Determinants of capital structure of listed firms in the pharmaceutical sector in vietnam

1.2 Research Objectives This study aims to study the theory of capital structure, evaluate the status of thecapital structure, and identify factors affecting the capital structure ofphar

VIETNAM NATIONAL UNIVERSITY, HANOI

VIETNAM JAPAN UNIVERSITY

TABLE OF CONTENTS

ACKNOWLEDGEMENT iii

STATUTORY DECLARATION iv

LIST OF TABLES v

LIST OF FIGURES vi

LIST OF ABBREVIATIONS vii

EXECUTIVE SUMMARY viii

CHAPTER 1: INTRODUCTION 1

1.1 Research Motivations 1

1.2 Research Objectives 3

1.3 Research Objects and Scope 3

1.4 Research Questions 4

1.5 Research Structure 5

CHAPTER 2 THEORETICAL FRAMEWORK 6

2.1 Definition relating to capital structure 6

2.2 The theories about capital structure 8

2.3 The determinants affecting capital structure 11

2.4 Literature review 16

2.5 Research gaps 21

CHAPTER 3: METHODOLOGY 23

3.1 Research methodology 23

3.2 Research Data 23

3.3 Research Model 24

3.4 Variables measurement 25

3.5 Hypothesis 26

CHAPTER 4: DATA ANALYSIS AND FINDINGS 31

4.1 Analyzing the pharmaceutical sector in Vietnam during the 10-year period 31

4.1.1 The characteristics of pharmaceutical sector in Vietnam 31 4.1.2 Current status of capital and capital structure of pharmaceutical listed firms

32

4.2 Descriptive statistics 35

4.2.1 Descriptive statistics of dependent variable 35

4.2.2 Descriptive statistics of independent variables 36

4.3 Testing the model 37

4.3.1 Original regression model 37

4.3.2 Correlation matrix and multicollinearity testing 38

4.3.3 Heteroskedasticity testing 40

4.3.4 Autocorrelation testing 41

4.3.5 Overcoming the Heteroskedasticity of the model 42

4.4 Result of the research and discussing them 43

4.5 Comparing factors affect to capital structure between companies listed on Hanoi Stock Exchange (HNX) and ones listed on Ho Chi Minh City Stock Exchange (HOSE) 46

CHAPTER 5: RESEARCH IMPLICATIONS AND RECOMMENDATIONS 51

5.1 Research implications 51

5.2 Recommendations 51

5.2.1 Recommendations for the pharmaceutical listed companies in Vietnam 51

5.2.2 Recommendations for related parties 52

5.3 Limitation and the following research directions 53

CONCLUSION 55

REFERENCES 57

APPENDIX 63

I would like to express my sincere thanks to the Board of Management, professors,and teachers of Vietnam Japan University and Yokohama National University forfacilitating and imparting knowledge to me to complete this graduation thesis aswell as help me to have a solid portfolio for the future career

And in particular, I would like to send my deepest gratitude to my supervisors Prof.Hiroshi Morita and Assoc Prof Nguyen Van Dinh, who mentored, instructed, andimparted useful knowledge and ideas during the implementation and completion ofthis thesis

Sincerely thanks to my family and friends for their support, convenience, andmotivation in the past time

Although many attempts have been made to implement the research in the mostcomplete way, the limitations of knowledge and experience will inevitably lead tocertain shortcomings

I hope to receive more guidance and valuable comments from teachers to complete

my thesis

Sincerely,Bui Thi Minh Huyen

STATUTORY DECLARATION

I pledge that the thesis “Determinants of capital structure of listed firms in thepharmaceutical sector in Vietnam” is the work of the author The content is drawnfrom the learning process and the results of empirical research The data used in thestudy period are true and have a clear origin Research results have not beenpublished in any previous scientific research The thesis is conducted under theguidance of Prof Hiroshi Morita and Assoc Prof Nguyen Van Dinh

Sincerely,Bui Thi Minh Huyen

LIST OF TABLES

Table 3.1: Variables measurement 25

Table 4.1: Overview of asset structure of pharmaceutical firms 33

Table 4.2: Overview of capital structure of pharmaceutical firms 34

Table 4.3: Descriptive statistics of dependent variable 35

Table 4.4: Descriptive statistics of independent variables 36 Table 4.5:Requirements for companies listed on the HOSE and HNX stock exchanges

47

LIST OF FIGURES

Figure 1.1: Revenue of Vietnamese pharmaceutical sector (billion USD) 2

Figure 4.1: Original regression model 37

Figure 4.2: Correlation matrix of research variables 38

Figure 4.3: Regression model without “SIZE” or “TANG” variable 39

Figure 4.4: Multicollinearity testing 40

Figure 4.5: Heteroskedasticity testing 41

Figure 4.6: Autocorrelation testing 42

Figure 4.7: Overcoming the Heteroskedasticity of the model 43 Figure 4.8: Regression model of firms listed on HNX and HOSE stock exchanges 48

Chief Executive OfficerCurrent LiabilitiesEarnings before interests and taxesGrowth opportunity

Hanoi Stock Exchange

Ho Chi Minh City Stock ExchangeLong-term Assets

Long-term DebtsLiquidity

Mergers and AcquisitionsOrdinary Least SquarePluralist ExecutiveProfitability

Firm size

Small and Medium-sized enterprises

Total AssetsTangible AssetsTotal CapitalTotal DebtTotal EquityUnited States DollarVariance – Inflation FactorVietnam Dong

EXECUTIVE SUMMARY

This research aims to study the factors influencing the capital structure ofpharmaceutical companies listed on stock exchanges in Vietnam This study uses datafrom financial statements, annual reports, management reports of listed companies thatpublish data on the stock market during the period 2010-2019 The study used theOrdinary Least Square method to estimate the parameters of the model The study useddifferent independent variables including company characteristics (profitability, growthopportunity, tangible assets, liquidity, firm size, firm age) and corporate governance(pluralist executives) Research results show that profitability, tangible assets, andliquidity have a negative correlation with capital structure However, research alsoillustrates firm size, firm age and pluralist executives have a negative correlation withcapital structure but they do not have statistical significance In contrast, growthopportunities have a positive relationship with capital structure Generally, the resultsare most consistent with previous studies on capital structure In addition, the study alsoshows the direction and the level of the influence of the above independent variables onthe capital structure of pharmaceutical companies listed on the Hanoi Stock Exchangeand Ho Chi Minh City Stock Exchange are different Also, the study proposed somerecommendations for pharmaceutical listed firms to get a reasonable capital structure aswell as investors and related parties when they would like to invest in pharmaceuticallisted firms in Vietnam

