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

VIETNAM NATIONAL UNIVERSITY, HANOI VIETNAM JAPAN UNIVERSITY ------------------------ BUI THI MINH HUYEN DETERMINANTS OF CAPITAL STRUCTURE OF LISTED FIRMS IN THE PHARMACEUTICAL SECTOR IN VIETNAM MAJOR: BUSINESS ADMINISTRATION CODE: 8340101.01 RESEARCH SUPERVISORS: Prof. Dr. HIROSHI MORITA Assoc.Prof. Dr. NGUYEN VAN DINH Hanoi, 2020 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 i 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 ii 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, Bui Thi Minh Huyen iii 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 iv 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 v 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 vi LIST OF ABBREVIATIONS Abbreviations Meaning AGE Firm age API Active Pharma Ingredient CA Current Assets CEO Chief Executive Officer CL Current Liabilities EBIT Earnings before interests and taxes GROW Growth opportunity HNX Hanoi Stock Exchange HOSE Ho Chi Minh City Stock Exchange LA Long-term Assets LD Long-term Debts LIQ Liquidity M&A Mergers and Acquisitions OLS Ordinary Least Square PLU Pluralist Executive PROF Profitability SIZE Firm size SMEs Small and Medium-sized enterprises TA Total Assets TANG Tangible Assets TC Total Capital TD Total Debt TE Total Equity USD United States Dollar VIF VND Variance – Inflation Factor Vietnam Dong vii 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. viii 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. 1 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. 7 5.9 6 5.2 4.7 5 4.2 3.7 4 3.13 3 2 1.99 2.28 2.65 1 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 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 2 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. 3 Research Scope: This research collects data and information of listed pharmaceutical firms in Vietnam in the period from 2010 to 2019. 1.4 Research Questions Question 1: Do firm-specific factors affect the capital structure in listed pharmaceutical firms in Vietnam? Question 2: Is there significant difference in the impact weights among factors that influent the capital structure of Vietnam pharmaceutical listed firms? Question 3: Is there any difference in the factors affecting the capital structure of companies listed on the Hanoi Stock Exchange and ones listed on the Ho Chi Minh City Stock Exchange? 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. 4 1.5 Research Structure In addition to the introduction, conclusion, table of contents, references, appendices, the content of this study consists of 5 chapters: Chapter 1: Introduction Chapter 2: Theoretical framework Chapter 3: Methodology Chapter 4: Data analysis and Findings Chapter 5: Research implications and Recommendations 5 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. 6 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 7 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. 8 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. 9 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. 10 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. 11