2.2.2 THE AGENCY COST THEORY 11

2.2.3 THE PECKING-ORDER THEORY 11

2.3 EMPIRICAL EVIDENCE 12

2.3.1 EVIDENCE FROM DEVELOPING COUNTRIES 13

2.3.2 EVIDENCE FROM DEVELOPED COUNTRIES 13

2.4 OVERVIEW OF VIETNAMESE ECONOMY AND STOCK MARKETS 14

3 RESEARCH METHODOLOGY AND HYPOTHESIS 16

3.1 CHARACTERISTICS OF VIETNAM'S STOCK MARKET: 16

3.2 DATA COLLECTION 16

3.3 HYPOTHESIS 16

3.3.1 Firm size 17

3.3.2 Profitability 17

3.3.3 Growth 17

3.3.4 Tangibility of asset 18

3.3.5 Liquidity 18

3.3.6 State capital ratio: 18

3.4 PRACTICAL METHOD: 20

3.4.1 Dependent variable: 20

3.4.2 Independent variable: 20

3.4.3 The model: 21

4 EMPERICAL RESULT 22

4.1 MEAN AND MEDIAN ANALYSIS: 22

4.2 CORRELATIONS 25

4.3 EMPIRICAL FINDINGS 27

5 CONCLUSIONS AND RECOMMENDATIONS 31

5.1 Conclusion of the study: 31

5.2 Limitations of this study 33

REFERENCES: 34

LISTS OF 88 LISTED FIRMS ON HOSE 38

LIST OF FIGURES

List of tables

Table 1: Table of Hypothesis and Empirical findings

Table 2: Descriptive statistic

Table 3: Descriptive statistic divided by type of ownership of companiesTable 4: Correlation matrix

Table 5: Impact of explanatory variables on total debt to total assetsTable 6: Impact of explanatory variables on short-term debt to total assetsTable 7: Impact of explanatory variables on long-term debt to total assets

Executive Summary

There exists or not an optimal capital structure to every business and if so, how its fect to value firm is always an argumentative topic in the financial community over the pastdecades Capital structure has been an important focus point in the literature since Modiglianiand Miler (1958) have published their seminal research article, entitled “The cost of capital,corporation finance and theory of investment” in the American Economic Review The M&Mtheory on capital structure claims that in an efficient market and in the absence of taxes, bank-ruptcy costs, and asymmetric information, the value of a firm is independent of capital struc-ture

af-Several theories have been developed in the attempt to arrive at one that is able to plain the financing behavior of companies as well as establishing whether an optimal capitalstructure exists Theories such as agency theory (Jensen & Meckling, 1976) trade-off theory(Modigliani and Miler, 1963) and Pecking order theory (Myer & Majluf, 1984; Myer, 1984),with the latter two being the most dominant, have been developed and used in the attempt toexplain companies’ capital structure The trade-off theory advances that the choice of capitalstructure in a firm is a result of a trade-off theory between the benefits of debt, such as thosearising from interest debt tax shields, and the costs of debt, such as indirect and direct bank-ruptcy costs (Myers, 1984), whereas the pecking order theory state that companies prefer thecheapest source of funding, which due to information asymmetry, means companies prefer in-ternal to external funding as well as debt to equity funding (Myer & Majluf, 1984)

ex-Numerous studies have carried out empirical tests of capital structure theories, trying

to establish whether they could explain the capital structure of company as well as figuringout which determinants were important when considering companies’ capital structure in de-veloped countries and developing countries

By learning about the situation of Vietnam businesses, I recognized Vietnam nesses does not focus on building the capital structure consistent with its business, while en-terprises in developing countries, it is the first issue to decide for the formation and develop-ment of a business

busi-To build an appropriate capital structure, Vietnam companies need to understand insuch conditions, their capital structure is subject to the impact of these factors Our main ob-jective is to contribute to help Vietnamese businesses build an optimal structure, so I choose

research question “Indentify factors that affect the capital structure, inspection in Vietnam”

This study used data from 88 non-financial companies listed on the Ho Chi Minh StockExchange from 2008-2012, including 88 firms has largest market value by industry All finan-cial data of 88 companies are derived from the financial statements on the website of thesecompanies

Synthesis and analysis of qualitative data combined with statistical analysis of tative data, comparing the results obtained with the previous results have been presented in or-der to clarify the research problem Tool use econometric models run on software Stata11.