CHAPTER 1: INTRODUCTION

1.1 Research Motivations

Enterprises need capital to operate which may be retained earnings, debt, andequity The source of funds from debt can increase the value of the firm but usingtoo much debt to finance investments, the company may have financial risks whichcan consequently lead the enterprise into bankruptcy Moreover, an idealcombination of capital structure including debt and equity can also minimize thecost of capital and maximize the firm’s value Therefore, “capital structure decision

is an important corporate policy that deals with the firm’s activities, with debts and

equity” (Brounen et al., 2006).

In fact, the capital structure will change depending on the characteristics of thesituation of each enterprise, the area in which it operates, as well as the effects ofmacroeconomic fluctuations of the economy, culture, and religion Rather thanfinding the optimal ratio of debt to equity, finance researchers are often interested infinding out the factors that influence the use of the financial leverage of thebusiness From the relationship between these factors and the capital structure that

we can assess whether the decision to use the loan or the equity of the business isreasonable or not, then propose solutions to improve the efficiency of usingfinancial leverage, maximizing asset value for businesses

In recent years, the theory of modern capital structure has only been studied indeveloped countries but has not been paid much attention in developing countries

Mouamer (2011) also confirmed that “There is little work done on examining capital structure in emerging countries” In Vietnam, those studies are almost

researched at the general level for businesses, but not research much for specificindustries, especially pharmaceuticals

Vietnam's economy has been growing in recent years, people's incomes haveincreased, however, Vietnam is facing an aging population as well as healthproblems arising from the environment and the process of industrialization Thisleads to an increased willingness to pay for medical services Therefore, leading tothe inevitable development of Vietnam's pharmaceutical industry.

According to International Medical Statistics Health, in 2018, Vietnam was one of

17 countries ranked among the highest pharmaceutical growth groups (Pharmergingmarkets) According to Business Monitor International report “Vietnampharmaceutical sector had revenue of USD 5.9 billion in 2018, an 11,7% increasefrom the previous year, which makes Vietnam become the second-largest medicinemarket in South East Asia” It once again confirms that the pharmaceutical sectornot only an essential industry but also an emerging and growing industry inVietnam in recent years

Figure 1.1: Revenue of Vietnamese pharmaceutical sector (billion USD)

(Source: Business Monitor International Report 2018, Vietnam Business Monitor

Report 2018)

Currently, Vietnam's pharmaceutical industry has to import up to 90% of raw material(according to KIS Vietnam Securities Corporation, Pharmaceutical Industry Report(09/01/2019)) In order to avoid being dependent on exchange rates, some domestic

drug manufacturers in Vietnam are thinking of making Active Pharma Ingredient(API) by themselves, but API production infrastructure in Vietnam is not yet welldeveloped, so it will require huge capital and technology investments From theneed for capital and technology of the pharmaceutical industry, in recent years,many domestic and foreign investors have invested in Vietnam's pharmaceuticalindustry The appearance of new investors will affect the capital structure of thebusiness and its operations, so Vietnamese pharmaceutical enterprises need to makewise decisions on the capital structure for sustainable development in the currentcompetitive economic environment.

According to Vo (2017) “Vietnamese enterprises are in the process of financial

liberalization, there are new policies that can affect the bond and equity markets inVietnam, which can affect the capital structure of Vietnamese enterprises” In recentyears, there has been very little researches on the capital structure of Vietnamesepharmaceutical enterprises, so this research is very necessary

Therefore, based on the situations mentioned above, I chose the topic “Determinants ofcapital structure of listed firms in the pharmaceutical sector in Vietnam” to examinewhich factors and their levels affect to the capital structure of pharmaceutical listedfirms in the Vietnam stock market helping financial planners, as well as enterprises,have a suitable view on opting for the optimal capital structure

1.2 Research Objectives

This study aims to study the theory of capital structure, evaluate the status of thecapital structure, and identify factors affecting the capital structure ofpharmaceutical firms listed on the stock exchange in Vietnam Then propose somerecommendations for business managers, investors, and policymakers

1.3 Research Objects and Scope

Research Objects: Capital structure and factors affect the capital structure ofpharmaceutical listed firms in Vietnam's stock market

Research Scope: This research collects data and information of listedpharmaceutical firms in Vietnam in the period from 2010 to 2019.

Motivations lead to research question 3: In Vietnam, listing conditions are differentbetween HNX and HOSE Specifically, a company listed on HOSE must have a chartercapital of VND 120 billion or more, while this capital on HNX is only from VND 30billion HOSE requires listed companies to have at least 2 consecutive years ofprofitability, while HNX does not require that HOSE requires listed companies topublish debts to members of the board of directors, the board of managers, majorshareholders, and related persons, meanwhile, HNX does not require

Therefore, whether there is any difference in the capital structure betweencompanies listed on the two stock exchanges HNX and HOSE or not, in order togive hints to stakeholders Managers should choose which stock exchange to list on,and "should or should not" transfer between two stock exchanges Whether thestock exchange that the company listed in should be considered by investors beforemaking investment decisions or not? Should policymakers merge the two stockexchanges or not, and which listing conditions should be provided to suit thedevelopment of companies

Chapter 4: Data analysis and Findings

Chapter 5: Research implications and Recommendations

CHAPTER 2 THEORETICAL FRAMEWORK

2.1 Definition relating to capital structure

debt and equity the firm uses to finance its operations” From these two definitions,

it can be said that capital strucutre is a financial term to describe the source andmethod to develop capital in enterprises which usually emphasizes the relationshipbetween the proportion of debt and equity

