This paper investigates the influence of capital structure on performance of listed firms in Vietnam during the period 2008-2016, where capital structure is measured by the ratio of total debt to total equity and ROA, ROE and Tobin’s Q are used as indicators for firm performance. Additionally, due to the large difference in operation and the use of debt between non-financial and financial firms, this study splits data of these two sectors and runs empirical regressions for non-financial firms separately. However, because of the prominent role of banking industry in Vietnamese economy, this study also tests the efficiency of using debt of listed banks in Vietnam.
As reported in empirical part, the results of panel OLS regressions show a negative relationship between financial leverage and all performance indicators of non-financial firms.
This finding provides a warning for Vietnamese listed companies in making capital structure decisions that a high level of debt can reduce profitability. Moreover, other control variables including firm growth, tangibility, firm size, firm age, profitability and liquidity also have effects on firm performance. By taking the 2008 global financial crisis into consideration, the negative impact of capital structure on performance of non-financial firms remains unchanged and empirical results also reveal that the crisis did not seriously affect performance of those firms.
Panel OLS regressions also present a negative effect of financial leverage on ROA of listed banks. However the relationship between financial leverage and bank’s ROE is positive, indicating an efficient use of debt. Regarding the impact of macroeconomic factors on bank performance, GDP negatively affects both ROA and ROE, which is justified by the increase in competition when economy grows. Moreover, when the dummy variable of the 2008 financial crisis is introduced into the models, empirical results report a similar relationship between capital structure and bank performance. However, unlike non-financial firms, banks are more influenced by the crisis.
To cope with the problem of endogeneity, this paper uses the two-step system GMM estimator to test all the models again. According to empirical outcomes, the negative impact of financial leverage on performance of non-financial firms is confirmed. Especially, the effect of capital structure on ROA and ROE is very strong. However, the link between financial leverage and bank performance becomes insignificant in GMM tests. This might be due to the small sample of listed banks in Vietnam, which leads to insufficient data for analysis.
Finally, this paper still has some limitations. In addition to the ratio of total debt to total equity, other factors like short-term debt and long-term debt can be used to determine proxies for capital structure. To strengthen the results of empirical models, other control variables such as tax, risk, dividend or cash flow can be added. Moreover, due to the lack of financial data, research results are still limited. A larger sample can be employed to test the relationship between capital structure and firm performance in Vietnam again.
REFERENCES
Abdel-Jalil, Tawfiq. (2014). The impact of capital structure on the performance of the Jordanian publicly-held industrial companies. Jordan Journal of Business Administration 10:3, 390–403.
Alifani, G. A., & Nugroho, A. B. (2013). Proving Modigliani and Miller theories of capital structure: the research on Indonesian cigarette companies. International Journal of Economic Sciences 2:3, 1-20.
Al-Taani, Khalaf. (2013). The relationship between capital Structure and firm’s performance:
Evidence from Jordan. Journal of Finance and Accounting 1:3, 41–45.
Athanasoglou, P. Athanasoglou., Sophocles, N. Brissimis., and Matthaios, D. Delis. (2008).
Bank-specific, industry-specific and macroeconomic determinants of bank profitability. Journal of International Financial Markets, Institutions and Money 18:2, 121–136.
Arellano, M., & Bond, S. (1991). Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations. The Review of Economic Studies 58:2, 277-297.
Arellano, M., & Bover, O. (1995). Another Look at the Instrumental-Variable Estimation of Error-Components Models. Journal of Econometrics 68:1, 29-51.
Berk, J., & DeMarzo, P. (2011). Corporate finance. 2nd edn. Boston: Prentice Hall
Black, F., & Scholes, M. S. (1973). The pricing of options and corporate liabilities.
Journal of Political Economy 81:3, 637-659.
Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models, Journal of Econometrics 87:1, 115-143.
Bradley, M., Jarrell, G.A., Kim, E.H. (1984). On the Existence of an Optimal Capital Structure: Theory and Evidence. The Journal of Finance 39:3, 857-878.
Brealey, R.A., & Myers, S.C. (2003). Principles of Corporate Finance. 7th edn. New York etc: McGraw Hill.
Breuer, W., & Gürtler, M. (2008). 50 years after MM: recent developments in corporate finance. Journal of Business economics, Special Issue 6/2008 edition.
Brigham, E. F., & Ehrhardt, M. C. (2010). Financial Management: theory and practice. 13th edn. Cengage: South Western.
Chakraborty, Indrani. (2010). Capital structure in an emerging stock market: The case of India. Research in International Business and Finance 24:3, 295–314.
DeAngelo, H., Masulis, R. (1980). Optimal Capital Structure under Corporate and Personal Taxation. Journal of Financial Economics 8:1, 3-29.
De La Bruslerie, H., & Latrous, I. (2012). Ownership structure and debt leverage: Empirical test of a trade-off hypothesis on French firms. Journal of Multinational Financial Management 22:4, 111–130.
Dessí, R., & Robertson, D. (2003). Debt, incentives and performance: evidence from United Kingdom panel data. The Economic Journal 113:490, 903-919.
Doğan, M. (2013). The Relationship Between Capital Structure and Profitability of Insurance Firms: An Investigation on Turkish Capital Markets. Journal of Accounting and Finance 57, 121-136.
Dudley, E. (2007). Testing Models Dynamic Trade off Theory [cited 05.02.2018]. Available from World Wide:
Web:<URL:http://ssrn.com/abstract=1030119>or<URL:http://dx.doi.org/10.2139/ssr n.1030119>
Ebaid, Ibrahim El-Say. (2009). The impact of capital-structure choice on firm performance:
Empirical evidence from Egypt. The Journal of Risk Finance 10:5, 477–87.
Ebrati, M.R., Emadi, F., Balasang, R.S., & Safari, G. (2013). The impact of capital structure on firm performance : Evidence from Tehran stock exchange. Australian Journal of Basic and Applied Science 7:4, 1-8.
Fama, Eugene., & French, Ken. (1992). The Cross-Section of Expected Stock Returns, The Journal of Finance 47:2, 427-465
Faruk, A., & Burim, P. (2015). A critical review of Modigliani and Miller’s theorem of capital structure. International Journal of Economics, Commerce and Management 3:6, 914-924.
Flannery, M. (1994). Debt maturity and the deadweight cost of leverage: Optimally financing banking firms. American Economic Review 84:1, 320-331.
Frank, M. Z., & Goyal, V. K. (2009). Capital Structure Decisions: Which Factors Are Reliably Important? Journal of Financial Management 38:1, 1-37.
Fu-Min Chang., Yale Wang., Nicholas Rueilin Lee., Duong Thu La. (2014). Capital Structure Decisions and Firm Performance of Vietnamese Soes. Asian Economic and Financial Review 4:11, 1545-1563.
Gansuwan, P., & Önel, Y. C. (2012). The influence of capital structure on firm performance:
a quantitative study of Swedish listed firms. Thesis for the Master Degree. Umeå, Sweden: Umea School of Business and Economics.
Hackbarth D., Hennessy C., Leland E. (2007). Can the Trade-off Theory Explain Capital Structure? Review of Financial Studies 20:5, 1389-1428.
Hovakimian A., Opler T., Titman Sh. (2001). The Debt-Equity Choice. Journal of Financial and Quantitative Analysis 36:1, 1-24.
Iavorskyi, M. (2013). The impact of capital structure on firm performance: evidence from Ukraine. Thesis for the Master Degree in Financial Economics. Kyiv: Kyiv School of Economics.
IMF. (2017). Vietnam Selected Issues, IMF Country Report No. 17/191 [cited 09.01.2018].
Available from World Wide Web:
<URL:https://www.imf.org/en/Publications/CR/Issues/2017/07/05/Vietnam-Selected-Issues-45046>
Jensen, M. (1986). Agency cost free cash flow, corporate finance, and takeovers. American Economic Review. 76:2, 323-329.
Jensen, M., & Meckling, W. (1976). Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics 3:4, 305-360.
Kaplan financial knowledge bank. (2012). Corporate financing [cited 07.01.2018]. Available from World Wide Web:
<URL:http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/Theories%20of%
20Gearing.aspx?mode=none>
Kester, W. C. (1986). Capital and ownership structure: a comparison of United States and Japanese manufacturing concerns. Financial Management 15:1, 5-16.
King, M., & Santor, E. (2008). Family values: Ownership structure, performance and capital structure of canadian firms. Journal of Banking and Finance 32:11, 2423–2432.
KPMG. (2017). Privatizing SOEs - Implications for Foreign Investors [cited 08.01.2018].
Available from World Wide Web:
<URL:https://home.kpmg.com/content/dam/kpmg/vn/pdf/publication/2017/privatizin g-soe-implication-for-foreigns-investors.pdf>
Le, Thi Phuong Vy and Phan, Thi Bich Nguyet. (2017). Capital structure and firm performance: Empirical evidence from a small transition country. Research in International Business and Finance 42:C, 710-726.
Lin, F.-L., Chang, T. (2009). Does debt affect firm value in Taiwan? A panel threshold regression analysis. Applied Economics 43:1, 117–128.
Manawaduge, Athula, Anura De Zoysa, Khorshed Chowdhury, & Anil Chandarakumara.
(2011). Capital structure and firm performance in emerging economies: An empirical analysis of Sri Lankan firms. Corporate Ownership & Control 8:4, 253–263.
Memon, Fozia, Niaz Ahmed Bhutto, & Ghulam Abbas. (2012). Capital structure and firm performance: A case of textile sector of Pakistan. Asian Journal of Business and Management Sciences 1:9, 9–15.
Miller, M .H. (1977). Debt and Taxes. The Journal of Finance 32:2, 261-275.
Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American Economic Review 48:3, 261-296.
Modigliani, F., & Miller, M. H. (1963). Corporate income taxes and the cost of capital: a correction. The American Economic Review 53:3, 433-443.
Muritala, Taiwo Adewale. (2012). An empirical analysis of capital structure on firms’
performance in Nigeria. International Journal of Advances in Management and Economics 1:5, 116–124.
Myers, S. C., & Majluf, N. S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics 13:2, 187–221
Myers S. C., Stewart C. (1984). The Capital Structure Puzzle. Journal of Finance 39:3, 575-92.
Myers, S. C. (2001). Capital Structure. The Journal of Economic Perspectives 15:2, 81-102.
Nguyen, N. A., D. C. Nguyen., C. N. Nguyen., & T. H. Bui. (2011). Fiscal Issues in Vietnam Economy: Assessment on the Impact of Stimulus, Fiscal Transparency and Fiscal Risk [cited 12.01.2018]. Available from the World Wide Web:
<URL:http://www.eria.org/publications/research_project_reports/images/pdf/y2010/n o1/ch8Fiscal_Issue_Vietnam.pdf
Nguyen, Tristan and Nguyen, Huy Cuong. (2015). Capital Structure and Firms’ Performance:
Evidence from Vietnam’s Stock Exchange. International Journal of Economics and Finance; 7:12, 1-10
Nikoo, Seyedeh Farokh. (2015). Impact of Capital Structure on Banking Performance:
Evidence from Tehran Stock Exchange. International Research Journal of Applied and Basic Sciences 9:6, 923–927.
Nimalathasan, B., Valeriu B. (2010). Capital structure and its impact on profitability: a study of listed manufacturing companies in Sri Lanka. The Young Economists Journal. 13:1, 55-61.
Niu X.(2008). Theoretical and Practical Review of Capital Structure and its Determinants.
International Journal of Business and Management 3:3, 133-139.
Oxford Business Group. (2017). Foreign direct investment and trade in Vietnam continue to climb. Available form the World Wide Web:
<URL:https://oxfordbusinessgroup.com/overview/bucking-trend-foreign-direct-investment-and-trade-continue-climb>
Pan, J. (2012). Evaluating theories of capital structure in different financial systems: an empirical analysis. Venezia: UniversitaCa'foscari.
Quiry, P., & Vernimmen, P., (2005). Corporate finance. Theory and Practice. 1st edn.
Chicester, West Sussex: Wiley Sons.
Ramadan, Zeyad Saleem, & Imad Zeyad Ramadan. (2015). Capital structure and firm’s performance of Jordanian manufacturing sector. International Journal of Economics and Finance 7:6, 279–284.
Salim, Mahfuzah, & Raj Yadav. (2012). Capital structure and firm performance: Evidence from Malaysian listed companies. Procedia - Social and Behavioral Sciences 65, 156–
166.
Salteh, Heydar Mohammadzadeh, Elham Ghanavati, Vahid Taghizadeh Khanqah, and Mohsen Akbari Khosroshahi. (2012). Capital structure and firm performance:
Evidence from Tehran stock exchange. International Proceedings of Economics Development & Research 43, 225–30.
Saurabh Chadha & Anil K. Sharma. (2015). Capital Structure and Firm Performance:
Empirical Evidence from India. Vision.19:4, 295-302
Schonbrodt, R. (2011). Capital structure and firm performance in Germany and the United States. Thesis for the Master Degree. Susteren: Tilburg School of Economics and Management.
Serrasqueiro Z., Nunes P.M. (2010). Are Trade-off and Pecking Order Theories Mutually Exclusive in Explaining Capital Structure Decisions? African Journal of Business Management 4:11, 2216-2230.
Short, J.C., Ketchen, D.J., Jr, Palmer, T.B., & Hult, G.T.M. (2007). Firm, strategic group, and industry influences on performance. Strategic Management Journal 28:2, 147–
167.
Shyam-Sunder L., Myers S.C. (1999). Testing Static Trade off Against Pecking Order Models of Capital Structure. Journal of Financial Economics, 51:2, 219-244.
Siddik, Md. N.A., Kabiraj, Sajal., Joghee, Shanmugan. (2017). Impacts of Capital Structure on Performance of Banks in a Developing Economy: Evidence from Bangladesh.
International Journal of Financial Studies 5:2, 13-31.
Smith, Chen., Anderson, David J., Hamish D. (2012). The relationship between capital structure and product markets,in evidence from New Zealand. Review of Quantitative Finance and Accounting 38:1, 1–24.
Sogorb F., López J. (2003). Pecking Order versus Trade-off: An Empirical Approach to the Small and Medium Enterprise Capital Structure. Instituto Valenciano de Investigaciones Económicas, S.A., Working Paper.
Soumadi, Mustafa M., & Osama Suhail Hayajneh. (2015). Capital structure and corporate performance: empirical study on the public Jordanian shareholdings firms listed in the Amman stock market. Research Journal of Finance and Accounting 6:4 1–9.
Stulz, ReneM. (1990). Managerial Discretion and OPTIMAL Financing Policies. Journal of Financial Economics 26:1, 3-27.
Tan, T. K. (2012). Financial distress and firm performance: Evidence from the Asian Financial Crisis. Journal of Finance and Accountancy 11, 1-11.
Tianyu, H. (2013). The comparison of impact from capital structure to corporate performance between Chinese and European listed firms. Thesis for the Master Degree. Jonkoping:
Jonkoping University.
Villamil, A. P. (2000). The Modigliani-Miller Theorem. The New Palgrave Dictionary of Economics 2, 715-717.
World Bank. (2012). Vietnam Development Report 2012: Market Economy for a Middle-Income Vietnam [cited 08.01.2018]. Available from the World Wide Web:
<URL:http://documents.worldbank.org/curated/en/2011/12/15546780/vietnam-development-report-2012-market-economy-middle-income-vietnam.>
World Bank. (2017). The World Bank In Vietnam [cited 07.01.2018]. Available from the World Wide Web:
<URL:http://www.worldbank.org/en/country/vietnam/overview>
World Bank. (2017). GPD growth (annual %) of Vietnam, other lower middle-income countries and the World Average in the period 2006-2016 [cited 07.01.2018].
Available from the World Wide Web:
<URL:https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?end=2016&locations
=VN-XN-1W&name_desc=false&start=2006&view=chart>