quanti-This study aims to help the managers and the scientists have the empirical evidenceabout the factors affecting on the capital structure of listed companies on the Ho Chi MinhStock Exchange

This study shows that: the factors that affect the capital structure of Vietnam firms areprofitability, tangibility, size, growth, liquidity; and the factors impact on capital structurestrongest is size, probability and liquidity, in which:

- Relationship between capital structure and profitability is negative

- Firms that are larger in size tend to have more leverage

- Liquidity has negative correlation with total debt to total assets

- Tang has negative correlation with short-term debt and positive correlation withlong-term debt

- Firms with more growth opportunities tend to have more long-term debt

- State companies tend to use more leverage than other companies

The negative relationships between profitability and leverage; positive relationships betweengrowth and long-term debt are confirming the presence of Pecking-order theory in determin-ing the financing behavior of Vietnam firms The strong positive relationships between sizeand leverage support the theoretical predictions of Trade-off theory

In addition, the research results show the company is listed on the HCM City Stock Exchange

to use less long-term debt, this can be explained by the corporate bond market in Vietnam hasnot found development, should be funded by businesses dependent on equity, short-term loansfrom banks and commercial credits Design thinking for increased funding for many busi-nesses need to promote development of the corporate bond market

Key word: “Capital structure”, “leverage”, “debt”,

1 INTRODUCTION

1.1 BACKGROUND

In finance, the capital structure is the most debatable topic and continues to keep searchers pondering Capital structure refers to mix debt and equity used by a firm in financ-ing its assets The capital structure decision is one of the most important decisions made by fi-nancial management The capital structure decision is at the center of many other decisions inthe area of corporate finance These include dividend policy, project financing, issue of long-term securities, financing of mergers, buyouts and so on One of the many objectives of cor-porate financial manager is to ensure the lower cost of capital and thus maximize the wealth

re-of shareholders Capital structure is one re-of the effective tools re-of management to manage thecost of capital An optimal capital structure is reached at point where the cost of capital is thelowest

Much on the empirical research on the determinants of firm’s capital structure hasbeen directed largely towards companies listed in developed countries, such as the US, UKand Western Europe (Rajan and Zingales, 1995; Wald, 1999; Franck and Usha, 2002); littlework has been done to further our knowledge of capital structure within developing countriesthat have different institutional structures Recently, Booth et al (2001) provided the first em-pirical study to test the explanatory power of capital structure models in developing countries.The study used data from 10 developing countries to assess whether capital structure theorywas portable across countries with different institutional structures It investigated whether thestylized facts, which were observed from the studies of developed countries, could apply only

to these markets or whether they had more general applicability The results were somewhatskeptical of this premise They provided evidence that firms’ capital choice decisions in de-veloping countries were affected by the same variables as they were in developed countries.Nevertheless, there were persistent differences of institutional structure across countries indi-cating that specific country factors were at work Their findings suggest that although some ofthe insights from modern finance theory are portable across countries, much remains to bedone to understand the impact of different institutional features on capital structure choices

Booth et al (2001) selected countries operating a market-orientated economic system,which bore many similarities to developed countries It is interesting and important to knowhow capital structure theories work in a transitional economy environment within which insti-tutional structures differ not only from developed countries but also from developingeconomies Vietnam is the developing and transitional economy in the world, and therefore ischosen as the focus of this study It is hoped to answer the questions as following:

- The impact of firm-specific factors on the capital structure of the Vietnam firms?

- What are the results that can be achieved from testing of variables indentified fromtheories?

- What variables can be derived from the theories of capital structures?

1.2 RESEARCH OBJECTIVES

In short, the purposes of the research are:

(1) An overview of the theory of capital structure in order to see the importance of anoptimal capital structure, the rationale for the development of the business in the long term

(2) To understand the factors that affect the capital structure of a business is a lot of searchers to analyze and debate to see the direction the impact of these factors on the capitalstructure of a business

re-(3) To survey and provide empirical evidence for the impact of these factors in nam through surveys capital structure of listed companies on the stock exchange in Ho ChiMinh City (HOSE) in the economic model amount, then gives an overview of and practicalcapital structure for Vietnamese business