In addition, Kaur and Narang (2010) found that “Capital structure is defined as the

ability of a firm in financing by using the combination of equity and debt to optimizethe value of the firm It has been a puzzle for the managers to choose the rightcombination of equity and debt to attract investors and creditors A right capitalstructure (equity-debt mix) can reduce the cost of capital and firms aim to reduce thecost of capital to create the shareholder value” Therefore, a suitable capital structurehas to ensure the harmony between the equity and debt, low cost and acceptable riskwhich is suitable for the condition of the firms It is really important to every companydue to the fact that it is related to the cost of capital, the benefit of the enterprises whichaffect the business capacity of the companies in the competitive environment

2.1.2 Components in capital structure of enterprises

The basic components in the capital structure include two main parts like debt andequity

Brigham and Houston (2008) said that liabilities mean that the money which the company owes to each other According to Ross et al (2013) “Liabilities are

divided based on time of payment including current liabilities and long-term debt”

Current liabilities shows the debt which the companies have the responsibility to pay within one year including short-term bank loan, account payable to suppliers or

the government and employees, short-term bond For short-term liabilities, theprocess is usually easy and simple to implement However, time to pay is short sothe companies may be difficult to pay the debt if they do not use them effectively

Long-term debt illustrates the debt which the firms are responsible to pay principle

and cost of capital after a certain period including medium and long-term loans fromexternal credit institution such as banks, financial leasing companies, the issuance ofbonds or other funds Long-term debt usually has a higher cost of capital than theshort-term one, however, the firms are under short-term payment pressure

Equity

“The shareholders are equity investors, who contribute equity financing” (Brealey,

Myers, & Allen, 2010) Besides, Hall and Lieberman (2012); Ross et al (2013) claimed

that “Equity is the difference between total assets and total liabilities” With differenttypes of firms, equity is developed differently and includes three main types:

Chartered capital is the amount of money contributed by the founders when they

open the companies This is the capital written in the companies’ rules Especially,for joint-stock companies, the main capital is the contribution of the shareholders bybuying the stock of the firms Each shareholder is an owner of the company and isliable only on the value of shares held by them This is not a debt so joint-stockcompanies have full rights to use their production and business activities withoutany restraints about payment This feature shows that the degree of autonomy in the

production and business of joint stock companies depends heavily on this source ofcapital The larger the equity contributes, the higher the financial autonomy is.

The capital from retained earnings is the income of the companies which is accepted by the shareholders to reinvest instead of receiving the dividend This is an

active and convenient capital for the companies However, companies must commit

to paying a higher interest rate than the current dividend

The capital from issuing stock: The enterprises can increase their equity by issuing

new stock This is really an important capital mobilization in the long-termfinancing strategies of enterprises The joint-stock company can issue additionalshares through the stock market

Other equity includes funds and specialized funds formed primarily from the

distribution of profits, including investment funds, financial reserve funds, capitalconstruction investment funds, exchange rate difference and so on

2.2 The theories about capital structure

2.2.1 Capital structure theory of Modigliani and Miller

The theory of Modigliani and Miller (1958) is the first theory that research the

capital structure of enterprises and this is also the basis for later theories

According to the Modigliani and Miller, in a perfectly competitive market with notax, all the way of combinations of equity and liabilities are the same According to

Bradley, Jarrell & Kim (1984) “At any financial option, whether using equity or

choosing short-term or long term debt, the value of the business is unchanged”

In 1963, Modigliani and Miller showed another study with the effect of corporatetax Because of benefits from the tax shield, the value of the levered company ishigher than value of the unlevered company

2.2.2 Trade-off theory

The trade-off theory explained why companies are often financed partly by debt andpartly by equity One big reason why enterprises cannot fully finance a loan is thatbesides the existence of a debt tax-shield benefit, the use of debt financing alsogenerates more costs, especially bankruptcy costs including both direct and indirectcosts of bankruptcy caused by debt The trade-off theory assumes that the targetdebt ratio can be different among firms Companies that have secure tangible assetsand high profitability have higher debt ratios and vice versa

Thus, this theory shows that the tangible fixed assets and profitability have animpact on capital structure Enterprises with large tangible fixed assets will be able

to pay better; firms will use more debt to take advantage of the tax shield Thehigher the profitability is, the fewer bankruptcy costs are, therefore; companies willtend to use more debt to take advantage of the tax shield

2.2.3 Pecking-order theory

The pecking order theory indicated that there is a priority in the use of funding sources.Accordingly, the investment will be financed first by internal capital (mainly retainedearnings), followed by new debt financing and finally new equity issuance The order ofusing funding sources indicates the negative relationship between profit and debt

This theory shows that growth rates and profitability have an impact on capitalstructure:

A company with a high growth opportunity means that there is a high demand toborrow when the retained earnings are not enough to meet the firm's demand, it willgive priority to choosing a loan to increase the debt ratio The growth opportunity ispositively correlated with capital structure

High profitability will allow enterprises to have more conditions to retain moreprofit, so they will use less debt, therefore; profitability is negatively associated withcapital structure

2.2.4 Agency theory

The agency theory was completed by Jensen and Meckling (1976) and it explains

the relationship between principal and agent

This theory shows the growth rate is negatively correlated with debt becauseshareholders often do not want to share benefits with creditors when the firm growswell

Agency theory points out that due to the conflict between shareholders andmanagers, larger companies choose to borrow more because the terms in the loanagreement will control the behavior of the manager Hence, firm size has a positiveimpact on the debt

Besides, agency theory also confirmed the conflict of interest between ownership and

manager in the corporation According to Nazir, Aslam & Nawaz (2012) “The

Corporate Governance and capital structure of the firms are linked together through theagency cost especially in case of developing economies” The relationship betweencorporate governance and capital structure has been identified in many studies, for

example, Berger et al (1997); Friend and Lang (1988); Wen et al (2002) One of the

most important issues of corporate governance is pluralist executives (CEO duality).When the CEO is the chairman of the board, he will increase the power of the CEO tohelp make decisions quickly and ensure decisions are implemented But the fact thatthe CEO is also the chairman of the board of directors is also losing the importantfunction of the chairman of the board of directors Hence, the CEO will act according

to his goals, not the shareholders' Besides, according to agency theory, because ofagency conflicts, managers of the firms may not always accept leverage choices thatare maximizing value for shareholders Instead, managers may tend to select theleverage degree that maximizes their own benefits Therefore, we can conclude thatthere is a relationship between pluralist executives and capital structure throughexplanation about agency conflict of agency theory

