Financial leverage of companies listed on hose and hastc an analysis across industries, over time and in compaision with other countries

Therefore, the issues on effective Capital strucíure become essential and headache decisions for firm s ’ managers in order to best uíilize theìr Capital sỉructure f o r fu tu re develop

Trang 2

FINANCIAL LEVERAGE 0 F COM PANIES LISTED

ON HOSE AND HASTC

A N A N A LYSIS ACROSS INDUSTRIES, OVER TIM E A N D IN

COMPARISON W IT H OTHER COUNTRIES

T R U N G T Ã M THONG ĩ!N TKƯVIẺN

m m h - w h h ơ ỡ c : : s o à i

•MTV _ Ạ I ậ O £

-Subm itted by

NGO THI THANH HUYEN

A thesis subm itted as a requirem ent for th e degree of

Bachelor of Business A dm inistration

HANOI UNIVERSITY

F aculty o f M a n a g e m e n t a n d T o u r is m

Hanoỉ November 2008

Trang 3

F in a n cỉa l leverage o f com pan ies lis te d on HOSE a n d HaSTC

CONTENTS

A B S T R A C T 4

S T A T E M E N T O F A U T H O R S H IP 5

h CKNOVVLEDGEM ENT 6

L IST 0 F F IR G U R E S 7

L IST 0 F T A B L E S 8

L IST 0 F A P P E N D IC E S 9

L IST 0 F A B R E V IA T IO N S 10

1 IN T R O D U C T IO N 11

1.1 B ackground o f the s tu d y 11

1.2 S tatem ent o f p ro b le m s 12

1.3 R esearch sig niíicance 13

1.4 T h e research 14

1.4.1 A im s o f research 14

1.4.2 Research C o n trib u tio n s 14

1.4.3 O rganization o f th e re s e a rc h 15

2 L IT E R A T U R E REVIEVV 16

2.1 D eíínition o f Capital structure and M M proposition m o d e l 16

2.1.1 D e íin itio n o f Capital s tr u c tu r e 16

2.1.2 M odigliani and M iller (M & M ) proposition th e o ry 17

2.1.2.1 N o T a x e s 17

2.1.2.2 With T a x e s 19

2.2 C apital structure theories r e v ie w 21

2.2.1 Pecking ord er th e o r y 22

2.2.2 Static T rad e-o ff th e o r y 23

2.3 F a c to rs a ffe c tin g Capital s tru c tu re 26

2.3.1 Firm -specific ĩa c to r s 26

Graduation Thesis _ Ngo Thi Thanh Huyen BA3 04

Trang 4

F in a n cĩa l leverage o f com panies lis te d o n H O SE an d HaSTC

2 3 1 1 Firm g ro w th 26

2.3.1.2 T an g ib ility 27

2.3.1.3 B usiness risk 27

2.3.1.4 P roíĩtability 28

2.3.1.5 Firm s iz e 28

2.3.1.6 R elationship with B anks 28

2.3.1.7 N etw o rkin g 29

2.3.2 C o un try -speciíìc facto rs 29

2.3.2.1 Institutional and legal fa c to rs 29

2 3 2 2 Financial m arkets and banking system factors 30

2.3.2.3 M acro eco n o m ics 30

2.4 E m pirical researches on Capital s tru c tu re 32

2.5 R esearches in V ietn am 33

3 M E T H O D O L O G Y 35

3.1 R esearch qu estions 35

3.2 R esearch to o ls 35

3.2.1 Industry classiíìcation m e th o d 35

3.2.1.1 Industry classiíication sy stem s 36

3.2.1.2 Industry classiíìcation fo r V ietnam ese listed c o m p a n ie s 37

3 2.2 R esearch D ata 38

3.2.2.1 D ata collection 38

3.2.2.2 D ata m easu rem en t 39

4 F IN D IN G S A N D D IS C U S S IO N 40

4.1 C apital structure across various industries in V ietnam 40

4.1.1 C apital structure by industries in V ietn am 41

4 1 2 S hort-term d ebt ratios acro ss In d u stries 49

4.2 C apital structure across industries through tim e 51

4.2.1 C apital structure o f listed firm s by tim e 52

4.2.2 Short-term d ebt ratios o f listed íirm s by tim e 53

4.2.3 C apital structure across industries by tim e 53

Trang 5

F in a n cia l leverage o f com panies lis te d on H O SE a n d HaSTC

4.2.4 Short-term d ebt ratios acro ss industries by tim e 56

4.3 C apital structure o f industries in V ietnam vs other co u n tries 60

4 3 1 V ietnam vs C h in a 60

4.3.2 V ietnam vs U SA and W estem E u ro p e 62

4.4 R esearch lim itation s 68

4.4.1 Industry c la ss iíic a tio n 68

4.4.2 D ata d isto rtio n 68

5 IM P L IC A T IO N S O N F IN D IN G S 70

5.1 Im plications fo r policy m a k e rs 70

5.2 Im plications fo r m anag ers 71

6 C O N C L U S IO N S 73

6.1 S u m m a ry 73

6.2 K ey íĩn d in g s 73

6.3 Future research reco m m en d atio n s 74

6.4 C onclusion s ta te m e n t 75

A P P E N D IC E S 76

R E F E R E N C E 90

Trang 6

F in a n cia l leverage o f com panies lis te d on H O SE and HaSTC

ABSTRACT

The 8-year deveìopment ofVietnam Capital market since 2000 has provided fim is usẹỷủỉ tooỉs in raising and mobilizing their sources o f funds Hovvever, Vietnam Capital markeís stiỉl show evidence o f the weaknesses in credit systems, organìiation and alỉocation o f sources o f funcỉs amongỷirms Therefore, the issues on effective Capital strucíure become essential and headache decisions for firm s ’ managers in order to best uíilize theìr Capital sỉructure f o r fu tu re developments For thai reasorì, this research ìs conducted to investigate the current situation o f Capital strucíure o f alỉ ỉisted Jìrm s across Industries in Vietnam.

Data used in this research are secondary informaiỉon taken from offìcỉal websites o f ÍM'Ũ stock exchanges

in Vietnam, HOSE and HASTC The sample invesiigaíed ìndudesỉ-year fìnancial data o f totơl 295 ỉisted companies in Vietnam.

The fìndings show that ỉisted companies in Vỉeínam generally use more ciebí compared to equiíy in íheir Capital strucíure (D/E = 1.33) in which aboui 68 per cent o f toíaỉ debís employed are short-term maturity Capital structures do vaty across nine iììdustries in Vietnam O f alì, fìrm s in Financiaỉs industry utilize highesí debt to equiíy ratios (D/E = 2.0) w hile/inns in Healthcare industry employ the least level o f debí

in iheir capitưỉ structure (D/E = 0.37).

Capital structures aỉso vary across countries Lisíed companỉes in Vietnam employ lower leveỉ o f debt compared ío lisíedfìrm s in developed markets (D/E = 1.33; 2.86 and 4.04 in Vietnam, USA and Westem Europe, respecíively) In addiỉion, ỉisted companies in Vietnam and China reìy more on shorí-term debt compared to those in USA and Wesíern Europe.

Imptìcations f o r poìicy makers and managers to improve the situations as weỉỉ as future research recommendations are also mentioned.

This íhesis consists o f about 17,170 M ords and 74 pages, excluding appendices.