Viet-1.3 OUTLINE STRUCTURES

The remaining part of the thesis is structured as follows Section Two offers a ture review on capital structure, capital structure in financial theory and empirical evidence,and an overview of Vietnamese economy Section Three provides research methodology; withcharacteristic of Vietnam’s stock market, data collection and the last discuss the practicalmethod used in order to conduct the econometric analysis of Vietnam listed companies’ capi-tal structures Section Four present, discuss and evaluates the findings Section Five conclu-sion and recommendation the study

litera-2 LITERATURE REVIEW2.1 CAPITAL STRUCTURE

Capital structure is the mix of financial instruments used to finance real investments

by corporations Capital structure mention to the way businesses seeking financing through acombination of plans to sell shares, options to purchase shares, bonds and loans Optimal cap-ital structure is the plan, which is now the smallest capital cost and highest stock prices

A capital structure is consistent with all important decisions by businesses not onlyneed to maximize the benefits obtained from individuals and organizations related to businessand business activities, but also by the impact of this decision to the business capability of en-terprises in the competitive environment

Optimal capital structure involves trade-offs between costs and business benefits nancing with loan capital created "tax shield" for businesses, while reducing the level of dis-persion management decisions (especially with a limited number of business opportunitiesand investments) The burden of debt, on the other hand training is offered to business pres-sures Funding from the share capital does not create user cost of capital for businesses How-ever, shareholders may intervene in business activities operating high expectations on the effi-ciency of production and business investors also create considerable pressure for managers

Fi-Capital structure has been an important focus point in literature since Modigliani andMiler stated publishing their research about it in 1958 and 1963, with the following assump-tions:

- No transaction costs

- No bankruptcy costs

- Firms issue only two types of claims: risk-free debt and equity

- Capital markets are complete

- Capital markets are competitive (individuals and firms are price takers)

- No taxes

Under the above set of assumptions, Modigliani and Miler showed that:

- Proposition I: A firm’s total market value is independent of its capital structure

- Proposition II: A firm’s cost of equity increases linearly with debt-equity ratio

During the decades which have passed since the emergence of Modigliani and Miler’s sitions regarding capital structure, a vast amount of research, in somewhat different directions,have added quite a bit of new knowledge in the discussion regarding capital structure, whichwill be reviewed in this chapter The starting point of that will be to look at what could argued

propo-to be “mainstream” financial research in the field of capital structure, post Modigliani andMiler

2.2 CAPITAL STRUCTURE IN FINANCIAL THEORY

Taking its theoretical point of departure mainly from what could be defined as traditional nance discourse, a number of newer theories, at least in comparison to the Miller andModigliani propositions, have in recent decades emerged for explaining a company’s choice of

fi-capital structure The ones reviewed in this section will be the trade-off theory, the agency cost theory and the pecking-order theory

2.2.1 THE TRADE-OFF THEORY

The trade-off theory explains firms’ choice of leverage by a trade-off between the benefits andcosts of debt A trade-off of costs and benefits of borrowing, holding the firm's assets areviewed as determiner of a firm’s optimal debt ratio Main focus of a firm is to substitute debtfor equity, vice versa in order to find optimal debt ratio and maximize value of the firm.Hence, trade-off theory can be summarized as balancing the different benefits and costsassociated with debt financing to have optimal capital structure Debt also has discipliningrole because of reduction in free cash flow (Myers, 1984, p.577-578)

When a firm adjusts the optimum debt ratio, costs, and therefore lags, which are called as justment costs, make optimal capital structure of each firm different (Myers, 1984, p.576).Graham and Harvey (2001) suggest that firms need to identify their optimal capital structureand endeavor to reach and keep it As it is understood, there is large deviation in optimal capi-tal structure among firms

ad-Tax shield is also important point of the theory Firms can deduct interest payment of debtfrom tax, as a result net incomes of the firms increase In order to maximize tax shield, firmsmay choose higher debt levels (Graham, 2000, p 1906) Therefore, firms with higher debt areexpected to have better financial performance However, high amount of debt may cause risk

of bankruptcy and raising agency costs occurring between owners and managers (Brealey andMyers, 2003) As it is seen, the theory does not only explain taxes and tax shields but effect offinancial distress due to high leverage It propose that firm’s target capital structure is designed

by taxes, financial distress (cost of bankruptcy), and the agency conflict (Graham, 2000, p.1907)