2.3 The determinants affecting capital structure

Based on theories of capital structure as well as a variety of research results fromprevious researchers, there are many factors having impacts on the capital structure

of the enterprises

These determinants are as follow:

Profitability

Titman and Wessels (1988) suggested that “Profitability is an essential determinant of

capital structure because it shows how much earning the company retains to keep itgoing” The pecking order theory showed that enterprises with high profit preferinternal funding to external debt In more detail, internal funding from retainedearnings will be used first which is followed by borrowed debt and issued stock Thisshows that there is a negative relationship between profit and capital structure This

opinion was supported by previous studies include Ahmed Sheikh and Wang (2011);

Saeed et al (2014); Titman and Wessels (1988); Wald (1999); Booth et al (2001); Viviani (2008); De Jong et al (2008); Serrasqueiro and Roga˜o (2009) Besides, the

studies of Chen (2004); Tong and Green (2005); Huang and Song (2006) also point to

the negative relationship between profitability and capital structure when researchersconduct research related to capital structure in Chinese companies

However, trade-off theory shows the positive relationship between profitability andleverage ratio, it means that “Companies with high profitability should use more

debt because of the tax depreciation and lower expected bankruptcy costs” (Frank and Goyal, 2003; Fama & French, 2002)

The growth opportunity

According to Mouamer (2011) “There is a relationship between growth opportunity

and capital structure and this relationship was confirmed in current literature”.Depending on the different theories and researches, the relationship direction isdifferent

Based on the pecking order theory, there is a positive relationship between growthopportunity and capital structure The companies with good growth opportunitiesmean that they have more demands for borrowing capital, especially when retainedearnings are not enough for operating, they will have the priority to chooseborrowed capital to increase the debt ratio because the cost of flotation in sellingstock is more than the cost of issuing debt.

However, according to Myers (1984) “High growth means higher bankruptcy costs” Besides, Deesomsak, Paudyal and Pescetto (2004) found that growth firms have value

come from intangible growth opportunities, so when firms need the money theirrevenue may not have Based on the trade-off theory, there is a negative relationshipbetween growth opportunities and capital structure due to the firms with growthopportunities like holding intangible assets which can not be collaterals, so they tend touse less debt Furthermore, based on agency theory, the high growth rate also meanspositive business results so the shareholders do not want to share this advantage with

the creditors, and then they will use less debt Researches from Zou and Xiao (2006);

Eriotis et al (2007) also confirmed this relationship.

Firm size

Large-sized enterprises usually have advantages in the recent competitive economicmarket The size of firms is considered to be the first sign for external investors to have

information about the companies According to Titman and Wessels (1988) “Large

companies can access the market more easily and can borrow money with betterterms” Therefore, most firms have the tendency to expand the size to take this

advantage When studying companies of G-7 countries, Rajan and Zingales (1995)

found that large companies are more diversified so they were less likely to go bankrupt,

so large firms should use more debt Ahmed Sheikh and Wang (2011) claimed that to

have external capital, small-sized firms have to bear a higher cost than the large-sizedones Based on the trade-off theory, large-sized companies can borrow more capitalthan small-sized enterprises to take tax benefits of debt Besides,

accroding to agency theory, due to the conflict between shareholders and managers,larger companies choose to borrow more because the terms in the loan agreement willcontrol the behavior of the manager It means that firm size has a positive relationshipwith leverage This opinion was confirmed by some previous researches including

Deesomsak et al (2004); Eriotis et al (2007); Serrasqueiro & Roga˜o (2009).

However, according to pecking-order theory, larger firms are better known willhave fewer problems related to information asymmetric and have enough internalcapital, so they will tend to use equity to finance firm activities It shows that firm

size has a negative impact on leverage Research from Chen (2004) pointed out the

negative relationship between firm size and the long-term debt ratio

Tangible assets

As stated by Myers (1984), there is a link between tangible assets and financial

leverage due to the fact that companies with lots of collaterals will have a low rate

in the matter of asymmetric information Frank and Goyal (2009) claimed that “ It

is evident that if the company has mortgage loans, the borrower's risk associatedwith the cost of the loan will also decrease” This argument is also supported by

empirical studies such as Huang and Song (2006); Titman and Wessels (1988).

Based on trade-off theory, tangible assets have a positive relationship with capitalstructure because enterprises which have the larger number of tangible assetsusually receive liabilities with the quite more convenient condition than the oneswith the smaller number of tangible assets Tangible assets can have an influence onthe decision of a company to borrow money because tangible assets are morevaluable than intangible assets in case the firm is bankrupt Besides, the level of riskwill decrease when the company provides tangible assets to mortgage and creditorscan require to sell these assets in case the company can not pay Therefore, tangibleassets are good-mortgaged assets for the debt

In contrast, other researchers illustrated that there is a negative relationship between

tangible assets and debt ratio including Ahmed Sheikh and Wang (2011); Booth et al.

(2001) Titman and Wessels (1988) showed that firms with fewer collateral assets can use more debt to prevent managers from the optimal levels of perquisites It is suitable for the implication of agency theory In Vietnam, a study from Tran and Ramachandran (2006) also found out this negative relationship.

Liquidity

“Liquidity ratio may have mixed effect to leverage of the firm” (Vo, 2017) Based

on the trade-off theory, enterprises with high liquidity usually maintain a higherdebt ratio because they can ensure obligations of a contract on time, which shows apositive relationship between liquidity and capital structure

However, as implied in the pecking order theory, enterprises usually have a priority

to use internal funding from retained earnings rather than external funding.Therefore, businesses that are able to generate retained earnings high enough tofinance the investment will not use debt anymore This refers to a negativerelationship between liquidity and capital structure Empirical studies supporting

this view include Deesomsak et al 2004; Afza et al (2011); Saeed et al (2014).

