dissertation_capital structure and firm performance
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Dissertation
Capital structure and firm performance
- Empirical evidence from Vietnam SMEs –
Table of Content
List of Figures 4
List of Tables 5
Table of Content .................................................................................................................................. 1
Chapter 1. Introduction .................................................................................................................. 6
1.1 Rationale for chosen topic ......................................... Error! Bookmark not defined.
1.2 Research objectives and questions ............................................................................... 8
1.3 Research object and scope ........................................................................................... 9
1.4 Research approach ....................................................................................................... 9
1.5 Research significance................................................................................................. 10
1.6 Research materials ..................................................................................................... 10
1.7 Research structure ...................................................................................................... 10
Chapter 2. Literature Review....................................................................................................... 12
2.1 Overview on corporate capital structure .................................................................... 12
2.1.1 Concept of corporate finance ....................................................................................... 12
2.1.2 Structure of corporate finance ...................................................................................... 12
2.2 Empirical research on factors affecting corporate capital structure ........................... 12
2.2.1 Firm size....................................................................................................................... 12
2.2.2 Business performance .................................................................................................. 13
2.2.3 Business risk ................................................................................................................ 13
2.2.4 Asset allocation ............................................................................................................ 13
2.3 Relationship between capital structure and firm performance .................................. 13
2.4 Empirical model and criteria ...................................................................................... 13
2.5 Summary .................................................................................................................... 13
Chapter 3. Methodology .............................................................................................................. 14
3.1 Research design ......................................................................................................... 14
3.2 Data interpreting ........................................................................................................ 15
3.2.1 Sampling ...................................................................................................................... 15
3.2.2 Data analysis ................................................................................................................ 15
3.3 Research model .......................................................................................................... 15
3.3.1 Model 1: Leverage model ............................................................................................ 15
3.3.2 Model 2: Firm value model.......................................................................................... 16
3.3.3 Summary ...................................................................................................................... 17
Chapter 4. Result and Discussion ................................................................................................ 18
4.1 Hanoi Stock Exchange ............................................................................................... 18
4.1.1 Hanoi Stock Exchange ................................................................................................. 18
4.1.2 Duties and authorities of Hanoi Stock Exchange ........................................................ 18
4.1.3 Issuance and listed securities ....................................................................................... 18
4.1.4 Current practice:........................................................................................................... 18
4.2 Capital structure characteristics of companies listed ................................................. 18
4.2.1 General situation of business performance of companies listed .................................. 18
4.2.2 Actual financial structure of listed companies ............................................................. 18
4.3 Empirical results ........................................................................................................ 18
4.3.1 Sample characteristic ................................................................................................... 18
4.3.2 Sample description ...................................................................................................... 18
4.3.3 Regression analysis ...................................................................................................... 18
4.4 Summary .................................................................................................................... 18
Chapter 5. Conclusion and Recommendation ............................................................................. 20
5.1 Conclusion ................................................................................................................. 20
5.2 Recommendations ...................................................................................................... 20
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5.3 Limitations ................................................................................................................. 20
Chapter 6. Learning Statement .................................................................................................... 21
6.1 What I have studied ................................................................................................... 21
6.2 Improvement of limitation and future study .............................................................. 21
6.3 Contribution to personal development and career ..................................................... 21
References Error! Bookmark not defined.
List of Figures
Figure 3-1 Research paradigms ........................................................................................... 14
Figure 3-2 Research process ............................................................................................... 14
Figure 3-3 Model 1: Leverage Model ................................................................................. 16
Figure 3-4 Model 2: Firm Value Model .............................................................................. 17
Figure 4-1 Revenue of listing companies............................ Error! Bookmark not defined.
Figure 4-2 Profit after tax .................................................... Error! Bookmark not defined.
Figure 4-3 Sector average revenue ...................................... Error! Bookmark not defined.
Figure 4-4 Sector average profit ......................................... Error! Bookmark not defined.
Figure 4-5 Industry average profit on sales......................... Error! Bookmark not defined.
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List of Tables
Table 2-1 Corporate financial structure .............................................................................. 12
Table 2-2 Relationship between asset structure and capital resource structure .................. 12
Table 2-3 Impacts of firm size on financial structure ......................................................... 12
Table 3-1 Symbols for dependent variables in model 1 ...................................................... 15
Table 3-2 Symbols of independent variables model 1 ......................................................... 15
Table 3-3 Symbols of dependent variables in model 2 ....................................................... 16
Table 3-4 Symbols of independent variables in model 2 .................................................... 16
Table 4-1 Revenue and profit by sector .............................. Error! Bookmark not defined.
Table 4-2 Average revenue – profit by firm size ................ Error! Bookmark not defined.