According to trade-off framework, firms set a target debt-to-value ratio and gradually movingtowards it, in much the same way that a firm adjusts dividends to move towards a target payoutratio (Myers, 1984, p 576) Many studies also support this framework such as Hovakimian,Opler and Titman (2001), Fama and French (2002) Gaud, Jani, Hoesli, and Bender (2005),Smith and Watts (1992), Byoun and Rhim (2003) These studies propose that firms move to-wards their target ratio over the long run or the short term and the target debt ratio and actualdebt ratio is an important aspect to take into consideration

2.2.2 THE AGENCY COST THEORY

Jensen and Meckling (1976) who are founders of the agency cost theory, subsequently definethe agency relationship inside the firm as: "A contract under which one or more person (theprincipal) engages another person (the agent) to perform some service on their behalf whichinvolves delegating some decision making authority to the agent”

According to the agency theory, the way of professional management style, which is the ration of ownership and management may result agency conflicts that is caused by insufficientwork effort of manager, indulging in perquisites, choosing inputs or outputs according to one’spreferences Due to these reasons, a firm may fail to maximize its value Conversely, withthese reasons one can maximize his/her own wealth and utility (Berger & Bonaccorsidipatti,2006)

sepa-However, the theory suggests that choosing best/optimal capital structure may mitigate agencyconflicts and decrease agency cost Therefore, according to the theory, high leverage/debt ra-tio help a firm to reduce its agency cost and mitigate agency conflicts This debt ratioalso encourages managers to act more in the interests of shareholders As a result, the firm’svalue increases

2.2.3 THE PECKING-ORDER THEORY

The so called pecking-order theory or pecking-order hypothesis was developed by StewartMyers in 1984, as a way of describing the corporate finance behavior that he has observedand based on that he pointed out three major points that corporate finance managers tends

to adhere to and that is highly relevant for capital structure choices Myers’ (1984, p 581)three points are provided below:

1) Managers want to maintain stable shareholder dividends over time, despite possible tions in earnings, stock prices or investment opportunities

fluctua-2) Mangers prefer internal financing compared to external financing, i.e funds which areraised through the issuing of new either debt or equity shares

3) If external financing is necessary, managers opt for the least risky option first and so on.Myers ranks different securities based on their perceived riskiness, with going from straightdebt on one end of the spectrum, through common stock on the other end

Thus it is argued that corporate financing behavior are a result of information asymmetry andthat investors are under informed about the value of projects within a company for instance,leading to that the company surrenders a substantial amount of a projects net present value tothe investors, when utilizing external financing, particularly external equity financing This isbecause the cost of debt financing is smaller than equity financing, as the differences in themarket’s and the management valuation of it are smaller than in the case of equity financing

To avoid getting into this scenario with external financing however, it is argued that companiesmaintain financial slack at all times, thus being able to internally finance its profitable projects

Financial slack as such could be defined as cash and marketable securities that the companyholds (Myers, 1984, p 590)

2.3 EMPIRICAL EVIDENCE

After knowing theories of capital structure we need so see how much research work has beendone on capital structure with regard to justify the predictions of these theories by collectingempirical evidence from all around the world Is there any difference between developed anddeveloping world with regard to source of finance? As mentioned below all the empirical evi-dence in the literature of capital structure subject to specific condition in which prediction ofsome theories work while hypothesis of other theories do not Likewise the behavior of firms

to adjust the capital structure is changing when they are confronted certain internal (companyspecific) and external (outside of the firm) situation Myers (2001) states all three theories ofcapital structure are conditional because they work under their own set of assumption Itmeans none of three theories can give vivid picture in practicing the capital structure Eldomi-aty and Ismail (2009) argue that in practice, business conditions are dynamic that cause firmschanging their capital structure thus moving from one theory to another, for example, whenthe tax rate increases firms issuing debt for taking advantage of tax shield (Trade-off theory).When debt becomes less attractive to issue then firms may seek financing from retained earn-ings (Pecking-order theory)