Business risk

According to the theory of trade-off theory, businesses with high-income volatilityoften face greater risk in paying their debts This implies that businesses with high-income volatility will borrow less and prefer internal funds The enterprises withhigh risk usually have to deal with the worry about bankruptcy Thus, a negativerelationship between business risk and capital structure Empirical research

supporting this view is Booth et al (2001) In contrast, according to pecking-order

theory, when a company has high risk, the potential investors will require higherreturns and it makes the company face expensive costs when the company issuesequity, therefore, risky firms will use more debt to finance themselves There areseveral studies that have found a positive relationship between business risk and

capital structure such as Saeed et al (2014); Tran and Ramachandran (2006).

Non-debt tax shield

The non-debt tax shield is also an analysis when discussing factors affecting the

capital structure While Bradley, Jarrell & Kim (1984) argues that “there is a

positive relationship between the non-debt tax shield and financial leverage”, otherauthors have the opposite view The trade-off theory shows a negative relationshipbetween non-debt tax shield and capital structure When this tax shield is high, netcash flow from operating profit to shareholders is large As a result, enterprises withhigh depreciation in the estimated cash flow will use less debt in the capital

structure Research results from Wald (1999); De Miguel & Pindado (2001); Deesomsak et al (2004) also point out the negative relationship between non-debt tax shield and capital structure In addition, Titman and Wessels (1988) found that

“there is no relationship between capital structure and non-debt tax shield”

Firm age

Oliner and Rudebusch (1992) gave the definition that “firm age as the number of

years from the firm’s initial public offering of common stock until now (the number

of years that company was listed in the stock market)” According to pecking ordertheory when years of listing are high, it means that the company has more time toget funds and market experiences Therefore, they are likely to use less debt and a

firm age has a negative impact on capital structure Research results from Hall et al (2000); Kieschnick & Moussawi (2018) supported the pecking order theory.

In contrast, trade-off theory shows a positive relationship between firm age andcapital structure, because younger firms can not have enough with the higher cost ofdebt and higher bankruptcy cost, so earnings of younger firms may not afford these

debts It makes younger firms unable to utilize the tax benefit of debt Chen and Strange (2005) also supported this opinion.

Pluralist executives

According to Boyd (1995) “CEO duality exists when a firm’s chief executive also

serves as Chairman of the board of directors” The goal of the shareholders is tomaximize the value of their business, that is, maximize the market value of theirequity Managers are aiming for short-term goals with the ability to increase profits,can bring quick results, help them increase their salaries, bonuses, and reputation.Based on the agency theory, when there is independence between owners andmanagers, if the owners lose their control, the managers will operate the companies

to make them profitable which may harm the benefit of the owners Therefore, whenthe CEO is also the chairman, managers tend to choose low-risk investment projects

or a project with a low debt ratio to reduce the probability of bankruptcy and avoidloss of control Thus there is a relationship between pluralist executives and capitalstructure

According to Fosberg (2004), there is a negative relationship between pluralist executives and leverage ratio However, according to Abor (2007), the author found

out that the positive relationship between pluralist executives and the use of debt

While Jaradat (2015) points out that there is no significant impact of CEO duality

on capital structure

2.4 Literature review

The issue of structuring capital has been particularly interesting to the managers aswell as the researchers in the world Since Modigliani and Miller’s research ofcapital structure was awarded the Economy Nobel Prize, there have been more andmore empirical researches carried out in order to examine its practice of theory andshow their opinion to diversify the effects of the firm’s capital structure

2.4.1 International researches

In the research of Chen & Strange (2005), the authors explored the determinants of

the capital structure of firms listed on the Shanghai Stock Exchange and ShenzhenStock Exchange in 2003 The author found out that profitability has an negative

impact on the capital structure while size, risk, and firm age have an impact positively

on debt ratio In addition, research of Ahmed Sheikh & Wang (2011) reported that four

independent variables include profitability, liquidity, earnings volatility, and tangibilityare negative impact on the debt ratio, while firm size is positively related to the debt

ratio The research of Chen & Strange (2005) showed that intangible assets do not have statistically significant effects meanwhile the research of Ahmed Sheikh

& Wang (2011) declared Non-debt tax shields is not significantly related to the debt

ratio Both of these two researches mentioned above showed that growth opportunity doesnot have statistically significant effects

Research in Turkish companies from Sayilgan et al (2006) also use independent

variables related to firm-specific characteristics to analyze Research results showedthat the leverage ratio has positive relationships with size and growth opportunity intotal assets and have negative relationships with tangibility, non-debt tax shields,profitability, growth opportunities in plant and property and equipment The paper

from Imtiaz et al (2016) attempts to determine the factors that affect the capital

structure of listed firms in the pharmaceutical sector in Bangladesh from 2009 to

2013 This research used six independent variables including profitability, growth,size, liquidity, tangibility, and operating leverage Profitability, tangibility andoperating leverage were statistically significant impact on the capital structure whilesize, growth, and liquidity were not Besides, profitability, tangibility, growth andoperating leverage have negative impacts on leverage, while size and liquidity havepositive impacts on the leverage of pharmaceutical firms in Bangladesh

The research of Pacheco & Tavares (2017) suggested that key determinants include

profitability, assets tangibility, firm dimension, total liquidity and risk are affecting thecapital structure when the authors do a research related to hospitality sector SMEs,while growth, other tax benefits and age are not relevant The size variable explained anegative relationship with short-term debt, indicating that smaller firms are more

leveraged in the short term Kieschnick & Moussawi (2018) investigated companies

with non-negative total assets or sales during 1996-2016 Research results show that

firm age has a negative impact on firm’s use of debt Furthermore, the authors alsoexplains the reason why firm age has a negative relationship with how much debt afirm uses Besides, this research showed dual class firms will not use much debtfinancing initially but when they age as public firms they seem to use more debtfinancing.

