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

In particular, factors of previous studies included in the review are: profitability, growth opportunities, tangibility of assets, liquidity, firm size, business risks, the n[r]

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

ACKNOWLEDGEMENT

I would like to express my sincere thanks to the Board of Management, professors, and teachers of Vietnam Japan University and Yokohama National University for facilitating and imparting knowledge to me to complete this graduation thesis as well

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, and imparted useful knowledge and ideas during the implementation and completion of this thesis

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

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

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

my thesis

Sincerely,

STATUTORY DECLARATION

I pledge that the thesis “Determinants of capital structure of listed firms in the pharmaceutical sector in Vietnam” is the work of the author The content is drawn from the learning process and the results of empirical research The data used in the study period are true and have a clear origin Research results have not been published

in any previous scientific research The thesis is conducted under the guidance 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

LIST OF ABBREVIATIONS

EXECUTIVE SUMMARY

This research aims to study the factors influencing the capital structure of pharmaceutical companies listed on stock exchanges in Vietnam This study uses data from financial statements, annual reports, management reports of listed companies that publish data on the stock market during the period 2010-2019 The study used the Ordinary Least Square method to estimate the parameters of the model The study used different independent variables including company characteristics (profitability, growth opportunity, tangible assets, liquidity, firm size, firm age) and corporate governance (pluralist executives) Research results show that profitability, tangible assets, and liquidity have a negative correlation with capital structure However, research also illustrates firm size, firm age and pluralist executives have a negative correlation with capital structure but they do not have statistical significance In contrast, growth opportunities have a positive relationship with capital structure Generally, the results are most consistent with previous studies on capital structure

In addition, the study also shows the direction and the level of the influence of the above independent variables on the capital structure of pharmaceutical companies listed on the Hanoi Stock Exchange and Ho Chi Minh City Stock Exchange are different Also, the study proposed some recommendations for pharmaceutical listed firms to get a reasonable capital structure as well as investors and related parties when they would like to invest in pharmaceutical listed firms in Vietnam

CHAPTER 1: INTRODUCTION

1.1 Research Motivations

Enterprises need capital to operate which may be retained earnings, debt, and equity The source of funds from debt can increase the value of the firm but using too much debt to finance investments, the company may have financial risks which can consequently lead the enterprise into bankruptcy Moreover, an ideal combination of capital structure including debt and equity can also minimize the cost 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 the situation of each enterprise, the area in which it operates, as well as the effects of macroeconomic fluctuations of the economy, culture, and religion Rather than finding the optimal ratio of debt to equity, finance researchers are often interested in finding out the factors that influence the use of the financial leverage of the business 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 is reasonable

or not, then propose solutions to improve the efficiency of using financial leverage, maximizing asset value for businesses

In recent years, the theory of modern capital structure has only been studied in developed 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 specific industries, especially pharmaceuticals

Vietnam's economy has been growing in recent years, people's incomes have increased, however, Vietnam is facing an aging population as well as health problems arising from the environment and the process of industrialization This leads to an increased willingness to pay for medical services Therefore, leading to the 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 (Pharmerging markets) According to Business Monitor International report “Vietnam pharmaceutical sector had revenue of USD 5.9 billion in 2018, an 11,7% increase from the previous year, which makes Vietnam become the second-largest medicine market in South East Asia” It once again confirms that the pharmaceutical sector not only an essential industry but also an emerging and growing industry in Vietnam 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 well developed, so it will require huge capital and technology investments From the need for capital and technology of the pharmaceutical industry, in recent years, many domestic and foreign investors have invested in Vietnam's pharmaceutical industry The appearance of new investors will affect the capital structure of the business and its operations, so Vietnamese pharmaceutical enterprises need to make wise decisions

on the capital structure for sustainable development in the current competitive 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 in Vietnam, which can affect the capital structure of Vietnamese enterprises” In recent years, there has been very little researches on the capital structure of Vietnamese pharmaceutical enterprises, so this research is very necessary

Therefore, based on the situations mentioned above, I chose the topic “Determinants

of capital structure of listed firms in the pharmaceutical sector in Vietnam” to examine which factors and their levels affect to the capital structure of pharmaceutical listed firms 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 the capital structure, and identify factors affecting the capital structure of pharmaceutical firms listed on the stock exchange in Vietnam Then propose some recommendations for business managers, investors, and policymakers

1.3 Research Objects and Scope

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

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

Motivations lead to research question 3: In Vietnam, listing conditions are different between HNX and HOSE Specifically, a company listed on HOSE must have a charter capital of VND 120 billion or more, while this capital on HNX is only from VND 30 billion HOSE requires listed companies to have at least 2 consecutive years

of profitability, while HNX does not require that HOSE requires listed companies to publish debts to members of the board of directors, the board of managers, major shareholders, and related persons, meanwhile, HNX does not require

Therefore, whether there is any difference in the capital structure between companies listed on the two stock exchanges HNX and HOSE or not, in order to give hints to stakeholders Managers should choose which stock exchange to list on, and "should

or should not" transfer between two stock exchanges Whether the stock exchange that the company listed in should be considered by investors before making investment decisions or not? Should policymakers merge the two stock exchanges or not, and which listing conditions should be provided to suit the development 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

2.1.1 Capital structure

The definition of capital structure is presented not only in famous books on economics and finance but also in scientific papers of authors in the world “The firm’s mix of

debt and equity financing is called its capital structure” (Brealey, Myers, & Allen,

2010) While Ross, Westerfield and Jordan (2013) claimed that “A firm’s capital

structure (or financial structure) is the specific mixture of long-term 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 and method to develop capital in enterprises which usually emphasizes the relationship between 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 optimize the value of the firm It has been a puzzle for the managers to choose the right combination of equity and debt to attract investors and creditors A right capital structure (equity-debt mix) can reduce the cost of capital and firms aim to reduce the cost of capital to create the shareholder value” Therefore, a suitable capital structure has to ensure the harmony between the equity and debt, low cost and acceptable risk which is suitable for the condition of the firms It is really important to every company due to the fact that it is related to the cost of capital, the benefit of the enterprises which affect 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 and equity

Liabilities

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, the process is usually easy and simple to implement However, time to pay is short so the 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 from external credit institution such as banks, financial leasing companies, the issuance of bonds or other funds Long-term debt usually has a higher cost of capital than the short-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 different types 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 by buying the stock of the firms Each shareholder is an owner of the company and is liable only on the value of shares held by them This is not a debt so joint-stock companies have full rights to use their production and business activities without any 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 of capital 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-term financing strategies of enterprises The joint-stock company can issue additional shares through the stock market

Other equity includes funds and specialized funds formed primarily from the

distribution of profits, including investment funds, financial reserve funds, capital construction 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 no tax, 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 corporate tax.Because of benefits from the tax shield, the value of the levered company is higher 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 and partly by equity One big reason why enterprises cannot fully finance a loan is that besides the existence of a debt tax-shield benefit, the use of debt financing also generates more costs, especially bankruptcy costs including both direct and indirect costs of bankruptcy caused by debt The trade-off theory assumes that the target debt ratio can be different among firms Companies that have secure tangible assets and high profitability have higher debt ratios and vice versa

Thus, this theory shows that the tangible fixed assets and profitability have an impact

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 The higher the profitability is, the fewer bankruptcy costs are, therefore; companies will tend 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 retained earnings), followed by new debt financing and finally new equity issuance The order

of using funding sources indicates the negative relationship between profit and debt This theory shows that growth rates and profitability have an impact on capital structure:

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

High profitability will allow enterprises to have more conditions to retain more profit, so they will use less debt, therefore; profitability is negatively associated with capital 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 because shareholders often do not want to share benefits with creditors when the firm grows well Agency theory points out that due to the conflict between shareholders and managers, larger companies choose to borrow more because the terms in the loan agreement will control the behavior of the manager Hence, firm size has a positive impact 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 the agency cost especially in case of developing economies” The relationship between corporate 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 to help make decisions quickly and ensure decisions are implemented But the fact that the CEO is also the chairman of the board of directors

is also losing the important function 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 of agency conflicts, managers of the firms may not always accept leverage choices that are maximizing value for shareholders Instead, managers may tend to select the leverage degree that maximizes their own benefits Therefore, we can conclude that there is a relationship between pluralist executives and capital structure through explanation 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 from previous 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

it going” The pecking order theory showed that enterprises with high profit prefer internal funding to external debt In more detail, internal funding from retained earnings will be used first which is followed by borrowed debt and issued stock This shows 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 researchers conduct research related to capital structure in Chinese companies However, trade-off theory shows the positive relationship between profitability and leverage 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 is different

Based on the pecking order theory, there is a positive relationship between growth opportunity and capital structure The companies with good growth opportunities mean that they have more demands for borrowing capital, especially when retained earnings are not enough for operating, they will have the priority to choose borrowed capital to increase the debt ratio because the cost of flotation in selling stock 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 their revenue may not have Based on the trade-off theory, there is a negative relationship between growth opportunities and capital structure due to the firms with growth opportunities like holding intangible assets which can not be collaterals, so they tend

to use less debt Furthermore, based on agency theory, the high growth rate also means positive 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 economic market 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 better terms” 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-sized ones Based on the trade-off theory, large-sized companies can borrow more capital than 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 will control the behavior of the manager It means that firm size has a positive relationship with 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 will have fewer problems related to information asymmetric and have enough internal capital,

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 associated with 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 capital structure because 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 Tangible assets can have an influence on the decision of a company

to borrow money because tangible assets are more valuable than intangible assets in case the firm is bankrupt Besides, the level of risk will decrease when the company provides tangible assets to mortgage and creditors can require to sell these assets in case the company can not pay Therefore, tangible assets 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 higher debt ratio because they can ensure obligations of a contract on time, which shows a positive 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 to finance the investment will not use debt anymore This refers to a negative relationship 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 volatility often face greater risk in paying their debts This implies that businesses with high-income volatility will borrow less and prefer internal funds The enterprises with high risk usually have to deal with the worry about bankruptcy Thus, a negative relationship 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 higher returns and it makes the company face expensive costs when the company issues equity, therefore, risky firms will use more debt to finance themselves There are several 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”, other authors have the opposite view The trade-off theory shows a negative relationship between non-debt tax shield and capital structure When this tax shield is high, net cash flow from operating profit to shareholders is large As a result, enterprises with high 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 order theory when years of listing are high, it means that the company has more time to get 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 and capital structure, because younger firms can not have enough with the higher cost of debt 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 to maximize the value of their business, that is, maximize the market value of their equity 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 and managers, 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, when the 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 avoid loss of control Thus there is a relationship between pluralist executives and capital structure

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 as well as the researchers in the world Since Modigliani and Miller’s research of capital structure was awarded the Economy Nobel Prize, there have been more and more empirical researches carried out in order to examine its practice of theory and show 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 Shenzhen Stock 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 tangibility are 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 does not 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 showed that the leverage ratio has positive relationships with size and growth opportunity in total 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 and operating leverage were statistically significant impact on the capital structure while size, growth, and liquidity were not Besides, profitability, tangibility, growth and operating leverage have negative impacts on leverage, while size and liquidity have positive 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 the capital 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

a negative 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 also explains the reason why firm age has a negative relationship with how much debt a firm uses Besides, this research showed dual class firms will not use much debt financing initially but when they age as public firms they seem to use more debt financing

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, board compensation, CEO Duality, and CEO tenure Research results showed that capital structure has a positive relationship with board size, CEO duality, and board composition 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 CEO Duality To do this research, the author selected and analyzed 40 listed firms

in the Nigerian stock exchange in the period 2006-2011 The paper found out that CEO duality 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, CEO Tenure, Board size and explored their relationship with the debt ratio Research results show that except size, tangibility and CEO duality, all remaining variables have a significant 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 from the 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 This research found out that the growth opportunity coefficients are positive but not significant for both long-term and short-term leverage However, this growth opportunity 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 explaining short-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 term debt and the ratio of term to long-term leverage, and this result is consistent with a result of profitability

short-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 The research’s findings point out that SMEs utilize generally current liabilities to fund

their activities The paper also pointed that firm ownership, firm size, relationships with banks, and networking are strong effect of determinants describe the asymmetric features of the fund mobilization process in a transitional economic system of Vietnam

Discussion:

From the research results of previous researches above, we can see there are some differences in the variables of the above studies that affect the capital structure of companies in different industries and also show the different results and even point out 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, the non-debt tax shield, tax, firm age, corporate governance and variables for the capital structure are total debt to total assets, long-term debt to total assets, and short-term debt to total assets

Although previous studies have contributed significant achievements related to the factors that affect the capital structure, there are very few studies related to the capital structure of developing countries In addition, “There are very few studies related to the effect 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 capital structure

of listed companies in Vietnam In particular, there are very few studies on the factors affecting the capital structure of listed companies of the pharmaceutical industry - an emerging industry of Vietnam recently

Therefore, with the topic "Determinants of capital structure of listed firms in the pharmaceutical sector in Vietnam ", the author aims to provide significant information on the Vietnam pharmaceutical industry and define the determinants affect the capital structure of pharmaceutical listed firms in Vietnam in 10 years from

2010 to 2019 This research will inherit and select independent and dependent variables to match the research context in Vietnam for pharmaceutical industry enterprises 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 for developed 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 a developing country Despite a large number of previous researches on capital structure, 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 capital structure

of companies in the Vietnam market

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

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

In addition, corporate governance is different between countries, because of the political 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 the capital structure of pharmaceutical companies in Vietnam – Pharmerging Therefore, to fulfill this gap, this study will examine the impact of pluralist executives 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 City Stock Exchange However, there is a limited number of researches done on the capital structure of companies listed by each stock market Therefore, this study will compare the factors affecting the capital structure of pharmaceutical companies listed on the Hanoi Stock Exchange with factors affecting the capital structure of those listed on the Ho Chi Minh City Stock Exchange

The pharmaceutical industry has been an emerging industry in Vietnam in recent years, so there have been very few studies conducted on the capital structure of the pharmaceutical industry in Vietnam in recent years This study will research the pharmaceutical 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 by using the linear regression model, using firm characteristics and source of finance as respective independent and dependent variables Hence, in order to suit with the research 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 is tested 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 listed pharmaceutical 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 and Eview

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 9 pharmaceutical companies are listed on the Hanoi Stock Exchange and 11 pharmaceutical 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 Hanoi Stock Exchange Standard Industrial Classification in which revenue is the

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

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

3.3 Research Model

Empirical studies in Vietnam as well as in the world about factors affecting capital structure of firms almost used linear regression model to test the hypotheses between 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, the author could compare the results of pharmaceutical companies in Vietnam which were 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 understand the capital structure situation and urgency of studying capital structure in Vietnam Moreover, to match the development situation as well as characteristics of pharmaceutical companies listed on stock exchange in Vietnam, the public data in the financial statements of companies listed on the stock market, the author has inherited, adjusted and issued a regression model as shown below In this thesis, the author uses the dependent variable which is the debt ratio The independent variables 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, Growth opportunity - GROW, Firm size – SIZE, Tangible assets – TANG, Liquidity – LIQ, Firm age – AGE, Pluralist Executives - PLU Therefore, the detailed model is:

Table 3.1: Variables measurement

Dependent

variable

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

Chen (2004); Ahmed Sheikh & Wang, (2011)

Independent

variables

GROW:

Growth opportunity

Change of percentage of total assets

Titman and Wessels, (1998); Saeed et al., (2014)

SIZE: Firm size Logarithm of total assets Chen (2004); Vo

(2017) TANG:

Tangible assets

Fixed assets/ Total assets Sinha & Samanta,

(2014); Chen (2004); Kayo & Kimura (2011)

LIQ: Liquidity Current assets/ Current

liabilities

Sinha & Samanta, (2014); Ahmed Sheikh & Wang, (2011)

AGE: Firm age The number of years =

present year – year of listing

Filatotchev and Wright, (2006); Chen

&

Strange, (2005) PLU:Pluralist

Executives

1 if CEO is a chairman of the board; 0 if CEO is not

a chairman of the board

Saeed et al., (2014); Boyd (1995)

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 from retained earnings will be used first which is followed by issued external debt or preferred stock Finally, common stock will be the final priority if necessary This shows 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

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

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

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 growth opportunities 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 negative relationship 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 growth opportunities will tend to borrow more in the future Because if the companies have good growth opportunities with good investment but they lack internal funds, they will tend to use debt to finance themselves In other words, there is a positive relationship 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

𝑮𝑹𝑶𝑾 = Total assets t - Total assetst-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 between shareholders and managers, larger companies choose to borrow more because the terms in the loan agreement will control the behavior of the manager As implied in trade-off theory, large-sized companies can borrow more capital than small-sized enterprises In more detail, to have external capital, small-sized firms have to bear a higher cost than the large-sized ones Therefore, the large firms are more convenient than the small ones to enter the capital market which shows that there is a positive relationship between debt ratio and the size of firms Another reason is that bigger firms are more diversified and thus they will have a lower variance of profit and can get tax benefits from debt, making them able to endure a higher cost of debt than smaller firms Besides, lenders prefer lending to larger firms because such firms are seen 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, I hypothesize 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

𝑻𝑨𝑵𝑮 =Fixed 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 a contract

on time, which shows a positive 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,

if firms are able to make higher retained earnings, their demand for external funding will not be important when their assets are enough to be used for 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

𝑳𝑰𝑸 = Current Assets

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

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 companies will use less debt than younger companies because these older companies have more 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 pecking order 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 the owners On the other hand, when the CEO is also a chairman, they can impact directly 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 Vietnam pharmaceutical industry context, recently, many domestic and foreign investors have invested in Vietnamese pharmaceutical companies, so to fund their activities, companies will use capital from new investors and shareholders instead of using debt Moreover, according to agency theory, shareholders do not want to share benefits with creditors, the CEO as a chairman will use less debt to avoid the risk of bankruptcy, loss of benefits, and loss of their control I hypothesize that:

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

CHAPTER 4: DATA ANALYSIS AND FINDINGS

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

4.1.1 The characteristics of pharmaceutical sector in Vietnam

The pharmaceutical industry is one of the important sectors in the national economy which has the function of producing, importing and distributing many types of medicine in order to serve the treatment, healing, restoration, and enhancement of human health

The operating activities of pharmaceutical firms are divided into two main types including producing and distributing drugs The producing medicines groups include materials for the production of pharmaceuticals suppliers, domestic pharmaceutical enterprises and FDI enterprises The distribution groups include wholesale distributors, local and foreign retailers, and retail markets

Besides, according to Business Monitor International Research, in 2018, Vietnam's pharmaceutical market size reached about 5.9 billion USD, up 11.5% compared to the previous year Vietnam has become Southeast Asia's second-largest pharmaceutical market and is among the 17 fastest growing countries in the world Although growing rapidly, Vietnam's pharmaceutical production capacity currently meets only 53% of the domestic pharmaceutical demand, the rest is through imports

In 2018, Vietnam's pharmaceutical imports nearly 2.8 billion USD; this level continues to increase by 10% in 2019 Vietnam is also highly dependent on imported pharmaceutical raw materials, mainly from China with more than 60% of demand Vietnam has completed the "golden population" phase from 2016, beginning its aging population from 2017 According to the Department of Population and Family Planning, Ministry of Health, by 2050, 21% of Vietnam's population has been over

65 years old, leading to high consumer demand for drugs over the next 30 years