Cook and Tang (2010) posit well macroeconomic conditions help firm to adjust capital ture toward target quicker than that in bad macroeconomic conditions Korajczyk and Levy,(2003) argue that ―our results support the hypothesis that unconstrained firms time their is-sue choice to coincide with periods of favorable macroeconomic conditions, while con-strained firms do not Barry et al (2008) argue that interest rate affects the leverage; firms is-sue more debt when interest rate is low as compare to its historical level Hennessy andWhited (2005) argue more liquid firms hold lower level of leverage They say debt issue ismore attractive when it is used to purchase back equity than when borrowed amount is distrib-uted in shareholders

struc-There can be many economic (country specific) factors such as GDP growth, interest rate, flation, capital market development and situational factors which directly or indirectly affectthe capital structure of the firm Graham and Harvey (2001) depict that firms consider the 17price appreciation of share before issuing it, and debt rating and financial flexibility before is-suing debt Miao (2005) claims to introduce competitive equilibrium model of capital struc-ture and industry dynamics, and says firms make capital structure decision on the basis of pe-culiar technology shocks

in-2.3.1 EVIDENCE FROM DEVELOPING COUNTRIES

Relatively little research work on firms’ financing decision has been done in developing

coun-tries (Shah & Khan, 2007) The main difference between developing and developed world isthat in developed world firms finance their leverage with long term debt and short term debt ismainly contributing in leverage of firms in developing world (Booth et al 2001) Tong andGreen (2005) inspect capital structure of listed Chinese companies and find evidence in thesupport of pecking order theory (Cobham & Subramaniam, 1998) Huang and Song (2006)examine capital structure of 1200 Chinese firms and find the results consistent with Trade-offtheory and Pecking order theory of capital structure Eldomiaty and Ismail (2009) examine thecapital structure of Egyptian firms and find the evidence supporting Trade-off theory Gurcha-ran, (2010) examines the capital structure firms in selected four developing ASEAN countriesand finds significant negative relationship between profitability and growth in all four coun-ties but other determinants of capital structure are treating differently in each country Booth

et al (2001) investigate capital structure of 10 developing countries and argue that there isnegative relationship between tangibility and leverage in Pakistan, Brazil, India and Turkeyunlike the corresponding results in G7 by (Rajan & Zingales, 1995) While investigating capi-tal structure of Pakistani companies (Shah and Hijazi 2004) also do not find significant rela-tionship between tangibility and leverage Chakraborty, 2010) argue the positive relationshipbetween tangibility and leverage of Indian firms Booth et al (2001) and (Shah and Hijazi,2004) find evidence supporting pecking-order theory As mention above, evidences in devel-oping world indicate the dominancy of pecking order theory as compared to trade-off theory

2.3.2 EVIDENCE FROM DEVELOPED COUNTRIES

It has been unanimously observed that most of the empirical research on corporate capitalstructure is conducted in developed world (Mazur, 2007) Margaritis & Psillaki (2007) inves-tigate capital structure of 12,240 firms in New Zealand and find evidence consistent withagency cost model Frank & Goyal, (2009) examine capital structure of publically tradedAmerican companies from 1950 to 2003 and find the evidence supporting some versions oftrade-off model Beattie et al (2006) conducted survey research in which they examine thecapital structure of listed UK firms and evidence support the predictions of trade off theory aswell as pecking order theories Huang & Ritter (2009) argue that US firms finance their oper-ations more with external equality than debt if cost of equity capital is low Lipson & Mortal(2009) investigate the relationship between liquidity and capital structure of US firms and findnegative relationship between liquidity and debt Cook & Tang (2010) investigate the financ-ing behavior of US firms in good and bad economic condition and find that US firm adjusttheir capital structure more quickly in good economic condition than bad Antoniou et al(2008) investigate capital structure of firm and find the evidences supporting Pecking-ordertheory and Trade-off theory of capital structure Bancel & Mittoo (2004) conduct survey in 16European countries and find the evidences consistent with Trade-off theory of capital struc-ture Rajan & Zingales (1995) investigate the capital structure of firms in G7 countries andfind the similar treatment of variables of capital structure in all seven industrialized countries.Brounen et al (2006) conducted survey to investigate the capital structure of firms in Europe

and find the evidences consistent with pecking order theory Allen & Mizuno (1989) examinethe financing decision of the Japanese firms and find evidences consistent with pecking ordertheory Pushner (1995) 18 analyses the capital structure of Japanese firms and finds evidenceconsistent with agency cost theory The evidence from Switzerland also supports pecking or-der and trade-off (Drobetz & Fix, 2005).