The study of Abor (2007) analyzed 22 listed firms in the Ghanaian Stock Exchange

during 1998-2003 to find out the impact of corporate governance on capital structure.The dependent variable is debt ratio, the explanatory variables are board size, boardcompensation, CEO Duality, and CEO tenure Research results showed that capitalstructure has a positive relationship with board size, CEO duality, and boardcomposition The results also pointed out that CEO tenure has a negative impact on the

leverage but this relationship is insignificant In the research of Pindado & De La

Torre (2011), the authors pointed out that “According to ownership’s view, the person

who has the power to control the firm will have an impact on the firm’s capital

structure” Besides, the research from Ranti (2013) tried to discover the relationship

between capital structure and two independent variables which are board size and CEODuality To do this research, the author selected and analyzed 40 listed firms in theNigerian stock exchange in the period 2006-2011 The paper found out that CEOduality has a positive associated with capital structure while board size has a negative

associated with capital structure The study of Saeed et al (2014) used different firm

characteristics variables and corporate governance variables such as CEO duality, CEOTenure, Board size and explored their relationship with the debt ratio Research resultsshow that except size, tangibility and CEO duality, all remaining variables have asignificant impact on the debt ratio Board size and CEO tenure have a negative impact

on debt ratio which indicates that governance avoids debt utilization to keep away fromthe larger performance pressure

2.4.2 Researches in Vietnam

Research from Vo (2017) utilizes data of firms listed on the Ho Chi Minh City stock

exchange from 2006 to 2015 According to this research, leverage is a dependent

variable and a large number of firm attributes variables comprise asset growth, ratio

of tangible assets, profit, firm size and liquidity as explanatory variables Thisresearch found out that the growth opportunity coefficients are positive but notsignificant for both long-term and short-term leverage However, this growthopportunity is positive and significant in explaining the ratio of long-term to short-

term debt Meanwhile, in the research of Tran & Ramachandran (2006), growth opportunity has a positive impact on leverage and the result from research of Pham

& Nguyen (2015) also supported this relationship.

Reseach results of Vo (2017) showed that tangible assets have a positive and

significant impact on long-term leverage but negative and significant in explainingshort-term leverage While tangibility has a negative associated with capital

structure as a result from research of Tran & Ramachandran (2006).The

profitability coefficient is negative and significant for both short-term debt and theratio of short-term to long-term leverage, and this result is consistent with a result of

profitability from research of Pham & Nguyen (2015) However, research of Tran

& Ramachandran (2006) declared that profitability does not have significant effect

on the capital structure of Vietnamese SMEs.

In addittion, research of Vo (2017) pointed that the coefficient of firm size is positive

and significant in explaining long term debt, while negative for short-term debt

Meanwhile, research paper from Tran & Ramachandran (2006) showed firm size has a positive relationship with capital structure In contrast, according to research of Pham

& Nguyen (2015), firm size does not have effects on leverage ratio Liquidity has a

negative and significant relationship with short-term leverage while positive but

insignificant in long term leverage in the research of Vo (2017), however, it does not have statistical meaning in the research of Pham & Nguyen (2015).

The paper form Tran & Ramachandran (2006) analyzed the determinants affecting

the capital structure of small and medium-sized enterprises (SMEs) in Vietnam Theresearch’s findings point out that SMEs utilize generally current liabilities to fund

their activities The paper also pointed that firm ownership, firm size, relationshipswith banks, and networking are strong effect of determinants describe theasymmetric features of the fund mobilization process in a transitional economicsystem of Vietnam.

Discussion:

From the research results of previous researches above, we can see there are somedifferences in the variables of the above studies that affect the capital structure ofcompanies in different industries and also show the different results and even pointout contrary research results This may be due to different industry characteristics,different time and space research scope, or different estimation analysis models

In particular, factors of previous studies included in the review are: profitability,growth opportunities, tangibility of assets, liquidity, firm size, business risks, thenon-debt tax shield, tax, firm age, corporate governance and variables for the capitalstructure are total debt to total assets, long-term debt to total assets, and short-termdebt to total assets

Although previous studies have contributed significant achievements related to thefactors that affect the capital structure, there are very few studies related to the capitalstructure of developing countries In addition, “There are very few studies related to theeffect of corporate governance on capital structure in developing countries but only

focus mainly on developed economies with inconclusive results” (Abor, 2007).

Besides, "Empirical results on the relationship between corporate governance and

capital structure appear to be varied and inconclusive" (Abor, 2007).

Moreover, there are very little researches on the factors affecting the capitalstructure of listed companies in Vietnam In particular, there are very few studies onthe factors affecting the capital structure of listed companies of the pharmaceuticalindustry - an emerging industry of Vietnam recently

Therefore, with the topic "Determinants of capital structure of listed firms in thepharmaceutical sector in Vietnam ", the author aims to provide significantinformation on the Vietnam pharmaceutical industry and define the determinantsaffect the capital structure of pharmaceutical listed firms in Vietnam in 10 yearsfrom 2010 to 2019 This research will inherit and select independent and dependentvariables to match the research context in Vietnam for pharmaceutical industryenterprises from 2010 to 2019.

2.5 Research gaps

Previous studies have provided valuable research results on capital structure,however, “there is little work done on examining capital structure in emerging

countries” (Mouamer 2011).

Particularly, according to Črnigoj & Mramor (2009) “The capital structure

differences of companies can be explained by modern capital structure theory fordeveloped countries, but for developing countries, it is still a question for

researchers to continue looking for answers”

This study aims to provide more understanding of capital structure decisions in adeveloping country Despite a large number of previous researches on capitalstructure, research using data of Vietnamese enterprises is still limited According to

Le and Do (2017), “Despite the abundant theoretical and empirical literature on

capital structure, the shortage of research in the Vietnamese context is obvious”.Therefore, it is important to investigate the factors that influence the capitalstructure of companies in the Vietnam market

Research on factors affecting the capital structure of the pharmaceutical industrylisted companies has been done in different countries before Previous studies used adifferent set of independent and dependent variables and also gave different, evencontradictory results Besides, existing theories also show different research results.Therefore, this is the motivation for the author to conduct research on the capitalstructure of the pharmaceutical industry in Vietnam As indicated above, there are

few studies on capital structure in the Vietnam market, and it only focuses oncompanies in general, not in any specific industries According to the data andevidence cited by the author in the practical motivation, Vietnam's pharmaceuticalindustry is an emerging and extremely important industry, so studying the factorsaffecting the capital structure of listed pharmaceutical companies in Vietnam isessential.