Trang 7

F in a n ã a l leverage o f com panies lis te d on H O SE and HaSTC

STATEMENT 0F AUTHORSHIP

"Except w h e re reíerence is m ade in the text o f th e thesis, this thesis contains no material published elsew here o r extracted in vvhole o r in part from a thesis o r any o th e r degree or diplom a

N o oth er person's w ork has been used w ithout due acknow ledgm ent in th e m ain text o f the thesis

T his th esis h as not been subm itted for th e aw ard o f any degree o r dipỉom a in any other tertiary institution”

S tudent signature

Ngo T h i T hanh Huyen

Date: 2 8 * N ovem ber 2008

Trang 8

ACKNOVVLEDGEMENT

T his thesis vvould not have been com pleted vvithout the enthusiasm , valuable guidance, and vvillingness to answ er all the questions o f m y supervisor, Mrs N guyen H oai Phuong I w ould like to give m y greatest thanks to h er for alw ays giving me supports, m otivations and useíùl inform ation during th e sis' com pletion progress It is her to discuss w ith m e for ideas generations, helping me to get back to the right track w h en ever I got lost

It is m y honor to send a w arm gratitude to all o f m y teachers in th e Faculty o f M anagem ent and Tourism w ho have been w ith m e for m ore than four years, teaching me to becom e not only a successĩul but also a kind-hearted person

I w ant to express my love to my classm ates in B A 3-04 w ho alw ays care fo r me, encouraging me during my hard time Especially, I am indebted to m y friend, M s Tran M inh N guyet vvho has helped me a lot with iníòrm ation searching as well as listening to m y troubles w hen I w as extrem ely w orried

AI so, m y great appreciation sent to m y colleagu es w orking in C B V R esearch Team They gave

me assistance in data collection and helped m e to balance the w ork-thesis tim e All o f my stresses w ere rem oved as w e talked and laughed

It is im possible for m e to com plete the thesis w ithout supports from m y fam ily and close íriends

w ho have given me best regards and been w iíh m e in the m ost nervous m om ents I truly w ant to send them a vvarm hug for th eir appearance in m y life

Pinally, I w ould like to send the m ost faithful and special thanks to my room m ates - m y little sister and a close íriend T hey have p ut up w ith me during diữ ìcult tim e w itho ut any com plain

M oreover they supported m e w ith the best condition to keep going on vvith m y thesis as well as helped me to balance m y life Thanks for alw ays sym pathizing and forgiving m e w hen ỉ w as not being w ith you w hen you w ere in need

Thank you very much w ith all o f my s\veetest love!

• • •

Trang 9

F in a n cia l le verag e o f com panies lis te d o n H O SE an d HaSTC

Lisr 0F FIRGURES

Figuc 1: M & M P roposition II (W ith T ax ) 20

Figuc 2 : Static T ra d e -o ff theory: C ost o f C apital vs C apital stru ctu re 24

Figuc 3: C apital stru ctu re o f íĩrm s in nine Industries - 2 0 0 8 46

Figuc 4 : R anking o f Capital structures across industries in V ietnam - 2 0 0 8 47

Figue 5: S egm ents o f Pharm aceutical Production Lines - 2 0 0 8 48

Figuc 6: R anking o f short-term debt ratios b y Industries in V ietnam , 2 0 0 8 49

Figuc 7: Capital stru ctu re o f listed íirm s through y e a rs 52

Figuc 8: Short-term d e b t ratios o f listed firm s through years 53

Figuc 9: Trends o f Capital structure across industries through tim e 54

FigUE 10: Inílation rates o f V ietnam , 2 0 0 8 55

Figuc 1 1: T ren ds o f short-term debt ratios across Industries through tim e 57

F iguc 12: Short-term d eb t ratio s - N ine industries in V ietnam 59

F igu c 13: R anking o f Capital structure across industries, 2008: V ietnam vs C h in a 61

FiguE 14: C apital structure across industries: V ietnam vs C h in a 62

F iguc 15: R anking o f Capital structure across industries: Vietnam vs USA and Western Europe 63

F igu c 16: C apital structure acro ss industries: V ietnam vs U SA and \V estem E u rop e 64

F igu c 17: S tructure o f V ietnam Listed Bond m arket throughout y e a r s 65

F igu c 18: B ond vs Equity m arket in V ietnam , 2 0 0 8 66

FiguE 19: T u m o v e r ratio s o f B ond m arkets across em erging countries, 2 0 0 8 66 Figui3 20: Long-term D /E ratios across industries: V ietnam - C hina - U SA - W estem Europe 67

« » •

Gradiation Thesis _ Ngo Thi Thanh Huyen BA3 04

Trang 10

F in a n c ia l leverage o f com pan ies lĩs te d on H O SE a n d HaSTC

LIST 0F TABLES

Table 1: Sum m ary o f Capital structure th e o rie s 24

Table 2: Impact o f C ountry-speciíĩc F acto rs in C apital S tru ctu re 31

Table 3: Sum m ary o f Industries in V ie tn a m 38

Table 4: C apital structure ratios fo r nine industries in V ietnam , 2 0 0 8 41

Table 5: Standard deviation and V ariance coeffĩcient for nine industries 46

Table 6: C apital stru ctu re across industries through tim e 51

Trang 11

Fin a n cia l leverage o f com pan ies lis te d on H O SE a n d HaSTC

LIST 0F APPENDICES

A ppendix 1: List o f V ietnam ese Iisted com panies by in d u stries 76

A ppendix 2: C apital structure ratios across industries from 2006 to 2 0 0 8 84

A ppendix 3: Industry classiíication benchm ark (1CB) s y s te m 85

A ppendix 4: Financial data o f all listed com panies from 2 006 to 2 0 0 8 95

Trang 12

F in a n cia l le v e ra g e o f co m p a n ie s lis te d on H O SE a n d HaSTC

LIST 0F ABREVIATIONS

HOSE : Ho C hi M inh S tock E xchange

H A STC : Hanoi S ecurities T rad in g C enter

ICB : Industry C lassiíication B enchm ark

M arket Cap : M arket capitalization

EBIT : Earnings before interest and taxes

SBV : State B ank o f V ietnam

CBV : Bien V iet S ecurities Jo in t S tock C om pany

e * *

Trang 13

F in a n c ia l ĩe verag e o f com panies lís te d on H O SE a n d HaSTC

1 INTRODUCTION

T his first ch apter giv es out a general idea o f the background w here the study is taken place Then the statem ent o f problem regarding to topic o f the research w ill be presented Subsequent part discusses about th e research signiíìcances, w hich are rationales to conduct this research The chapter ends vvith th e organization o f the research

1.1 Background of the study

In recent tim es, V ietnam ese G overnm ent has continuously m aintained com prehensive reíòrm s in all aspects, including socio-econom ic and adm inistrative reform s W ith th e aim s at rapid and sustainable econom ic grovvth a s w ell as socia] equality, V ietnam econom y h as achieved sound grovvth

ỉn 2007, regardless o f difficulties in natural disaster, dangerous diseases and com plicated períorm ance o f w orld econom y, V ietnam econom y attained the highest level o f grow th for 11 years, belonging to the group o f countries w ho have highest econom ic grow th in the region The social area has gained good achievem ents; especially the poverty reduction has been highly appreciated by intem ational com m unity T h e valuable achievem ents in social econom ic developm ent have been gained w ith the appearance o f the active contribution o f C a p ita l m arkets

in V ietnam , vvhich help to m obilize dom estic and íòreign íinancial resources to invest effìciently for developm ent, and m aintain the m acro stabilization

A fter nearly 8 years o f operation, V ietnam securities m arket has been developed rapidly The

m arket has gained good progresses in th ree recent years, w hich create the prerequisite for the next developm ent Through securities m arket, fund raising is im proved to contribute for the developm ent o f enterprises and econom ic grow th

A ccording to o íĩicial data from H A STC and H O SE (2008), vvith the regard o f scope o f

V ietn am 's securities m arket, by end o f Jun e 2008, there are 295 com panies w hich have been listed and registered for transaction on security m arket T he total value o f transaction on both trading íloors is ab o u t 40% o f G D P (C B V data, 2008)

Trang 14

In early m onths o f 2008, responding to the recession o f wor!d stock exchanges, V ietnam security

m arkets are affected Hovvever, w ith the continuous econom ic grovvth, the stable investment policies and th e relevant solutions for developm ent o f security m arkels w ill help Vietnam security m arkets grow steadily and stabilize T he interm ediaries operate on the security m arkets are increasing in num ber and step by step im proving th eir períòrm ance quality There are 75 licensed security com panies, 2 4 licensed fund m anagem ent com panies w ho provide services on the m arkets

V ietnam bond m arkets are also quite developed with som e typical types o f bonds such as