2.4 OVERVIEW OF VIETNAMESE ECONOMY AND STOCK MARKETS

From 2007 to 2012 is the period witnessed a lot of volatility in the economy in general andVietnam Vietnam's stock market in particular Therefore, the capital structure of firms in themarket is more volatile due to the economy During this period, the capital structure of thebusiness by the book value (long-term debt on the book value of equity) generally range from10% - 15% and the variation between the year is not too large However, the capital structure

of the market value (long-term debt ratio on market value of equity) have very large tions between years and reflects more clearly the impact of the economy the capital structure

fluctua-of the business Although the value fluctua-of the book or market value fluctua-of the overall capital structure

of Vietnam enterprises have long-term debt ratio is not too high (below 15%) This shows thatVietnam now mainly used by owners of capital (equity) rather than debt

In 2007 was a year of prosperous development of Vietnam's economy with GDP growth rate

of 8.48% annually on average, macroeconomic stability, the base rate of the period was8.25% This period of development is very favorable for most businesses in the Vietnam mar-ket Especially in 2007, there are many businesses successful IPO, sold 100% of the issuedshares and earned huge surplus stock It's a great motivation boost Vietnam businesses con-tinue to grow Businesses tend to use more equity than debt to financial leverage tends to de-crease In terms of book value, long-term debt in 2007 is 12.77%, based on market value;long-term debt in 2007 was 8.1%

After a period of prosperity, in 2008, brought to Vietnam market more "waves" with theglobal financial crisis to make people spend limited countries making enterprises in the field

of import Shedding border At the same time, rising domestic inflation (22.97%), so the baserate also increased (12% - 14%) and reduced GDP growth (6.23%) As investors lost confi-dence in Vietnam's stock market, the VN-INDEX plummeting (from 1100 peak of 2007, theVN-Index dropped to 286 in 2008) Stocks that depreciate businesses can not use the advan-tage of the equity that can not borrow because interest rates fluctuate constantly due to themacroeconomic policies of the government to stabilize the economy

Expressed most clearly the devaluation of equity on the stock market as measured by the rate

of long-term market value Long-term debt ratio calculated as the average market value in

2008 increased the number of years of mutations observed (17.06%) The cause of this suddenincrease is due to the devaluation of equity investors lost confidence in Vietnam's stock mar-ket, many investors withdraw capital or sell-off led to the collapse of the market school

2008 also began a difficult period of Vietnam's economy in the years that followed 2009 and

2010, thanks to the stimulus package, lending support of the government of Vietnam to ment corporate restructuring towards capital-intensive rather than capital-intensive outstand-ing shares as before Also in 2009 and 2010, but the stock market has not really recoveredfully but there were positive changes, so that the rate of long-term debt by market value is notexcessively high, such as in in 2008

imple-2011 stock market plunge, rising inflationary pressures, production and business activities ofsmall and medium enterprises at a disadvantage from the high interest rates while consistentlyimplementing government policy tight monetary and fiscal impact negatively on the construc-tion industry and mining industry, construction material production, manufacturing enter-prises have difficulty with nearly 50,000 corporate dissolution and bankruptcy

2012 Vietnam's stock market remains volatile due to many reasons both objective and tive Despite the economic bright spots as relatively low inflation, stable exchange rate, inter-est rate reduction, increased exports and trade balance surplus the trend of divestment of cor-porations, public corporations with restructuring problems in not only the organization butalso in the credit markets that SOE is difficult to improve significantly in the medium term.Overall, in the 5 years of observation (2008-2012), long-term debt by market value is alwayslower than long-term debt by the book value because the market value of equity is generallyhigher than its book value due to the reflection of market expectations on the future growth ofthe business Particularly, only in 2008 was long-term debt by market value is higher than thebook value of equity this year due to falling prices because of the collapse of the stock market

subjec-in Vietnam

The following is an analysis of the components of the capital structure of Vietnam enterprises

in the industries represented in the Vietnam market listing on the stock exchanges TP Ho ChiMinh City (HOSE)

The selected sectors are divided into 13 main sectors (according HOSE), including 88 nies listed on HOSE shares with a total market value of each industry's largest

compa-Institutional environment for the activities of the Company are listed on the Vietnam stockmarket has two following highlights:

- Vietnam is a country in transition from command economy to a market economy

- Most of the companies listed on the stock market of Vietnam, formerly known as the owned companies, although were privatized but the government has a stake in the company

state-3 RESEARCH METHODOLOGY AND HYPOTHESIS

3.1 CHARACTERISTICS OF VIETNAM'S STOCK MARKET:

Institutional environment for the operation of the company is listed on the Vietnamstock market have two highlights, as the followings:

- Vietnam is a country in transition from oriented economy to the market economy

- Almost all listed firms on Vietnam's stock market has formerly state-owned nies, although was privatized but the government has a stake in the company this It is not dif-ficult to understand that Vietnam is different institutional structures for developed countriesand other developing countries For example, in the world of Modigliani and Miller (2), the taxwill not affect the capital structure decisions of firms in the command economy Because, just

compa-as all state companies and banks are also benefiting from tax Therefore, this article aims toconsider the factors affecting the capital structure of companies listed on the stock market isnothing like Vietnam and other countries around the world

In that state ownership is dummy variable, this variable has a value of 1 if the pany is under state corporate law in 2005 (with the state share percentage of 51% or more),whereas the cost value is 0

com-3.2 DATA COLLECTION

This study used data from 88 non-financial companies listed on the Ho Chi Minh Stock change from 2008-2012, including 88 firms has largest market value by industry All financialdata of 88 companies are derived from the financial statements on the website of these compa-nies

Ex-Synthesis and analysis of qualitative data combined with statistical analysis of quantitativedata, comparing the results obtained with the previous results have been presented in order toclarify the research problem Tool use econometric models run on software Stata11

3.3 HYPOTHESIS

The previous study has shown a number of factors that affect the capital structure of the ness as the characteristics of economy, tangible fixed assets, taxation, company size, profitabil-ity, opportunities, growth and the volatility of earnings etc In his research, Harris and Raviv(1991) summarized that financial leverage increases with tangible fixed assets, non-debt taxshields, investment opportunities and firm size, lever down with fluctuations in income, adver-tising costs, the probability of bankruptcy, profitability and proprietary products However, therelationship between these factors and capital structure is not stable Empirical research resultsoften change and sometimes opposed to theory Furthermore, when comparing the capitalstructure between the different countries, the institutional differences may influence the rela-tionship between financial leverage and other factors

busi-Aside from the more recent theories regarding capital structure steaming mainly from whatcould be labeled as rather traditional financial research, there has also been attempts made inresearch to complement that view with other areas from the field of business administration,for instance strategy, innovation, firm growth and, arguably, marketing A number of thosecomplimentary theories will be reviewed here and will be utilized for summarizing factors

3.3.1 Firm size

It is presented, more often than not by tangible assets (either fixed assets or total assets) and ispostulated, under the Trade-off theory that is positively related to debt The underlying argu-ment is that big companies (i.e companies with large quantities of tangible assets) face lessvolatility in their fortunes, and, therefore can have more financial risks in the form of debts.The effect of size on leverage under the pecking order Theory of Capital Structure is given by,among others, Harris and Raviv (1991) and Rajan, R.G and Zingales (1995) They argue thatfirms with fewer tangible assets will have more debt since debt is used as a signal for futureprospects Titman and Wessels (1988) both found evidence to support the negative hypothesisbetween size and leverage Size, in this study, is measured by taking into consideration the nat-ural log of the fixed assets (LOGFA)

Accordingly, we propose the first hypothesis:

H1a: Firm size is expected to have a positive impact on leverage.

H2a: Firm size is expected to have a negative impact on leverage.

3.3.2 Profitability

Firm’s profitability is another important variable for conventional prescriptions, credited withthe ability to be relevant predictor of debt levels Highly profitable companies are able to gen-erate more retained earnings and therefore, are able to rely more on the internal resources forfinancing growth, which would reduce the need to resort to external funds like debts Hence,debt and profitability are inversely related; a negative relation between debt and profitability isalso tenable as the latter speaks about the ability of the companies’ to repay The asymmetric

information approach also assigns negative relations The company’s profitability is

repre-sented, in this study, by (profit after tax) ÷ (Total Assets) and is referred to as PROFIM

Accordingly, we propose the second hypothesis, H2: Profitability is negatively related to

capi-tal structure.