In addition, corporate governance is different between countries, because of thepolitical and legal differences between countries for ownership and control

authorities of public companies (Roe, 1990) Besides, there are very little researches

on corporate governance's influence on capital structure in Vietnam Especially,there are little researchess related to the influence of pluralist executives on thecapital structure of pharmaceutical companies in Vietnam – Pharmerging.Therefore, to fulfill this gap, this study will examine the impact of pluralistexecutives on the company's capital structure

Besides, previous capital structure studies in Vietnam focused on companies listed

on both two stock markets, namely Hanoi Stock Exchange and Ho Chi Minh CityStock Exchange However, there is a limited number of researches done on thecapital structure of companies listed by each stock market Therefore, this study willcompare the factors affecting the capital structure of pharmaceutical companieslisted on the Hanoi Stock Exchange with factors affecting the capital structure ofthose listed on the Ho Chi Minh City Stock Exchange

The pharmaceutical industry has been an emerging industry in Vietnam in recentyears, so there have been very few studies conducted on the capital structure of thepharmaceutical industry in Vietnam in recent years This study will research thepharmaceutical industry in the last 10 years, from 2010 to 2019, so this research will

be topical

CHAPTER 3: METHODOLOGY

3.1 Research methodology

Based on results of previous reseachers, hypothesises in this research are tested byusing the linear regression model, using firm characteristics and source of finance asrespective independent and dependent variables Hence, in order to suit with theresearch model as well as the data collected, the thesis uses Ordinary Least Square(OLS) to estimate the parameters of the model Multicollinearity in this model istested through the coefficient of correlation matrix and variance – inflation factor(VIF)

The detail steps in this study:

Step 1: Collecting data from financial statements and annual reports of listedpharmaceutical firms in Vietnam from 2010 to 2019

Step 2: Choosing the variables and hypotheses based on the theories in chapter 2.Step 3: Suggesting a regression model and doing the calculation by using Excel andEview

Step 4: Testing the model

Step 5: Discussing the results and giving a conclusion for the study

3.2 Research Data

There are 20 pharmaceutical firms listed on Vietnam's stock market, of which 9pharmaceutical companies are listed on the Hanoi Stock Exchange and 11pharmaceutical companies are listed on the Ho Chi Minh City Stock Exchange

The data was collected from financial statements of 20 listed pharmaceutical firms in

Ha Noi and Ho Chi Minh City Stock Exchange during the ten year period from 2010 to

2019 (Hanoi Stock Exchange divides listed firms into different sectors based on HanoiStock Exchange Standard Industrial Classification in which revenue is the

main criteria to decide the main industry of the firm, while Ho Chi Minh City StockExchange divides listed companies into different sectors based on Global IndustryClassification Standards including four levels from sector, industry group, industry

to sub-industry) After that, I also used Excel to collect data and calculate thenecessary ratios To analyze and test the regression model of determinants affectinglisted pharmaceutical firms in Vietnam, the thesis used the Eview program toanalyze the data

3.3 Research Model

Empirical studies in Vietnam as well as in the world about factors affecting capitalstructure of firms almost used linear regression model to test the hypothesesbetween capital structure and determinants affecting it

Based on the capital structure theories as well as domestic and foreign studies

mentioned in chapter 2, especially the study of Saeed et al (2014) which researched

the determinants influencing on pharmaceutical firms in Pakistan, therefore, theauthor could compare the results of pharmaceutical companies in Vietnam whichwere different from the ones of Pakistan or not Also, the author has consulted the

study of Vo (2017) which studied the factors influencing the capital structure of

emerging markets, case study in Vietnam, it helps the author to better understandthe capital structure situation and urgency of studying capital structure in Vietnam.Moreover, to match the development situation as well as characteristics ofpharmaceutical companies listed on stock exchange in Vietnam, the public data inthe financial statements of companies listed on the stock market, the author hasinherited, adjusted and issued a regression model as shown below In this thesis, theauthor uses the dependent variable which is the debt ratio The independentvariables consist of Profitability, Growth opportunity, Firm size, Tangible assets,Liquidity, Firm age, and Pluralist Executives

I will denote variables as follows: Debt ratio – TD, Profitability - PROF, Growthopportunity - GROW, Firm size – SIZE, Tangible assets – TANG, Liquidity – LIQ,Firm age – AGE, Pluralist Executives - PLU Therefore, the detailed model is:

TD=α+α+1 + 2 + 3 + 4 + 5 + 6 + 7 +ε

3.4 Variables measurement

The data of this study comes from financial statements, annual reports andmanagement reports of listed companies, therefore, all variables in this study areestimated using book value Besides, estimates of these variables are adopted fromexisting researches

Table 3.1: Variables measurement

TD: Debt ratio Total debt/ total assets Saeed et al., (2014);

(2011)

Samanta, (2014)

(2017)TANG: Fixed assets/ Total assets Sinha & Samanta,

Kayo & Kimura(2011)

LIQ: Liquidity Current assets/ Current Sinha & Samanta,

Sheikh & Wang,(2011)

AGE: Firm age The number of years =α+ Filatotchev and

present year – year of Wright, (2006); Chen

Strange, (2005)PLU:Pluralist 1 if CEO is a chairman of Saeed et al., (2014);Executives the board; 0 if CEO is not Boyd (1995)

a chairman of the board

3.5 Hypothesis

Profitability (PROF): Based on the pecking order hypothesis, enterprises with high

profit prefer internal funding to external debt In more detail, internal funding fromretained earnings will be used first which is followed by issued external debt orpreferred stock Finally, common stock will be the final priority if necessary Thisshows that there is a negative relationship between profit and capital structure The

empirical researches did a favor for this opinion including Ahmed Sheikh and Wang (2011); Saeed et al (2014); Titman and Wessels (1988); Wald (1999); Booth et al.

(2001); Viviani (2008); De Jong et al (2008); Chen (2004) However, as implied in

the trade-off theory, companies with high profitability should use more debt because

of the tax depreciation and lower expected bankruptcy costs In Vietnam, the

26

researches of Pham and Nguyen (2015); Vo (2017) proved that there is a negativebetween profitability and capital structure Therefore, based on the pecking ordertheory and previous researches in Vietnam, I hypothesize that:

H1: Profitability has a negative relationship (-) with debt ratio

=

EBIT Total Assets

Growth opportunity (GROW): Based on the trade-off theory, the firms which have larger growth opportunities usually maintain a lower debt ratio because the

risk level may be high with growth-oriented investment Besides, firms with growthopportunities like holding intangible assets which can not be collateral, so they tend

to use less debt Therefore, according to the trade-off theory, there is a negativerelationship between growth opportunities and capital structure Some researches

supported for this opinion are Saeed et al (2014); Imtiaz, Mahmud & Mallik (2016).

In contrast, as implied in the pecking order hypothesis, companies with good growthopportunities will tend to borrow more in the future Because if the companies havegood growth opportunities with good investment but they lack internal funds, theywill tend to use debt to finance themselves In other words, there is a positiverelationship between growth opportunity and capital structure The empirical studies

supported for this opinion include Vo (2017); Pham and Nguyen (2015); Tran and Ramachandran (2006) Therefore, based on the pecking order theory and some

previous researches, I hypothesize that:

H2: Growth opportunity has a positive relationship (+) with debt ratio

=α+ Total assets t - Total assets

t-1

Total assets t-1

Firm size (SIZE): According to pecking-order theory, larger firms will have fewer

problems related to information asymmetric, they will tend to use equity to finance firm

activities It means that firm size has a negative impact on capital structure Chen

(2004) also showed the negative relationship between firm size and long-term

leverage ratio However, accroding to agency theory, due to the conflict betweenshareholders and managers, larger companies choose to borrow more because theterms in the loan agreement will control the behavior of the manager As implied intrade-off theory, large-sized companies can borrow more capital than small-sizedenterprises In more detail, to have external capital, small-sized firms have to bear ahigher cost than the large-sized ones Therefore, the large firms are more convenientthan the small ones to enter the capital market which shows that there is a positiverelationship between debt ratio and the size of firms Another reason is that biggerfirms are more diversified and thus they will have a lower variance of profit and canget tax benefits from debt, making them able to endure a higher cost of debt thansmaller firms Besides, lenders prefer lending to larger firms because such firms areseen to have lower levels of risks This opinion was supported by a lot of empirical

studies in the world including Abor (2007); Ahmed Sheikh and Wang (2011); Saeed

et al (2014) In Vietnam, the positive relationship between the size of firms and capital structure was also proved in the research of Tran and Ramachandran (2006).

Based on the trade-off theory and the results of previous empirical research, Ihypothesize that:

H3: The size of firms has a positive relationship (+) with debt ratio

SIZE = Ln(Total assets)

Tangible assets (TANG): Tangible assets are considered to be one of the

determinants of the firms’ capital structure As implied in the trade-off theory, tangible assets have a positive relationship with capital structure Based on this theory, previous researchers thought that the enterprises which have the larger number of tangible assets usually receive liabilities with the quite more convenient condition than the ones with the smaller number of tangible assets due to the fact that it looks like a positive sign for creditors Empirical studies supported this

opinion including Saeed et al (2014); Frank and Goyal (2009); Titman and Wessels (1988) In contrast,

other researchers illustrated that there is a negative relationship between tangible

assets and debt ratio According to Titman and Wessels (1998) the firms with fewer

collateral assets can use more debt to prevent the managers from the optimal level

of perquisites Empirical studies conducted in various countries that support this

view include Booth et al (2001); Sayilgan et al (2006); Ahmed Sheikh and Wang (2011); Tran and Ramachandran (2006) Therefore, based on the previous empirical studies as well as the trade-off theory, I hypothesize that:

H4: Tangible assets have a positive relationship (+) with debt ratio.

Fixed assets=

Total assets

Liquidity (LIQ): Based on the trade-off theory, enterprises with high liquidity

usually maintain a higher debt ratio because they can ensure obligations of acontract on time, which shows a positive relationship between liquidity and capitalstructure However, as implied in the pecking order theory, enterprises usually have

a priority to use internal funding from retained earnings rather than externalfunding Therefore, if firms are able to make higher retained earnings, their demandfor external funding will not be important when their assets are enough to be usedfor investing This shows that there is a negative relationship between liquidity and

debt ratio The empirical studies proved this opinion including Deesomsak et al (2004); Ahmed Sheikh & Wang (2011); Saeed et al (2014) Therefore, based on the pecking order theory and some empirical studies, I hypothesize that:

H5: Liquidity has a negative relationship (-) with debt ratio

Current Assets

= Current Liabilities

Firm age (AGE): Based on the trade-off theory, the profits of younger firms may

be small to pay for the cost of debt and may not be useful to utilize the tax benefits

of debt, it means that they gave the research result that firm age has a positive

29

relationship with the leverage ratio Chen and Strange (2005) also supported this opinion Besides, Diamond (1989) also pointed out that the older listed companies

have a reputation and debt repaying history will be easier to finance their company

at a lower cost In contrast, the pecking order theory showed that older companieswill use less debt than younger companies because these older companies havemore time to attract, collect and accumulate funds To support pecking order theory,

researches from Hall et al (2000); Kieschnick & Moussawi (2018) found out that

firm age has a negative relationship with the leverage ratio According to peckingorder theory and previous researches, I hypothesize that:

H6: Firm age have a negative relationship (-) with debt ratio

Pluralist Executive (PLU): Based on the agency theory, when owners and managers are independent, if the owners lose their control, the managers will

operate the companies to make them profitable which may harm the benefit of theowners On the other hand, when the CEO is also a chairman, they can impactdirectly the financing decisions of the firms, they usually prefer using less debt to

avoid bankruptcy and loss their control According to Fosberg (2004) “there is a

negative relationship between pluralist executives and leverage ratio” However,

according to Abor (2007), the author found out that the positive relationship between pluralist executives and the use of debt While Jaradat (2015) points out

that “there is no significant impact of CEO duality on capital structure” In Vietnampharmaceutical industry context, recently, many domestic and foreign investorshave invested in Vietnamese pharmaceutical companies, so to fund their activities,companies will use capital from new investors and shareholders instead of usingdebt Moreover, according to agency theory, shareholders do not want to sharebenefits with creditors, the CEO as a chairman will use less debt to avoid the risk ofbankruptcy, loss of benefits, and loss of their control I hypothesize that:

H7: Pluralist executives have a negative influence (-) on debt ratio