G overnm ent bonds, local govem m ent bonds, enterprise bonds and bank bon ds vvith total outstanding at end o f 2007 o f about 17% o f G DP ỉn 2005, th e fĩrst issuance o f G overnm ent bond to th e intem ational m arket has been com pleted su ccessíully with the am ount o f U SD 750

millions T h is is good start for V ietnam for its next issuance to intem ational Capital m arket

Since rec o g n izin g th e im portance o f Capital m arkets in each econom y, num erous researches, books, dissertations as w ell as articles have been carried ou t to investigate th e factors aíĩectin g Capital stru c tu re c h o ic e s o f íìr m s w ith in a reg io n H o w e v er, th e im p o rta n c e o f Capital stru c tu re varies across industries due to th e typical characteristics o f each industry, especially w ith regard

o f m obilizing d ifferent kind o f íiinds for running business and investm ents Y et th ere are ju s t few

ũliteratures about Capital structure explorations for V ietnam ese case, especially none done for industries investigations For th at reason, th is research is d on e to fulfil! this gap in V ietnam ese literatures

1.2 Statement of problems

A c tu a lly , a g ood Capital stru c tu re w ith re a so n a b le c o st o f Capital is a p rim a ry in su ra n c e fo r a healthy ĩinancial perform ance o f íìrms H ow ever, it is no t easy to have such effective Capital structure, especially in not w ell-organized and low liquid íìnancial m arkets like V ietnam The fact in re c e n t y e a rs is th a t a n a v e ra g e o f 15 p e r c e n t h a s b e e n c o n sid e red to b e th e Standard in calculating cost o f Capital regardless o f w here th ose capitals com e from

C ost o f Capital is also the cost o f investing because w hen d eciding to invest in o r lend to this organization or investm ent is to give up chances to invest in others activiiies o r o ther businesses

• • *

Trang 15

Up to novv, still a m ạịority o f m anagers do not realize the im portance o f a reasonable Capital structure for their businesses A ccording to reports o f S tate Bank o f V ietnam (2007), íìnancing costs o f V ietnam ese íĩrm s are to o high, in particular firm s in C onstructions and M aterials w ith debt to total assets o f m ore than 80-90% T he facts that V ietnam ese firm s use to o much debt in

th eir Capital stru c tu re m ay b e e x p la in e d by the d isto rtio n in m a n a g e rs’ p e rc e p tio n s o f c o s t o f debt They m ay think th at cost o f debt is much low er than cost o f equity as fíxed interest rates are

o f course low er than required rates o f retum from investors In addition, íìrm s can take advantage w hen u sin g debt because interests are tax-deductible C onversely, they have not thought o f the fact that higher íìnancial distress com es o u t as higher debt used

Specifically, the actual annual aVerage cost ò f d ebt vvhich x o m p a n ie s in Industrials industry

em ployed w as about 10% per year (the low est rate is ab ou t 8% ) vvhile annual rate o f retum was only 5% (SB V , 2007) Such high cost o f debt aíĩected directly to the com petitiveness o f íirm s due to higher cost o f productions

In case o f a d e v e lo p e d Capital m ark e t, c o st o f Capital (in c lu d in g b o th c o st o f d e b t and e q u ity )

m ust be clearly stated plus po ssible deíault risks o f speciíic sources o f funds C reditors norm ally

do not accept a Capital structure w ith level o f debt to o high due to high risks V ice versa, com panies should n ev er operate based on only shareholders’ equity because cost o f Capital is too expensive

D espite rem arkable dev elopm ents and achievem ents, V ietnam Capital m arkets still exhibit the

w eaknesses in credit system s, organization and allocation o f sources o f ĩunds am ong íìrm s Thereíore, the issues on effective Capital structure becom e essential and head-aching decisions for íìrm s’ m an a g e rs in o rd er to best u tilize th e ir Capital structure for future developm ent

1.3 Research significance

To attain a good sense in term s o f effective Capital structure leve! for íìrm s in a sp eciíĩc industry,

m anagers m ust understand th e current situations o f Capital used am ong íìrm s in V ietnam and other developed countries H ow ever, th ere are only lim ited num bers o f studies th at exam ine the current Capital structure o f íirm s in V ietnam H ence, th is research is carried o ut w ith the hope o f

Trang 16

F in a n c ia l leverage o f com p an ies lis te d on H O SE a n d HaSTC

providing m anagers as well as policy m aker useful inform ation about average structure o f Capital used by industries

Thanks to the average ratios o f debt to equity vvorked out for each industry, m anagers from a particular com pany can refer to those average ratios to m ake crucial decisions OĨ1 how to allocate

th e so u rc e s o f fu n d s In a d d itio n , Capital stru c tu re s e x a m in e d by in d u strie s w h ic h a re c la ssiííe d based on the sam e m ethod (ICB) provide consistent data th at allovv com parisons across countries

to be m ade

1.4 The research

1.4.1 Aims of research

This research is conducted w ith som e specitìc purposes F irst, th e research aim s at investigating

th e c u rre n t Capital s tru c tu re o f listed c o m p a n ie s a c ro ss in d u strie s in V ietn am S e c o n d , b ased on

three-year data analysis, the thesis will give an idea about the trend in using Capital structure of

listed co m p a n ies T h e n , th e p re fe re n c e reg a rd in g to m a tu rity o f d e b t used in Capital stru c tu re o f listed com panies by industries is also One o f the research ’s aim s In addition, the research

a tte m p ts to m ake th e c o m p a riso n s b e tw e e n Capital stru c tu re o f listed c o m p a n ie s by in d u stries in

V ietnam and other cou ntries w hich are both in em erging m a rk e t and developed m arket Finally, recom m endations fo r com panies to have an effective Capital structures w ill be given based on researcher’ s j udgm ents

1.4.2 Research Contributions

W ith respect o f industries’ study in V ietnam , this p ap er is likely to be th e earliest study that

in v estig a te th e Capital stru c tu re a n d g iv e o u t a n a ly sis T h e re fo re , it m ay b rin g c e rta in b e n e íìts to som e parties in V ietnam :

Trang 17

■ Use average ratios o f C a p i t a l structure across In d u stries as references for choices o f sources o f Capital

• Have an overview about the current structure o f Capital used in V ietnam and in other countries

In short, different types o f parties m ay perceive dilTerently about the contributions that the research m ay convey

1.4.3 Organization of the research

The research co n sists o f six m ain parts C hapter 1 includes th e discussion about background o f the research, statem ent o f problem s, research signiíìcance and contributions plus structure o f the research C hapter 2 synthesizes all fam ous theories related to Capital structure as well as

em pirical studies done on th is topic to provide a basic fundam ental for readers T h e next chapter describes m ethodology used to conduct the research com prising industry classiílcation method, data collection and m easurem ent The fourth ch ap ter presents all fíndings from secondary data for Capital structure o f listed com panies in V ietnam by industries Then, chapter 5 gives out

im plications on íin d in g for policy m akers as well as firm ’s m anager to im prove current situations Finally, ch ap ter 6 concludes all the w orks d o ne through researching process with sum m ary, key fm dings and suggestions fo r future research opportunities

• • ■

Trang 18

Fin a n cìa l leverage o f com panies lis te d on H O SE a n d HaSTC

2 LITERATURE REVỈEW

T his c h a p te r is a im e d a t sy n th e siz in g all the re la te d -th e o ry a b o u t Capital stru c tu re s a n d o th e r theories used in th is research It also review s the key íìn ding s o f previous researches both in

Vietnam and others countries regarding Capital structures and factors aíĩecting the Capital

structure decisions There are six main sections in this part T he íìrst section w ill deal with general deíìnitio n o f Capital structure in corporate íìnance and a snapshot o f fam ous M &M proposition m odel T h e second section indicates key factors affecting Capital structure decisions The optim al Capital structure and its im portance will be discussed in the third section The next is

h o w to d e v e lo p an o p tim a l Capital stru c tu re fo r a sp e c iíic c o m p a n y th e o re tic a lly A ll th e selective key fin d in g s o f h isto ric a l re se a rc h e s re la te d to Capital s tru c tu re issues all o v e r th e w orld vvill be reviewed in th e section after T hen th e íìnal section will be the key íin din gs about this topic in

V ietnam

2.1 Definition of Capital structure and M M proposition model

2.1.1 Definition of Capital structure

The theory o f Capital structure is not new in íĩnancial econom ics being the subject o f many

d e b a te s in th e c o rp o ra te íĩn a n c e literatu re T o un d erstan d th e Capital stru c tu re , firstly w e have to exam ine th e deíĩn itio n o f Capital in financial term A ccording to Investopedia, Capital is defined

as “íínancial assets o r th e íinancial value o f assets, such as cash, the íactories, m achinery and equipm ent ovvned by a business Capital is a vague term and its speciíic d eíin ition depends on

th e co ntex t in w hich it is used In general, it refers to íìnancial resources available for use.”