3.3.3 Growth

It generates demands for external capital and growth opportunities and needs signals to reachthe investors The asymmetric information approach develops positive relationships betweenDebt and Growth opportunities Long and Malitx (1985) and Lang, Ofek and Stulz (1996)found positive relation between leverage and growth opportunities Some emperical evidence

in support of this negative relationship can be found in Rajan and Zingales (1995) and Barclayand Smith (1996) According to the pecking order theory, high growth firms have a greaterneed for funds, are more likely to exhaust internal funds, and so can be expected to borrow

more In this study, the measure of growth opportunities by Price/Earnings (P/E) ratio (GRPE).

Base on this, we present the following hypothesis;

H3a: Growth is positively related to capital structure.

H3b: Growth is negatively related to capital structure.

3.3.4 Tangibility of asset

Theories generally state that tangibility is positively related to leverage Since the tangible sets can be used as collateral in external borrowing, the presence of a large fraction of tangibleassets of a firm help to get bank loans at lower interest rate and it also help to reduce the riskthe lender suffering from the agency cost of debt Negative relationships have been reportedbetween leverage and fixed assets in small and medium firms (Daskalakis and Psillaki, 2009)and in less developed economies (Joever, 2006) The proxy used in this study to measure the

as-value of tangible assets of the company is the ratio of fixed assets to total assets

Base on this, we present the fourth hypothesis, including:

H4a: The tangible assets is positively related to capital structure.

H4b: The tangible assets is negatively related to capital structure.

3.3.5 Liquidity

Firm prefer internal financing to external financing Therefore, firm are likely to create liquidreserves from retained earnings If the liquid assets are sufficient to finance the investments,firms will have no need to raise external funds Here we use the current ratio (current assets di-

vided to current liabilities) as a proxy of liquidity Firm with higher liquidity ratios are

pre-ferred to acquire more debt because of great ability to meet short term obligations (Ozkan,2001) Hennessy and Whited (2005) argue more liquid firms hold lower level of leverage

On this study, we propose the fifth hypothesis, H5: Liquidity is negatively related to capital structure :

3.3.6 State capital ratio:

State capital in the company is one of the unique features of the company is listed on the nam stock market and haven’t got any theory mention to the relationship between the statecapital ratio with capital structure and firm performance Theoretically, Leland and Pyle(1977) argue that leverage is positively correlated with the extent of managerial equity owner-ship However, empirical studies produce mixed results: for example, Berger, Ofek and Yer-mack (1997) confirm such positive correlation, while Friend and Lang (1988) give oppositeresults According to recent theories of Jean J Xue Chen and Yen (2004), state capital ratio isnegative relationship to financial leverage, but not statistically significant

Viet-On this study, we propose the sixth hypothesis, H6: State owner is positively related to capital structure for the following reasons:

 First, by the relationship before equitation, the state owned companies often creditorswilling to lend

G7 Coun- tries

oped countries

Devel- ing coun- tries

"+" means that leverage increases with the factor

"-" means that leverage decreases with the factor

"+/-" means that both positive and negative relations between leverage and the factorare possible theoretically if in "Theoretical Predicted Signs" column or have found empirically

if in 'Major Empirical Studies' Results' column "?" means that no clear prediction or empiricalstudy result

“a”: Indicates that the result was either not statistically different from zero at tional significance levels or that the result was weak in a non-statistical sense

“b”: Indicates that the result is weak in a statistical sense

Sources:

G7 countries: (Rajan - Zingales, 1995)

Developed countries: (Harris - Raviv, 1991), i.e., a survey of the following empericalstudies: (Bradley, et al., 1984), (Chaplinsky Niehaus, 1990), (Friend - Lang, 1988), (Gonedes,

et al., 1988), (Long - Malitz, 1985), (Kester, 1986), Kim - Sorensen, 1986), (Marsh, 1982), man - Wessels, 1988)

Tit-Developing countries: (Booth et al., 2001)

China: (Huang - Song, 2002), Jean J Xue Chen and Yen (2004)

Profitability (Prof.) (Profit after tax) ÷ (Total Assets)

Size Natural logarithm of fixed assets

Tangibility of asset (Tang.) Fixed assets divided to total assets

Growth Price/Earnings (P/E) ratio

Liquidity (Liq) Current assets divided to current liabilities

State owner (State) State owner:

LTD = β0+ +β1 Size +β2 Prof +β3 Tang + β4 Growth+ β5 Liq + β6 State

The study tied to find the answer of the following research questions: