Tài liệu Impact of capital structure on firm's performance evidence from vietnamese listed companies

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY ------------ NGUYỄN THỊ HỒNG LOAN IMPACT OF CAPITAL STRUCTURE ON FIRM’S PERFORMANCE EVIDENCE FROM VIETNAMESE LISTED COMPANIES Subject: Master of Business Administration Code: 60.34.01.02 MASTER THESIS OF BUSINESS ADMINISTRATION SUPERVISOR: PGS.TS. PHẠM THỊ THU TRÀ TPHCM - 2012 Abstract: Although over the last decades many studies have been conducted to examine the impact of Capital Structure on Firm’s Performance, but the report results are mixed and the question of capital structure’s impact on performance still holds well and empirical study continues, especially in an emergency market like Vietnam where the financial imbalance occurs in almost business. To answer this question, this study examines the impact of capital structure on corporate performance in Ho Chi Minh stock exchange, in which we control the effect of firm’s size, firm’s age, industrial sectors and ownership in the period 2007-2011. At first the research results show that Vietnamese firms are using an unbalance financial leverage with a big amount of debt while state controlled use more debt than non state controlled firm and heavy industry uses more debt than light industry and the difference is significant. These results are consistent with theories. An unbalanced panel of 97 companies are studied in this paper and report that a firm’s capital structure was found to have a significant and negative impact on the firm’s performance measures in the accounting measures and negative but insignificant in the market measure – Tobin’s Q. Therefore, it is recommended that Vietnamese firms can reduce their debt ratio in order to increase profitability. Control variables: Firm’s age, size, industrial, ownership show mixed results of relationship with firm’s performance, it may significant or not but with the same trend as the theories. Key works: Capital structure, Debt Ratio, Firm’s performance, ROE, ROA, Tobin’s Q, Gross Profit Margin, Firm’s Age, Firm’s Size, Owner-ship, Different Industries. 1 Statement of original authorship I declare that this research project is my own work. It is submitted in partial fulfillment of the requirements for the degree of Master of Business at Institute School of Business, University of Economics. It has not been submitted before for any degree or examination in any other University. I further declare that I have obtained the necessary authorization and consent to carry out this research. 2 Acknowledgments First and most importantly, I would like to thank my family especially my beloved husband for their love, support and patience from the beginning of the course to the end. I could not have made it without them. Secondly I would like to express my all respects and appreciation to Ms. Pham Thi Thu Tra my supervisor for her invaluable support, advice and instructions. Having her as a supervisor greatly assisted in getting to this research done. I would also like to thank Mr. Nguyen Dinh Tho, who exerts every effort in guiding me as well as ISB students to implement research. I would like to thank all my colleagues in VCSC, for supporting me in getting data for the research. I also thank to my ISB classmate, for their kindly support and assistance during this last year. Last but not least, I would thank management, the faculty and all the staff at ISB for what they have done to support me as well as my classmate during the course. Ho Chi Minh City, January 1st, 2013 Nguyen Thi Hong Loan 3 Table of Contents Abstract:............................................................................................................................... 1 Statement of original authorship ......................................................................................... 2 Acknowledgments ............................................................................................................... 3 List of tables ........................................................................................................................ 6 List of Figures:..................................................................................................................... 6 Abbreviations....................................................................................................................... 7 1 2 Introduction:.................................................................................................................. 8 1.1 Research Background: ........................................................................................... 8 1.2 Research objective ............................................................................................... 10 1.3 Research questions: .............................................................................................. 10 1.4 Outline of the report ............................................................................................. 10 Literature review ......................................................................................................... 11 2.1 Vietnam Economic overview:.............................................................................. 11 2.2 Theory about Capital structure and Firm’s Performance ..................................... 13 2.2.1 Modigliani and Miller’s theory: .................................................................... 13 2.2.2 Trade-off theory ............................................................................................ 13 2.2.3 Pecking order theory ..................................................................................... 14 2.2.4 The information asymmetry and signaling theory: ....................................... 15 2.3 3 The impact of firm’s characteristics: ................................................................... 16 2.3.1 Firm’s Age..................................................................................................... 16 2.3.2 Firm Size ....................................................................................................... 17 2.3.3 Ownership ..................................................................................................... 17 2.3.4 Different industrial sectors ............................................................................ 18 2.4 Empirical evidences ............................................................................................. 19 2.5 Hypotheses development: .................................................................................... 21 Research methodology................................................................................................ 21 3.1 Data collection: .................................................................................................... 21 3.2 Variable of research: ............................................................................................ 22 4 4 5 3.2.1 Capital Structure (Independence Variable) ................................................... 22 3.2.2 Firm’s performance (Dependence variable).................................................. 22 3.2.3 Control variable: ............................................................................................ 24 3.3 Regression Method .............................................................................................. 24 3.4 Model of study: .................................................................................................... 25 3.5 Conceptual framework: ........................................................................................ 26 Results and Discussions .............................................................................................. 27 4.1 Descriptive Statistics ............................................................................................ 27 4.2 Regression ............................................................................................................ 32 Conclusions:................................................................................................................ 34 5.1 Conclusions: ......................................................................................................... 34 5.2 Implication ........................................................................................................... 35 5.3 Limitations and recommendations ....................................................................... 35 Bibliography ...................................................................................................................... 37 Appendix ........................................................................................................................... 40 Appendix A: Final sample selection .............................................................................. 40 Appendix B: DR - GPM regression analysis result ....................................................... 45 Appendix C: DR - ROE regression analysis result ........................................................ 47 Appendix D: DR - ROA regression analysis result ....................................................... 49 Appendix E: DR - Tobin’s Q regression analysis result ................................................ 51 5 List of tables Table 1: Summary statistics of the explanatory Variables, 2007-2011 ............................. 27 Table 2: Correlation Matrix of the Explanatory Variables, during 2007-2011 ................. 30 Table 3: Correlation Matrix of the Explanatory Variables of Heavy industry during 20072011 ................................................................................................................................... 30 Table 4: Correlation Matrix of the Explanatory Variables of Light industry during 20072011 ................................................................................................................................... 30 Table 5: Correlation Matrix of the Explanatory Variables of state- controlled Company during 2007-2011 .............................................................................................................. 31 Table 6: Correlation Matrix of the Explanatory Variables of non state-controlled Company during 2007-2011 .............................................................................................. 31 Table 7: Impact of Capital structure on manufacturing firm’s performance ................... 32 List of Figures: Figure 1: Total debt to asset in different industrial factor ................................................. 12 Figure 2: The explanatory variable of time, 2007-2009 .................................................... 29 6 Abbreviations GPM: Gross Profit Margin ROE: Return on Equity ROA: Return on Assets EPS: Earning per Share DR: Debt ratio HSX: Hochiminh Stock Exchange HNX: Hanoi stock Exchange RE: Random-effects model FE: Fixed-effects model SMEs: Small and medium-size enterprises 7 1 1.1 Introduction: Research Background: Capital structure decisions play a pivotal role in maximizing the performance of firm and its valve. Capital structure involves the decision about the combination of the various source of funds, a firm uses to finance its operations and capital investments. These sources include the use of long term debt finance, short term debt finance called debt financing, preferred stock and common stock also called equity financing. Modigliani and Miller (1958) were the first authors who developed capital structure theory which suggest that in the perfect capital market financing strategies do not affect the value of the firm, but later they argue that firm value can be increased by changing the capital structure because of tax advantage of debts (Modigliani and Miller, 1963). In recent decades the capital structure has become one of the most interesting issues in the corporate finance literature. Since then, many researcher followed Modigliani and Miller’s path to develop new theory on debt policy of firms. However, these attentions led to develop two main capital structure theories: the static trade-off theory and the pecking-order theory. According to the static trade-off theory, an optimal capital structure exists for firm that can be reached by conducting a balance between benefits (interest tax shields) and the cost of financial distress (bankruptcy and agency costs) of debts (Myers and Majluf, 1984) Rajan and Zingales, 1995; Wald, 1999; Shyam-Sunder and Myers, 1999; Booth et al., 2001; Fama and French, 2002; Huang and Song, 2006; Tang and Jang, 2007; Karadeniz et al., 2009 and Chakraborty, 2010). Using this optimal capital structure, the value of the firm could be increased due to its lowest cost of capital (Tang and Jang, 2007; Karadeniz et al., 2009). Myers and Majluf (1984) developed the pecking order theory as an alternative to the static trade-off theory. Pecking order theory, in contrast to static trade-off theory, assumes that there is no an optimal capital structure for a firm. According to this theory, 8 since there is an asymmetric information between managers and investors, therefore to minimize this asymmetric information firms prefer to finance using retained earnings, debt and equity respectively (Myers, 1984; Myers and Majluf, 1984; Rajan and Zingales, 1995; Wald, 1999; Booth et al., 2001; Fama and French, 2002; Huang and Song, 2006; Tang and Jang, 2007; Karadeniz et al., 2009; Chakraborty, 2010). Although over the last decades many studies have been conducted to examine the superiority of pecking order theory compare to static trade-off theory, but the reported results are controversial. Fama and French (2002) revealed that none of these theories would be rejected. Furthermore, Myers (2003) argues that the efficiency of capital structure theories is based on conditions which are different from one firm to another (Huang and Song, 2006). The theories show that the use of financial leverage to grow faster, bringing in higher profits for shareholders is required. However, in Vietnam, the financial imbalance occurs in a lot of business in the past years, when the economy fell into difficulties. As Son (2012) said, the debt-to-equity ratio of local firms is as much as 120%, versus the regional average of 45%. This is an alarming figure; a ratio of over 60% already poses risk of bankruptcy if the market developments are unfavorable. The question is whether the increase of debt influences the financial performance of the business? As my knowledge, only several such studies have dealt in Vietnam. Of these, San (2002) focused on a single industry sector (tourism) in a single locality (ThuaThien Hue Province), whilst Nguyen and Ramachandran (2006) focused on small and medium-size enterprises (SMEs) only. By contrast, Vu (2003) analyzed companies listed the main stock exchange. Although they are far less numerous than unlisted companies (most of the latter are SMEs), listed companies account for a larger share of economic activity. Therefore, it is important to explore the relationship between capital structure and firm performance in Vietnamese market. 9 Research objective 1.2 This study aims at examining the relation between Capital Structure which is indicated by Total debt ratio and the manufacturing Firm’s Performance; including Gross profit margin (GPM), Return on Assets (ROA), Return on Equity (ROE) and Tobin’s Q over the period 2007-2011 in Hochiminh Stock Exchange (HSX). Moreover, I will examine some other factors which have influences on this relationship such as: Firm’s age, Size, Ownership and Different industries. So the main objective of this research report is: - To examine the nature of relationship between capital structure and firm performance of listed companies in Vietnam. - To evaluate different impacts of capital structure on firm performance with the different firm’s characteristic. Research questions: 1.3 This study seeks to provide answers to these questions: 1. What is the impact of capital structure on firm performance? 2. Is there any different impact of capital structure to firm performance in the firm with different characteristic? Outline of the report 1.4 This research will be comprises of 5 parts: - Introduction: introduce research background, research problem, research objective and research question. - Literature reviews: introduce the Vietnam economic overview and review theories as well as empirical evident which concern with research to develop the research hypothesis. - Research methodology: introduces research variables and provides general idea of research process include: method to collect and analyses data, introduces and reports the research process together with the analyzed results of pilot survey. 10 - Result and discussion, this part reports the analysis results of panel data as well as discusses the result finding and connection with theory. - Conclusion, to conclude the research finding, includes implication and gives research limitation as well as provides some further recommendation. 2 2.1 Literature review Vietnam Economic overview: After implementing the “Doi Moi” (Reform Policy) in 1986, Vietnam implemented many reform policies such as equitizatizing the state controlled companies, reforming the banking system, liberalizing the interest rate, establishing stock markets and opening the economy to foreign investors. Many laws also have been newly created or revised in order to support companies in such new environment. Although the financial environment of the listed companies in Vietnam has improved because of the economic reform, many problems remain need to be solved. First, in many equitized state controlled companies, the government remains as a controlling shareholder and still has a strong impact on the firm’s activities. These companies may have more advantages than other companies (International Finance Corporation, 2010). Second, although the functions of the state bank (central bank) and commercial banks are separated, and the interest rates are liberalized, the five big state controlled or state-controlled commercial banks lend more than half of the domestic demand. Thus, compared with the other companies, state-controlled companies may have a priority access to bank loans; such loans do not necessarily consider economic rationality (Akiba, 2010). During the hot economy development, the company was borrowing massively from many different sources. So now, the weighted average debt-to-equity ratio in book value gleaned from the second quarter financial statements of 647 non-financial companies listed on the two bourses of Vietnam is among the world’s highest, up to 1.53. This ratio is so high compared to other economies, both developed and emerging. For example, the ratio of the U.S listed companies was 1.2 in 2011 and Chinese firms 1.06. Vietnamese 11 businesses have increased financial leverage since 2007. Their debt ratios were already at high levels in the early 2000s. The ratios of accounts payable to equity of 114 companies listed on the Hochiminh Stock Exchange averaged out at 1.2 in 2007 (Thanh, 2012). In this report Thanh also cited the Q2 financial statements of listed firms showing that construction and real estate are those suffering the highest ratios of debt to equity, at above 2.0. Non-financial companies have an average ratio of 153%, energy 144% and consumption goods 80%, the lowest. Remarkably, the ratio of State groups and corporations reaches over 1.73, higher than the average 1.5 of listed companies in general. 0 50 100 150 250 207 Construction & real estate(267) 153 Non-financial listed company(647) 144 Energy(43) Raw material(62) 139 Pharmaceuticals & medical equipment(16) 135 Industrial(71) 134 126 Technology & communication(24) 119 Serivces(71) 105 Agricultural processing(51) Consumer(42) 200 80 Figure 1: Total debt to asset in different industrial factor Sharing Thanh’s view, Son (2012) said “The financial weakness of Vietnamese companies is alarming.” The debt-to-equity ratio of local firms is as much as 120%, versus the regional average of 45%. This is an alarming figure; a ratio of over 60% already poses risk of bankruptcy if the market developments are unfavorable (Son, 2012) 12 2.2 Theory about Capital structure and Firm’s Performance Modigliani and Miller (1958) is a natural starting point for an analytical understanding of capital structure. All research that have followed study various forms of deviations from their idealized setting with fully symmetrical information, no taxes, no bankruptcy costs, exogenous cash-flows, and efficient markets in all assets. Myers (1984) defines the two main competing theoretical directions; “Trade-off theory” and “Pecking order theory”. 2.2.1 Modigliani and Miller’s theory: Since Modigliani and Miller published their seminal paper in 1958, capital structure has generated great interest among financial researchers. They argued that in efficient markets the debt-equity choice is irrelevant to the value of the firm and benefits of using debts will compensate with decrease of companies stock. Prior to MM theory, conventional perspective believed that using financial leverage increases company’s value. In this respect, there is an optimized capital structure that minimizes capital costs. In a subsequent paper, Modigliani and Miller (1963) eased the conditions and showed that under capital market imperfection where interest expenses are tax deductible, firm value will increase with higher financial leverage. Models based on impact of tax, suggest that profitable companies should have more debts these firms have more need for tax management in corporation’s profit. However, increasing debt results in an increased probability of bankruptcy. Hence according to this theory, the firm with higher debt should perform better, but that level of debt has to balance bankruptcy costs and benefits of debt finance. 2.2.2 Trade-off theory Trade-off theory assumes that firms optimally balance the costs of debt, e.g., distress risk and bankruptcy frictions with the benefits, typically tax savings, but also management discipline and optimal scale. Firms are expected to move towards target leverage and does their marginal financing accordingly, although time their transactions due to costs of adjustments. In a dynamic setting, firms see their targets develop over time and consider 13 today’s adjustments through new financing or payouts also in light expected future optimal leverage. Agency issues are relevant in any financing discussion and the seminal paper is Jensen and Meckling (1976). They develop a theory based on agency costs in structures with separation between ownership and management and as well as outside lenders. They postulate that conflicts between shareholders and managers occur since managers hold less than one hundred percent of the residual claim. In these case, because ownership (shareholders) and control (management) of firms lies with different people, managers are not motivated to apply maximum efforts and are more interested in personal gains or policies that suit their own interests and thus results in the loss of value for the firm and harm shareholders interests. Therefore, debt finance act as a controlling tool to restrict the opportunistic behavior for personal gain by managers. It reduces the free cash flows with the firm by paying fixed interest payments and forces managers to avoid negative investments and work in the interest of shareholders. So according to this theory, the firm with higher debt should perform better. Agency problems are one of the reasons why the pecking order theory predicts that outside capital is more expensive. 2.2.3 Pecking order theory Pecking order theory predicts that due to the information asymmetry between a firm and outside investors regarding the actual value of both current operations and future prospects, outside capital will always be relatively costly compared to internal funds and equity more so than debt. Outside investors will, as described by Akerlof (1970), require a compensation for their expected informational disadvantage. Myers and Majluf (1984) argue that information asymmetry will lead to a mispricing of a firm’s equity in the marketplace. Aware of the resulting dilution of current shareholders’ actual values, firms may not raise new equity even for projects with positive net present values, often denoted the “under-investment problem”. They predict that firms will 14 choose to finance new investments in ways which minimize this problem and thus avoid new equity issues. Myers (1984) extends this theory into a ’pecking order’ theory of financing. This theory predicts that the existence of asymmetric information will lead a firm to firstly use retained earnings and funds from current owners, then risk-free debt and finally risky debt before eventually raising new equity from outside investors. A development in this area, Halov and Heider (2004), takes a more sophisticated approach to the issue of asymmetric information by separating uncertainty from risk. The paper is primarily empirical, but novel in that they find that firms prefer to issue equity when risk matters relatively more and debt otherwise. Their argument is that by issuing equity rather than debt, risky firms avoid the adverse selection costs of debt. Berger and Udell (1998) apply a related approach to the issue of credit availability for small- and medium sized companies, discussing how the opaqueness of firms impacts the relevant lending assessment technology. Pecking order theory predicts marginal financing flows, but has no views as to overall optimal capital structure. It is hard not to assume that extremely high or low leverage will have to impact marginal financing, but this is outside the pecking order theory. 2.2.4 The information asymmetry and signaling theory: The information asymmetry theory of capital structure is credited to the work of Ross (1977). He posits that firm managers possess more information about the future prospects of the firm than the market. Therefore management’s choice of capital structure may provide the market with signals of a firm’s future prospects. Increasing leverage would signal to the market that a firm’s managers are confident about servicing the interest charge, and are hence confident about the future prospects of the firm. Therefore an increase in leverage would increase the value of the firm since investors would deem this to be a positive signal of the size and stability of future cash-flows. 15 Fama and French (1988) disagreed with this notion, arguing that more profitable firms tend to have lower levels of debt. In this case increasing debt would signal poor future prospects for the firm, since future earnings will be impacted negatively due to cash flow being used to service debt, reducing the amount or money available to fund future development. Raju and Roy (2000) establish that the value of available information contributing to firm profitability is higher for larger companies and is higher for Different industries sectors where there is intense competition. Therefore the release of credible information by managers affects the performance of a firm and has an impact on the perceptions held by the external market about a firm. 2.3 The impact of firm’s characteristics: A number of firm level characteristics have been identified in previous empirical research. Recent papers on dynamic capital structure include Fischer, Heinkel, and Zechner (1989), Goldstein, Ju and Leland (2001) and Hennessy and Whited (2005). Most of this literature assumes a firm scale and that product markets and cash flows as exogenous, disregarding any interaction between leverage and operations. An example of the opposite is Maksimovic (1988) who shows that a firm’s debt capacity is a function of Different industries and firm characteristics, e.g. elasticity of demand and discount rate. In this research I review impact of firm’s size, firm’s age, different industries and ownership. 2.3.1 Firm’s Age Age could actually help firms become more efficient. Over time, firms discover what they are good at and learn how to do things better (Arrow, 1962; Jovanovic, 1982; Ericson and Pakes, 1995). They specialize and find ways to standardize, coordinate, and speed up their production processes, as well as to reduce costs and improve quality. The relevant literature goes back to Smith and Ricardo. Old age, however, may also make knowledge, abilities, and skills obsolete and induce organizational decay (Agarwal and Gort, 1996 and 2002). One possible reason is that success induces firms to codify their approach through organization and processes, a regulation that can become capillary over 16 time. This behavior seems increasingly to entangle firms in structural and process-related rigidities that are difficult to discard (Leonard-Barton, 1992)and that could cause companies to succumb to Schumpeter’s “perennial gale of creative destruction.” It could also be that older firms are incapable of solving collective action problems. As in the case of nations (Olson, 1982), firms might increasingly become organizations of rent-seeking factions as they get older. On balance, it is therefore unclear whether aging helps firms prosper or whether it dooms them. From the above contributions, a firm’s age is expected to have a positive influence on a firm’s performance. 2.3.2 Firm Size The size of a firm affects performance in many ways. Key features of a large firm are its diverse capabilities, the abilities to exploit economies of scale and scope and the formalization of procedures. These characteristics, by making the implementation of operations more effective, allow larger firms to generate superior performance relative to smaller firms (Penrose, 1959). Alternative points of view suggest that size is correlated with market power (Shepherd, 1986), and along with market power x-inefficiencies are developed, leading to relatively inferior performance (Leibenstein, 1976). Titman and Wessels (1988) assert that larger firms are more diversified and are therefore less susceptible to bankruptcy than smaller firms. Rajan and Zingales (1995) also hold that there is a positive relationship between firm size and leverage. Although, theory is equivocal on the precise relationship between size and performance, it’s more likely a firm’s size is expected to have a positive influence on firm’s performance. 2.3.3 Ownership There are many listed companies of which the government became the controlling stockholder and influenced company activities after state-owned companies were State controlled. These companies are defined as state-controlled companies, which have closer relations with state-owned banks than other companies and state-owned commercial 17 banks may not be normal external creditors of state-controlled companies, and their monitoring activities may be less stringent toward state-controlled companies. These accords with Nguyen and Ramachandran (2006), who pointed out those state-owned enterprises in Vietnam tend to receive more favorable treatment from state-owned commercial banks which represent the bulk of the banking sector. With regard to government ownership influences on firm performance, literature suggests that governments are likely to pay attention to political goals such as output prices and employment highlighting the fact that government ownership are nonprofit-maximizing owners and are therefore expected to be low performers in terms of conventional performance measures (Laffont and Tirole 1993; Shleifer and Vishny 1997). From these arguments, it’s expected a different relationship between capital structure and performance of the firm with difference ownership. 2.3.4 Different industrial sectors Schwartz and Aronson’s (1967) research concludes that the capital structures of firms in different industries are different from each other. They infer that capital structure in an Different industries is influenced by operational risk and asset structure. They also indicate that the capital structure in specific Different industries sectors over time is dynamic, given a firm’s pursuit to maximize value. Barclay, Smith, and Watts (1995) find that leverage is high for regulated firms and firms in low-tech industries, and is low in high-tech industries. Jensen and Meckling (1976) state that industries in which opportunities for asset distribution are more limited, will have higher levels of debt. Therefore, the industries sector is expected to have an impact on corporate performance also. 18 2.4 Empirical evidences The empirical evidences on the relationship between firm performance and capital structure have produced mixed results: Some empirical studies have been found a positive relation between financing choices and firm performance: Roden and Lewellen (1995) examines the capital structure of 48 US firms during the period 1981-1990 and revealed a positive relation between profitability and capital structure. Similar results were documented by Champion (1999) and Gosh et al. (2000). Hadlock and James (2002) suggest corporations with high level of profitability use high level of debts. In the other words, they show a positive relation between performance and capital structure. Abor (2005) reports a positive relation between capital structure, which measured by short-term and total debt, and performance over the period 1998 -2002 in the Ghanaian firms. Berger and Bonaccorsidi Patti (2006) provide the same results. Finally, Arbabiyan and Safari (2009) investigate the effects of capital structure on profitability using 100 Iranian listed firms from 2001 to 2007. They found short-term and total debts are positively related to profitability (ROE) while indicate a negative relation between long-term debts and ROE. Saedi and Mahmoodi (2011) examine the relationship between capital structure and firm performance. The study uses four performance measures (including ROA, ROE, EPS and Tobin’s Q) as dependent variable and three capital structures (including long- term debt short –term debt and total debt ration) as independent variable. The study indicated that firm performances, which is measured by EPS and Tobin’s Q, is significantly and positively associated with capital structure, while reported a negative relation between capital structure and ROA, and no significant relationship between ROE and Capital structure. By contrast, several scholars revealed a negative relation between capital structure and firm performance. In this line, Kester (1986) found a negative relation between capital structure and performance (profitability) in the US and Japan. Similar results were reported by Friend and Lang (1988), Titman and Wessels (1988) from the US firms, Rajan and Zingales (1995) in the G-7 countries, Wald (1999) in the developed countries. 19