“ In íĩn a n c e , Capital stru c tu re re íe rs to th e w ay a C orporation fín a n c e s its a s se ts th ro u g h so m e com bination o f equity, debt o r hybrid securities.” (W ikipedia).A firm 's Capital structure is then the com position or 'structure' o f its liabilities For exam ple, a íìrm that issues $45 billion in equity and $65 billion in debt is said to be 45% equity-íinanced and 65% debt-financed The firm 's ratio o f debt to total íìnancing, 6 5% in th is exam ple is referred to as th e firm 's leverage In reality, Capital s tru c tu re m ay b e h ig h ly c o m p le x and in clu d e te n s o f sources

• » «*

Ỉ6

Trang 19

2.1.2 M odigliani and M iller (M&M) proposition theory

W henever m entioning to C apital structure theory, fam ous M M Proposition is considered as the most basic knovvledge to look at T his section discusses th e M M Proposition I and MM Proposition II in case o f N o T axes as w ell as W ith Taxes

w hether it íĩnances its e lf w ith d ebt o r equity Thus, Capital structure is irrelevant T heir theory, how ever, w as based on very restrictive assum ptions:

■ C apital m arkets are p eríectly com petitive; there are no transaction costs, taxes, òr

no m atter how a íirm fínances (slice) it The value o f the firm is determ ined by Real A ssets and

n o t its Capital structure

A nother w ay o f expressing M & M Proposition I is the value o f th e levered firm equals the value

o f th e unlevered one:

VL = V„

W here:

F in a n cia l le verag e o f com pan ies lis te d on H O SE a n d HaSTC

Trang 20

F in a n cia l le verag e o f com panies lis te d on H O SE a n d HaSTC

= value o f leverage íìrm (firm using debt)

= value o f unleveraged firm (firm w ith no debt)

T he reason o f this is that the operating eam in gs (EBIT) o f a fĩrm are available to all providers o f Capital In u n lev erag ed c o m p a n y (co m p an y w ith no debt), all o f the e a m in g s flow to equity holders and the value o f the fĩrm is the discounted present value o f these eam ings ỉ f a com pany

is partly ílnanced b y debt (leveraged), operating eam ings are split betvveen D ebt holders and Equity holders U nder the assum ption o f perfect m arkets, th e sum o f a firm ’s d ebt and equity should equal the value o f the all-equity com pany so the value o f th e com pany is unchanged

2.1.2.1.2 M & M P rop osition I I (N o Taxes): C ost o f E q u ity a n d L evera g e Proposition

A gain, the assum ptions used in M & M Proposition I are also applied in M & M Proposition II as there is no taxes, no transaction cost, no cost o f bankruptcy and hom ogenous expectations The

M & M Proposition II w ith no tax es says that “The cost o f eq uity increases linearly as a com pany increase its proposition o f deb t fm ancing”, (Schw eser, 2008) It m eans that vvhen a com pany íìnances itse lf w ith m ore debt, th e retum on equity rises A ccording to th eir proposition, debt

ho lder has the priority o f claim ing on assets to equity holders, w hich m akes th e cost o f debtlovver than the cost o f equity H ow ever, since com panies increase their use o f debt, the risk toequity holder increases, that in tu m leads to higher cost o f equity Thus, th e b en eíĩts in using debt

as a cheaper source o f íìnancing are o íĩse t by the rise in co st o f equity A s a result, nothing changes in th e firm ’s W A CC (W eighted A verage C ost o f C apital o r the R etum on A sset)

WACC = — * Re + — * Rd * (1 - Tc)

In vvhich:

= C ost o f equity

= C ost o f debt

E = M arket value o f the fìrm 's equity

D = M arket value o f the firm 's debt o r in this research it is the book value o f debt

Trang 21

Tc = C orporate tax rate

U sing W A CC íbrm ula (assum ing the m arginal tax rate equal to zero), vve can solve for the cost

o f equity:

Re = WACC + ( WACC - Rd ) *

-c

A s the fìrm increases the proportion o f debt, th e co st o f equ ity increases bu t W A C C and the cost

o f debt are unchanged Thus, M & M Proposition li support the íìrst proposition in term s o f the overall v alu e o f firm A S the beneHts o f lovver cost o f d eb t are o íĩse t by th e increased cost o f equity, the relative am ount o f d ebt versus equity in the f im r s Capital structure has no eíĩe c t on the overall value o f th e firm

In short, according to M &M P ropositions w ith no Taxes, th e value o f fìrm is not affected by its Capital structure Hovvever, it rarely holds in practice since T axes alm ost alw ays exist

2.1.2.2.1 M & M P roposỉtỉon I ( W ith Taxes): V a lu e is m a x im iz e d a í 100% D eb í

In this Proposition, the co ncep t o f T ax shield vvill be exam ined R em oving the M & M ’ assum ption that th ere are no tax es results in different conclusion o f th e ir proposition regarding Capital structure irrelevance A s th e cost o f debt - interest paym ent - is p re-tax expense and thus tax deductible, vvhile dividends - cost o f equity - are paid on an aữ er-tax basis The diíĩerential tax treatm ent encourages firm s to use debt lìnancing because d ebt bring a tax shield that adds to the value o f firm T ax shield eq uals to the m ultiple o f the m arginal tax rate and the am ount o f

F in a n cia l leverage o f com pan ies lis te d on H O SE and HaSTC

• • *

Trang 22

Fin a n cia l leverage o f com p an ies lis te d on H O SE a n d HaSTC

D = v alu e o f debt in Capital structure

V L = value o f levered firm

Vu = value o f unlevered firm

t = com pany tax rate

In sum m ary, according to M & M proposition I vvith taxes, th e value o f th e com pany increases as proportion o f d ebt increases and th e optim al Capital structure is 100% debt if the M & M ’s other assum ptions (i.e no c o st o f bankruptcy) is kept

2.1.2.2.2 M & M P roposiíỉon I I (W ith Taxes): W A C C is m in ỉm iz e d a t 100% D ebt

A ssum e th at th e m arginal tax rate differs from zero and use th e W A C C ío rm u la to solve for retum on equity, M & M proposition II (w ith Taxes) holds:

R e = W A CC + [W A CC - (Rd (1-t))] ( ^ )

= VVACC + [W A CC - Ra*] )

W here: Rd* = Rd (1 - 1) = after-tax cost o f debt

This proposition can b e illustrated by graph a s folIow:

F i g u r e 1: M & M P r o p o s it io n II ( W i t h T a \ )

Graduation Thesis _ Ngo Thi Thanh Huyen BA3 04

* • *

Trang 23

F in a n cia l leverage o f com panies lis te d on HO SE a n d HaSTC

Figure 1 sho w s that th e tax shield provided by d ebt causes th e W A CC to decline as leverage gets

m ore and m o re The value o f fìrm is m axim ized at the point vvhere th e W ACC m inim ized, that is 100% debt

W e have gone through m ain co nten t o f M & M P ropositions To sum up, under som e very strict assum ptions, M & M Proposition m entions about tvvo asp ects o f Capital structure: Firm value and cost o f Capital in case o f N o T axes and W ith Taxes In case o f no taxes, the value o f firm and its cost o f Capital as a w ho!e are not affected by its Capital structure O nly cost o f equity is positively related to proportion o f debt In case o f appearance o f taxes, th e optim al Capital structure is 100% debt tth e r e W A CC o f th e co m pan y is m inim ized and value o f a levered firm equ als to value o f unlevered firm plus the tax shield Though those propositions are basis for latter theorem s on Capital structure, it is criticized on som e grounds such as no transaction cost or no cost o f íinancial distress vvhile in practices they do exist and have sig niíican t im pacts on íìrm s

2.2 Capital structure theories revỉew

T he fact th at M & M ’s assum ptions is no t feasible in the real w orld due to the existence o f the

im perfections such a s d ifferent íorm s o f taxes, transaction costs, cost o f íinancial distress, agency costs and co sts o f asym m etry o f inform ation m otivates o th er upgraded theories about Capital structure

To understand the relations o f th ose im perfections on Capital structure, w e now look at som e o f their quick d escriptions (Schxveser, 2008)

C osís o f fìn a n c ìa l d istress are deíìned as increased costs fírm s have to face w hen eam ings

decline and firm h as trou ble p ay in g its íìxed íìnancing co sts (i.e interest on debt) The expected costs o f íinancial distress for a com pany include tw o m ain com ponents:

- C osỉs o f fìnancial distress a n d bankruplcy can b e direct o r indirect D irect costs o f íĩnancial distress m ay be cash expenses associated w ith th e bankruptcy, such as legal fees and adm inistrative fees Indirect costs m ay be forgone investm ent opportunities and the

c o sts that result from losing the trust o f its stakeholders (i.e custom ers, creditors, suppliers, and em ployees)

« » •

Trang 24

Fin a n cia l leverage o f com panies lis te d on H O SE a n d HaSTC

- P robability o f /ìn a n c ia l distress is related to the ievel o f firm 's leverage In general,

higher proportion o f d ebt in Capital structure, higher probability o f íĩnancial distress Besides, o thers íactors regarding to quality o f co m p an y 's m anagem ent and corporate govem ance structure also aíĩect th e probability o f financial distress

G eneral speaking, h igher expected costs o f íinancial distress tend to discourage íirm s from using large a m o u n ts o f d e b t in th e ir Capital stru c tu re , all e ls e eq ual

A g e n c y co sís o f equity refer to th e costs associated w ith the co n ílict o f interest between

m anagers and ow ners M anagers w ho do not have stake in the com pany m ay not bear the costs associated w ith excessive com pensation o r taking on too m uch (or too little) risk If shareholders are a\vare o f this conílict, they will take steps to m inim ize these costs A ccording to agency theory, \vhen th e íìrm uses m ore debt, m anagers are íorced to be disciplined w ith regard to how they spend cash because th ey have less cash flow to use for their ow n beneíit A s a result, greater

am ount o f d ebt used, the lovver th e agency costs

C osís o f a sym m eíric in fo rm a tio n refer to costs com ing from the fact th at m anagers norm ally

have m ore iníorm ation about a firm ’s activities as vvell as future perform ance than ow ners or creditors Firm s w ith com plex productions o r litter transparency in íinancial statem ents tend lo have h ig h er cost o f asym m etric iníbrm ation w hich results in higher required retu m s on debt and equity Capital

A ctually, the asym m etric iníòrm ation problem s do exist; shareholders and oth er stakeholders o f

th e com pany try to look at the m anagem ent behavior to fm d the signals o f w hat m anagem ent’s opinion o f firm 's future prospects For instance:

- Stick to fixed incom e source o f íìnance through debt m ay signal that m anagers are coníident in firm ’s abilities to m ake paym ent for debt in the íuture

- Issuing m ore equity is norm ally seen as a negative signal that m anagers think íĩm v s stocks are undervalued

2.2.1 Pecking order theory

Pecking order theory by M yers and M ajlu f (1984) refers to the “signals” investors can catch from the behavior o f m anagem ent in their íinancing choices It focuses on the iníbrm ation

• • •

22

Trang 25

asym m etry A ccording to this theory, m a n a g e rs prefer to m ak e fun din g ch o ices w hich are least likely to send negative signals to investors H ence, th e h ierarch y o f preĩerred so urces o f fund resulted from peck in g o rd er th eo ry starts w ith intem ally g en erated equity (i.e eam ings), then debt b ein g th e next best choice and extem al equity being th e last ch o ice to take M anagers are perceived to issue ex tem al eq uity only w hen sto ck p rice s are believed to b e overvalued

T hereíore, íìrm s prefer to use th eir ow n eam in g s and th e n d eb t íìn an cin g w hen they need additional funds E xtem al eq uity is o n ly used vvhen íìrm s íailed to raise any m ore debt As consequences, the pecking o rd e r th eo ry predicts th at th e Capital structure is a by-product o f the individual fínancing decisions

2.2.2 static Trade-off theory

S ince it is undeniab le th at th e re are tax -b en efits asso ciated w ith issuin g deb t because inlerest expenses are tax-deductible, bu t increasing th e use o f d e b t also increases th e co st o f íĩnancial distress To a sp e c iíic point, th e costs o f financial d istress wil! exceed th e tax b en eíits o f debt

The S ta tic T ra d e -o ff th e o ry (B ax ter 1967) aim s to b alan ce th e b en eíit o f deb t w ith the cost o f

Anancial distress and identiíy th e firm ’s optim al leverage U n d er th e static tra d e -o ff theory, there

is an optim al C a p ita l structure w hich results from a tra d e -o ff b etw een b en eíĩts o f tax shield from debt and the co st o f financial distress In o th e r w o rd s, rela x in g th e assu m ptio n o f no cost o f ĩinancial d istress in M & M proposition, th e firm should borrovv up to th e point w here the

m arginal tax shield equal the m arginal cost o f íínancial đ istre ss A t th a t poin t, the W ACC is

m inim ized and th e firm value is m axim ized

T hen th e value o f a levered firm becom es:

Vi — V ịj + ( í X ũ ) - PV (c o s t o f f i n a n c i a l d is tr e s s)

PV = present value

F in a n cia l le v e ra g e o f co m p a n ie s lis te d on H O S E a n d HaSTC

Trang 26

F in a n cia l le v e ra g e o f com panies H sted on H O S E a n d H aSTC

C o s t o t'

Capital1

W A Cc

Figure 2: Static T rad e-oíĩ theory: C ost o f Capital vs Capital structure

Figure 2 show s that the after-tax cost o f debt has an upvvard slope due to the increasing costs o f

fm ancial distress that com e w ith higher level o f debt A s the cost o f debt increases, the cost o f equity also rises d ue to the fact that som e o f the costs o f íínancial distress are eíTectively bom e

by equity holders The optim al proportion o f debt is a t the point vvhere the m arginal beneíìt provided by the tax shield o f taking on additional d eb t is exceeded by the m arginal costs o f íínancial distress from the additional debt This is also the point vvhere fírra’s value is m axim ized since the W A CC is m inim ized

H ere is the table sum inarizing in a chronological order som e o f very fam ous papers that worked

on Capital structure issues Those papers contribute signifícantly to fínancial theory and becom e the foundation for later researches on this topic:

T able 1: Summary o f C a p ita l structure theories

M odigliani/M iller propositions

M & M (1958) Capital structure irrelevant

M & M (1963) 100% debt ĩinancing m axim izes firm 's value

M iller (1977)

Capital structure relevant w ith personal and corporate taxes

• ao

24

Trang 27

Fin a n cia ! /everage o f com panies lis te d on H O SE a n d HaSTC

Statỉc trade o ff theory (including íĩnancial distress and tax theories)

Static trade o ff theory holds

Bow en/D aley/H uber

D ebt increases with íĩxed asset intensity and increascs with bankruptcy

probability

A sym m etry o f iníorm ation and sign aling theoríes

M yers/M ajlouf (1984) Pecking order theory Pecking order in choosing sources if

funds: internally generated funds íírst, debt second and equity last

because o f asym m etry o f inform ation

B • •

25

Trang 28

Fin an cia/ leverage o f com panies H sted on H O S E a n d HaSTC

D eterm inants o f C a p ita l structure

M yers (1977) Developed a model o f the

determ inants o f íírm s' debt

w ith equity and assets in place with debt

K ester (1986) Com pare us and Japanese

fírms

Debt increases with grow th and decrease with volatility o f earnings, size and proíĩtability

G enerally agree that leverage positively correlates with íìxed assets intensity, non-debt tax shields, grow th and firm size Leverage negatively correlates with eam ings, R&D, advertising and probability o f bankruptcy

2.3 Factors affecting Capital structure

There are many different factors determ ining the Capital structure o f firms In general, however, those íactors can be categorized into tw o main groups: firm -specific and country-specifíc factors This section describes theoretically the im pacts o f each g ro u p ’s com ponents onto Capital choices

o f íìrms

2.3.1 Firm-specific íactors

Several published articles dealt with identifying the fírm ’s attributes and characteristics that affect the choice o f its C a p i t a l structure Such researched attributes generally include: Firm grow th, the tangibility (i.e fixed assets intensity), business risk, profítability, fírm size, relationship with banks, and netvvorking

2 3 1 1 Firm grovvth

Pecking order theory suggests that a firm ’s grovvth is negatively related to its use o f debts

A ccording to M yers and M ajluf (1984), inform ation asym m etry dem ands an extra prem iura for firm s to raise extem al funds, irrespective to the true quality o f their investm ent project In case o f

Trang 29

Fin a n cia l leverage o f com pan ies lis te d on H O SE an d HaSTC

issuing d eb t, th e ex tra prem ium is reílected in the higher required yield H igh-gro\vth íirm s may find it too costly to re ly on debl to íinance grovvth

The agen cy problem also suggests a negative relationship betvveen leverage and a firm ’s grovvth

M yer (1977) argued that high-grow th firm s m ight have m o re options for íu tu re investm ent than lovv-grovvth flrm s Thus, highly leveraged fìrm s are m ore likely to pass up p ro íltable investm ent opportunities, because such an investm ent w ill effectively tran sfer w ealth from th e firm ’s owners

to its d ebt holders A s a result, firm s w ith high grovvth opportunities m ay not issue debt in the first place, and leverage is expected to be negatively related to grovvth opportunities However,

M yers (1977) argued that the agency problem could be m itigated i f long-term debt is replaced by short-term debt T his suggests th at the short-term d ebt ratio m ight actually be positively reỉated

to grow th rale, i f grovving íĩrm s substitute short-term íìnancing for long-term íĩnancing

2 3 1 3 B u sin e ss risk

B u siness risk is th e Auctuation in proíìts due to uncertainty in econom ic conditions Based on the theory o f íìnancial distress, higher business risk increases th e probability o f fm ancial distress, so fírm s h av e to trade o f f betw een tax shield beneíits and bankruptcy costs T h e fact is that firm

• p • 27

Trang 30

F in a n cia l le verag e o f com pan ies lis te d on H O SE and HaSTC

w ith high business risk vvill discourage creditors from lending their money due to high costs o f íĩnancial distress H ence, leverage is predicted to be negatively related to business risk ỉn the context o f the sm all business sector, Q ueen and Roll (1987) argue that SM Es are likely to have a higher level o f business risk, relative to large íirms

There is no consistent relationship betvveen proíitability and Capital structure in th e considerable theoretical w ork undertaken, ever since th e publication o f th e theory o f irrelevance (M odigliani and M iller 1958) T h e pecking order theory proposes that íĩrm s w ill use retained eam ings first as investm ent funds, and subsequently m ove to debt and n ew equity only if necessary (M yers 1984) In this case, th e re vvould be a negative relationship betvveen proíìtability and leverage

M any studies reveal th at there is a positive relationship betvveen Ieverage and íirm size M arsh (1982) íìn d s that large fírm s m ore often choose long-term debt, vvhile sm all íìrm s choose short- term debt Large fírm s m ay be able to take advantage o f econom ies o f scale in issuing long-term debt, and m ay even have bargaining povver over creditors S o the cost o f issuing debt and equity

is ncgatively related to firm size In addition, larger firm s a re often diversified and have m ore stable cash flow s, and so the probability o f bankruptcy for larger íĩrm s is less relative to sm aller íirm s T his suggests th a t size could be positively related w ith leverage

B anking practices w ith respect to procedures and regulations can aíĩe c t a fírm ’s ability to access loans A close relationship w ith banks can reduce the asym m etric iníorm ation and relax the liquidity constraints for borrow ers (Petersen and Rạịan 1994), w hich will result in higher probability o f firm to get loan from banks

D onnelly, B eư y , and Thom pson (1985) argued that th ere are a num ber o f b en eíĩts for a firm in establishing and m aintaining relationships w ith a few íĩnancial institutions: greater assurance o f fund availability, favorable rates and term s w hen needed; and th e b an k s’ better know ledge o f Client needs It could be expected that relationships w ith banks may provide an im plicit or explicit guarantee o f access to funds in o rd er to cover unexpected íinancial requirem ents

• » •

Trang 31

F in a n c ia ì leverage o f com panies lis te d on H O SE an d HaSTC

Relationships with banks generally include tw o com ponents: business relations and social relations such as relatives or íriends B esides business relations, social relations are fundam ental issues in do ing business A s a cultural elem ent, social relations create strong degree o f interpersonal trust The im portance o f social relations is recognized not only in C hina, but also in Japan, K orea, and Southeast A sia, including V ietnam (Y eung and T u ng 1996) Finally, the closer the relationship vvith banks, the m ore debt m ay be em ployed

to help íìnance a firm 's operations Thus, th e stronger the level o f netw orking, the greater the level o f lia b ilitie s m a y b e held in a c o m p a n y ’s Capital structure

2.3.2 Country-speciflc íactors

For intem ational íìrm s, country-speciíĩc ĩacto rs m ay have a signiíicant im pact on a firm ’s Capital structure policy G enerally, factors ex plain ing the signiíicant d iíĩeren c es in Capital structure across countries can be grouped into th ree broad categories: Institutional and legal factors, fínancial m arkets and banking system factors, and m acroeconom ic factors (S chew er, 2008)

■ Síren gíh o fI e g a ỉ system : Firm s d o in g business in countries w ith w eak legal system s tend

to have greater agency costs due to th e lack o r little protection for investors These íìrm s are Iikely use m ore leverage on th e ir Capital structure and greater reliance on short-term debt In contrast, íìrm s operating in countries vvith strong legal system s are supposed to use less debt overall, and the debt used tends to have longer m aturities

• • •

Trang 32

F in a n cia l le verag e o f com panies lis te d on H O SE and HaSTC

■ ỉnfo rm ation asym m etry: A high level o f iníbrm ation asym m etry betw een m anagers and

in v e s to rs e n c o u ra g e s m an a g e rs to p re fe r d e b t in Capital stru c tu re p o lic y In c o u n tries

w here auditors, íìnancial analyst and w ell-organized ĩinancial m arket are greatly present, iníorm ation asym m etry are reduced T hereíòre, increased transparency ten ds to result in low er íinancial leverage

■ T axes: The different tax policies across countries m ay affect C a p ita l structure o f íĩrm s

T hough tax shield provided by debt encourages the use o f d ebt fínancing, this relationship m ay change som ew hat i f dividends are taxed at a m ore ĩavorable rate than interest income A favorable tax rate for dividends w ould reduce th e retum that investors req uire on equity Capital, thus reducing the cost o f equity for th e íìrm s T h e low er the cost

o f equity will cause fírm s operating in countries w ith Iow er tax rates on dividend income

to h a v e less d e b t in th eir Capital s tru c tu re a n d v ic e versus

■ L iq u id ity o f Capital m arkets: In countries w ith m ore Iiquid and larg er Capital markets,

íìrm s te n d to u se lo n g er m atu rity d e b t th an in c o u n trie s w ith less liq u id Capital m arket

■ R eỉiance on ban king sysíem : C om panies op eratin g in countries th at are m ore reliant on

th e banking system than corporate bon ds m arkets as a source o f corporate borrovving tend

to be m ore highly leveraged

■ Institutional investor presence: F irm s o p e ra tin g in c o u n trie s th a t h a v e a c tiv e large institutional investors tend to have less íĩnancial leverage than íìrm s operating w here there is less o f an institutional investor presence Large institutional investors tend to have greater resources to ana]yze com panies and reduce iníbrm ation asym m etries, w hich

in tu m reduces the use o f debt In addition, w hen debt is used, m any large institutional investors, such as pension plans, tend to p reíe r longer m aturity debt A s a result, institutional investor presence tends to result in the use o f longer m aturity debt

* Inflation: H igher inílation reduces th e value to investors o f fixed interest paym ents A s a

result, íirm s operating in countries w ith high inílation tend to use less debt íĩnancing, and

th e debt used has shorter m aturity

• » •

Trang 33

Fin a n cia ! leverage o f com panies U sted on H O SE a n d HaSTC

■ G D I’ grow th: Firms operating in countries with higher G D P grow th tend to use longer

m aturity debt

The im pacts o f country speciíĩc factors on leverage are sum m arized in Table 2

Mậ* TMỊILCyMKVy.ĩlMM 5

M mi ' j 1» tt ] „ * j ị 1 - ' * l)se o f Total Debt M aturitv of Dcbt

I nst imtional and Legaỉ Factors

Financial Market Factors

M o re ỉiq u id sto c k a n d b o n d m arkets N/A Longer

G re a ter insùtutional investor

M acroeconom ics Pactors

.

_

Source: Schewer, 2008 Table 2: Impact o f Country-specific Factors in Capital Structure

B esides, íínancial m arket conditions such as market boom or recession, governinent policies,

e c o n o m y grow th, b anking System , etc also m ay a ffe c t th e Capital structure choices o f firm s

R obert A K orajczyk and A m non Levy (2001) concluded in their research about new evidence o f how m acroeconom ic conditions affect Capital structure choice that: “ M acroeconom ic conditions are signifícant for issue choice for unconstrained íírm s but less so for constrained fưms Our results support the hypothesis that unconstrained fírms tim e their issue choice to coincide with periods o f íavorable m acroeconom ic conditions, vvhile constrained fírms do not”

Trang 34

F in a n cia I leverage o f com panies lis te d on H O SE a n d HaSTC

Capital structure policies appear to be very im portant to m anagers in m aking decision on funding

th eir businesses T herefore, investigating th e ĩactors affecting Capital structure is necessary for a lucid decision A s a result, there have been num erous researches on this topic all o v er the world ranging from em erging to w elI-developed m arkets and from sm all lo large íĩrm s Foliow ings are

so m e re s e a rc h e s tak e n a s ty p ical e x a m p le s re g a rd in g Capital stru c tu re in real b u sin e ss w orld.Regarding to determ inants o f íirm s’ Capital structure, there are num erous studies carried out in developed m arkets such as The United S tates o f A m erica, Europe, etc, vvhile there is little w ork

in em erging m arkets Iike Vietnam A ty pical em pirical investigation w as carried out by Adhem Chehab (2002) w as about th e determ inants o f íirm s’ debt level on the sam ple o f 304 listed com panies in s & p 500 for the period from 1978 to 1991 in u s The resu lts indicated that debt level tend to increase w ith grow th, dividends, íixed assets intensity a n d insider ow nership

O verall, the results support the pecking o rd er theory explanation o f firm ’s íinancing behavior

A n other paper o f A dhem C hehab done in th e sam e year w ith the sam e period o f tim e but o f only

102 com panies due to limited inform ation w as about em pirical investigation o f the íĩrm s’ extem al íĩnancing decisions The results show ed that vvhen choosing betw een debt and extem al equity, íirm s w ith high grow th rates and dividend payout ratios utilized d eb t íinancing while firm s w ith h ig h e r th a n th e ir resp e c tiv e in d u stry lev erag e a n d high b u sin e ss ris k issued eq uity

On th e other hand, for th e sam e issue but in em erging m arkets, there is a research m ade by Tong Liu (1999) on “the determ inants o f co rpo rate Capital structure: E vidence fro m listed com panies

in C hina” T h e analyzed data taken from listed com panies in tw o national stock exchanges in

C hina from 1992 to 1997 The results indicated that industry classiíication iníluences the Capital structure in C hina Firm s in m ore íĩxed asset-intensity industry, such as m anuíacturing, have

m ore leverage com pared to other industries Debt ratio has a positive relationship w ith firm size, proporlion o f tangible assets and grow th rate o f assets, but negatively related to proíĩtability Evidence suggests th a t ow nership s tru c tu re i s n o t im p o rta n t in explaining p a r t o f C apital s tru c tu re

design o f listed com panies in C hina The overall results suggest th at the d eterm inants o f Capital structure in C hina are sim ilar to those in developed countries A lso, Capital structures in C hina are aíTected by agency and bankruptcy costs

* » •

Trang 35

F in a n c ia l leverage o f com panies lis te d on H O SE a n d HaSTC

B esides the đeterm inants o f Capital structure, recent researches have been also paid attention to exam ine the Capital structure d ifferences across countries o r inter-industries A study carried out

by S um itra D as (2003) vvas on “ Inter-industry differences in Capital structure: T he evidence from India” T his research exam ined the Capital structure o f 12 different industries in India from 1979

to 1999 to fin d out th at Capital stru c tu re s o f firm s are sy ste m atic a lly d iíĩe re n t across industry- classes so far as the debt íĩnancing as a proportion o f totai Capital is concem ed Both firm size and industry-classification contribute to the existing variation in Capital structure across Industries but nature o f th e industry seem s to dom inate M ore speciíically, it is th e differences in extem al fund requirem ent based on technology differences th at play a leading role in

d e te rm in in g th e in te r-in d u stry v a ria tio n in Capital stru ctu re T his signals th at th ere e x ists a lin k ag e betvveen p ro d u c t m a rk e t a n d Capital m arket

A lso, Capital structure across industries has been studied by Joshua A bor (200 7) for G hana case

T his p ap er aim ed to exam ine th e e íĩe c t o f industry cla ssiíìc a tio n on th e Capital structure o f SM Es

in G hana T he results o f this study su g g e ste d th at S M E s’ Capital stru ctu res v ary a c ro ss industries and th at Industries w ith high-collateral value are often capable o f attracting m ore long-term debt

In th e case o f G hana, th e agricultu re industry appears to have the highest asset structure or collateral and thus exhibit the h ighest long-term debt ratio The results clearly dem onstrated the

im portance o f collateral in accessing long-term debt The vvholesale and retail trad e industry has the Capital structure o f low est proportion o f fíxed assets and highest proportion o f current assets, thus it seem s that G hanaian tend to u se m ore short-term debt in íin ancing th e ir operations This vvas explained that SM Es fĩrm s engaged in trad in g o íten depend on trad e credits from their suppliers The results o f this study broadly su pport th e argum ent th at industry effect is im portant

in explaining the Capital structure o f SM Es and th at th ere are variations in Capital structure across

various Industries

2.5 Researches in V ietnam

T here are a lim ited num ber o f researches on Capital structure in V ietnam S om e o f them ju s t paid attention to Capital structure o f a sp ecifíc industry (Tourism com panies by San 2002), o r listed com panies on Ho Chi M inh S tock E xchange (H O S E ) by Vu (2003), o r 50 largest listed com panies in V ietnam for one-y ear period by Bien V iet Securities Joint-stock C om pany (CBV,

Graduatỉon Thesis _ Ngo Thi Thanh Huyen BA3 04

• • •

Trang 36

F in a n cia l leverage o f com panies lis te d on H O SE an d HaSTC

2008) A m o n g those papers, one m ade by T ran Dinh Khoi N guyen (2006) is a typical research about the determ inants o f Capital structure o f SM Es in V ietnam The research processed with book v alu e taken from lìnancial data o f S M Es o v er the period 1998-2001 T h e em pirical results show that S M E s in V ietnam m ostly use short-term to finance th eir operation A ílrm ’s ow nership also a íĩe c ts S M E s’ financial choices T he Capital structure o f SM Es in V ietnam is positively related to grow th, business risk, firm size, netw orking, and relationships w ith banks; but negatively related to tangibility P roíitability seem s to have no sign iíĩcant im pact on the Capital structure o f V ietnam ese SM Es The strong im pact o f such determ inants as firm ow nership, firm size, re la tio n sh ip s w ith banks, and netw orking reílects the asym m etric features o f the fund

m obilization process in a transitional econom y like that o f V ietnam The results o f C B V shared the sam e id eas w ith D inh K h o r s study

A nother im portant research done by H ung Son (2006) investigated the factors affecting Capital structure o f listed com panies H ow ever, th e d ata w ere updated to 2 006 and sam ples w ere limited

to only 45 listed com panies on Ho C hi M inh Stock Exchange The key findings found are the positivÊ relatio nship betvveen debt to total asset ratios and tangibility, tax, size and negative

re la tio n s h ip b e tw e e n Capital stru c tu re a n d re tu rn on a sse ts, g ro w th a n d u n iq u e c h a ra c te ristic s o f íìrms O ne m ore íìn din g is that listed íìrm s preferred short-term debt to long-term ones in their

C apital s tr u c tu r e s

Even th o ug h Capital structure is indeed an im portant issue, researchers have not developed it in a

w ide ran g e fo r b etter understanding about current situation in V ietnam ]n addition, it stands to reason th a t fìrm s operating in different industries will exhibit d iíĩeren t levels o f deb t in their Capital structure H arris and Raviv (1991) suggest that the industry in vvhich a firm operates does

a ffe c t its C apital stru c tu re d irectly T h e y a rg u e th a t íìrm s w ith in a n in d u stry h a v e m ore in com m on w ith e a c h o th e r th an w ith firm s in different Industries a n d th a t th e re h a s been a persisten t diíTerence in industry debt ratios over tim e H owever, th e re have not been any researches investigating about Capital structure across various industries in V ietnam Based on such gapi, th is thesis is conducted w ith the desire to bring about an ov erview o f the funding behaviors o f all listed com panies in V ietnam w hich are divided into broad industries from the period o f 2006-2008 T his thesis íbcuses m ainly on the Capital structure by different industries in Vietnam

• » •

34

Graduatiion Thesis _ Ngo Thi Thanh Huyen BA3 04

Trang 37

F in a n cia l leverage o f com panies lis te d on HOSE a n d HaSTC

■ VVhat is the current average Capital structure (D ebt to Equity ratio) o f all Iisted com panies

in V ietnam ?

■ D o listed firm s in V ietnam prefer short-term debt to long-tenm debt íìnance?

* W hat are the current C a p ita l structures o f listed íĩrm s across I n d u s tr ie s ?

■ W hat are th e portions o f short-term d ebt em ployed in listed íĩrm s ’ Capital structure by

3.2.1 Industry dassifỉcation method

The standardized classification system has th e advantage that it encourages íoreign investors to look into local m arkets, as \vell as allow ing local investors to look at the rest o f th e w orld and

• » •

Trang 38

F in a n cia l leverage o f com pan ies lis te d on HOSE an d HaSTC

com pare stock s via industry classiíìcation T his approach contributes to th e transparency and efficiency in th e investm enỉ process

There are several but three m ain system s th at can be used for industry classiíìcation: Industry

C lassiíication B enchm ark (IC B ), G lobal Industry C lassiĩication (G IC S), and N orth A m erican Industry C lassification System (N AICS)

3.2.1.1.1 Industry C lassiílcation B enchm ark (IC B )

1CB created by FTSE G roup and D ow Jo nes Indexes in 2005 is a detailed and com prehensive structure for sector and industry analysis, facilitating th e com parison o f com panies across four levels o f classiíìcation and national boundaries The highest level o f IC B is Industry level, follow ed by Super-sector, then Sector and íin ally Sub-sector D etails as foIlows:

* 10 Industries help investors m onitor broad industry trends

■ 18 Super-sectors can be used for id en tify in g m ac ro ec o n o m ic opportunities for investm entand trading decisions

■ 39 Sectors provide a broad benchm ark for investm ent m anagers

■ 104 Subsectors allow for m ore detailed quantitative and q u a l i t a t i v e analysis

The m ain principal o f the ICB is to categorize individual com panies ĩnto subsectors based prim arily on each com pany’s m ajor source o f revenue The ICB is adopted by sto ck exchanges representing o v er 65% o f the w orId's m arket capitalization (Investopedia, 2008)

The expertise o f D ow Jones Indexes and FTSE has m ade ICB a relevant and user-friendly classiíication Standard for trading and investm ent decisions T hanks to th e ir com bined global presence and partnerships, ICB has becom e a global Standard

3.2.1.1.2 G lo b a l I n d u s tr y C la ssiíìca tio n (G IC S )

GICS established in 1999 is a standardized classiíìcation system fo r equities w hich vvas developed jo ĩn t]y by M organ Stanley C apital International (M SC I) and Standard & Poor's (S& P) T h e G ICS m ethodology is used by th e MSC1 indexes, w hich include dom estic and intem ational stocks, as vvell as by a large portion o f the proíessional investm ent m anagem ent com m unity T h e G IC S hierarchy can be seen w ith:

• • •

Trang 39

F ĩn a n cia l le verag e o f com panies lis te d on H O SE a n d HaSTC

d e c is io n s fro m w ith in a co m m o n fram ew o rk

The G IC S com peles with ICB for eq uities though in practice, m ost o f th e sam e sector and industry d esig nation s exist in both standards

3 2 1 1 3 N orth A m erican In du stry C lassiíìcation System (N A IC S)

A nother system used in In d u stries classiíĩcation is N A IC S (reiníorced from SIC - Standard Industry C lassification) N A IC S , w hich w ill be review ed every five years, is a new business classiíicatio n system developed through a partnership between the U nited States, C anada and

M exico T h is system allovvs statistics to be com pared fo r all business activity across N orth

A m erica A lĩ com panies are separated into industries deíined by businesses th at use sim ilar producti<on processes N A IC S is m ainly used by business and g ovem m ent to classiíy and

m easure econom ic activity in C anada, M exico and th e U nited States

Due to the availability o f d a ta in íĩnancial m arket, IC B m ethod is em ployed for industry classiíìciation in this thesis T he sam ple used in this study consists o f 295 listed com panies in both HA.STC and H O SE vvithin th e period o f 3 years, 2006 - end o f June 2008

The higíhest level o f industries classiíication (i.e Industries) is taken into account when categ o riain g the listed com panies All the prospectuses o f íìrm s are used to gather the needed iníòrmattion for industry classiíìcation based on principal o f ICB A s a result, there are nine main

• * •

Graduatiion Thesis _ Ngo Thi Thanh Huyen BA3 04

Trang 40

Industries o u t o f ten in ICB System currently operating in Vietnam ese m arket The lacking One is

Telecom m unication industry that has liad no listed com panies as its m em bers yet The result is taken from A n aly st’s database o f Bien Viet Securities Joint-stock com pany w hich applies the sam e method w hen classifying listed com panies into industries (ICB) The research team in CBV exam inedall the prospectiis o f those listed com panies and group them into nine Industries based

on their rnạịor source o f revenue

H ere is thỉ com position o f the sainple (to see the detail list o f all com panies in each industry, go

D ata e m p o y ed in this thesis are all secondary data taken from offícial and reliable sources

T here are tw o m ain sources w here data are dow nloaded: Official w ebsites o f the two stock exchangeí in V ietnam (i.e HASTC and H O SE) that serve for V ietnam ese com panies analysis and B lo o n b e rg T erm inal (i.e limited access for specifíc com pany’s staff only) that provides data for th ree (ther cou ntries’ com panies

Graduatkn Thesis _ Ngo Thi Thanh Huyen BA3 04

Định dạng
Số trang	111
Dung lượng	20,98 MB