Table 4-3 Descriptive Statistics in SPSS Vs 16.0 ............... Error! Bookmark not defined.
Table 4-4 Correlation matrix of variables in model 1 ......... Error! Bookmark not defined.
Table 4-5 Correlation matrix of variables in model 2 ........... Error! Bookmark not defined.
Table 4-6 with TDTA as dependent variable ...................... Error! Bookmark not defined.
Table 4-7 with TDTE as dependent variable ...................... Error! Bookmark not defined.
Table 4-8 with STDTA as dependent variable .................... Error! Bookmark not defined.
Table 4-9 with LTDTA as dependent variable ................... Error! Bookmark not defined.
Table 4-10 With TDTA as the independent variable .......... Error! Bookmark not defined.
Table 4-11 With TDTE as the independent variable .......... Error! Bookmark not defined.
Table 4-12 With STDTA as the independent variable ........ Error! Bookmark not defined.
Table 4-13 With LTDTA as the independent variable........ Error! Bookmark not defined.
Chapter 1. Introduction
1.1 Research Background
Most of the enterprises often finance their business through two sources, which are debt
and equity (Gasparro and Pagano, 2010; Covas and Haan, 2011). Which source should be the
prior one? Or financing at the same time two sources with the suitable ratio? In other words, is
there any optimal financial structure for each enterprise or not and if yes, how it affects the
firm value has always been the controversial topic in finance community for many decades.
Modigliani and Miller (1958) review with the result is that under perfect capital market
conditions, no taxes, no transaction cost, no asymmetric information, expectations in
homogeneous market, the firm value is independent of the capital structure. The work has
made contribution to the process of forming modern capital structure theory. Since then this
topic has drawn much interest of many economists and firm managers worldwide. With the
calculation of the corporate income tax, Modigliani and Miller (1963) have changed the
initial conclusions and come to recognize the tax shield because tax that needs paying can be
reduced, therefore the best capital structure of a firm should be 100% of debt but this does
not seem to make sense in practice.
Jensen and Meckling (1976) have introduced the concept of representative cost and have
researched in details about the nature of the representative which is generated from the
existence of debt and maximum equity. The study has presented the theory balancing these
above factors to achieve the best capital structure, together with the calculation that involves
at the same time corporate income tax, bankruptcy cost and representation cost. Based on the
extension of results of Castanias (1983); Barclay and Smith (2005); Hackbarth and Mauer
(2011) include both tax and bankruptcy cost to gain the best capital structure. Hamada et al.
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(1984); Grabowski (2009); Kolari and Velez-Pareja (2010) argue that: the existence of
corporate income tax shield without debt is the enough deduction to upset the
incompatibility theorem of financial leverage. Recently, Levin (2009); Rodrigues and
Stegemoller (2011); Sinn and Wollmershäuser (2012) report that companies tend to aim at
the target rate when they raise or withdraw capital or redeem the existing capital, It is also
realized that companies should use an appropriate debt structure to financial assets and
relative amount of equity to take advantage of financial growth opportunities.
One controversial matter that has been going on is that: companies that gain much profit
tend to be less dependent on debt in its capital structure than companies that gain less profit
in literature (Psillaki and Daskalakis, 2009; Czarnitzki and Kraft, 2009; Baker and Martin,
2011; Zhu, 2012).. Another controversial problem is that: companies that have high growth
rate have high debt-to-equity index. Bankruptcy cost (which is determined by the company
size) is also the important effect on the capital structure, in literture (Hwang et al., 2009; Lee
et al., 2011; Aysun and Honig, 2011). If those three factors are considered the crucial to the
capital structure, the three factors can be used to determine the efficiency of the company’s
performance later on. In fact, successful managers are people who can determine the optimal
capital structure by minimizing the financial cost therefore maximizing company’s profit. It
can be seen that capital structure affects the company’s performance thus affecting the
financial capacity and insolvency evidently. According to Aysun and Honig (2011) in the
angle of banking, debt-to-equity ratio of the company is the targets supporting the risk
management strategy of banks and is the base for them to determine insolvency as well as the
finance value of the company when facing bankruptcy.
In summary, capital structure and the effective company’s efficiency are critical issues
in theory and in practice. However there has not been much empirical evidence on the
relationship between capital structure and the company’s performances in both developing
and developed countries, particularly in Vietnam and also some limitations. Within the scope
of knowledge, the research title “Capital structure and firm performance: Empirical evidence
from Vietnam SMEs” is conducted surveying the impact of factors: profit, scope, growth and
tangible asset on the capital structure as well as impact of capital structure on the
performance of companies listed on Hanoi and Hochiminh stock market on their markets to
study and write the dissertation.
1.2 Research objectives and questions
Objectives of the research are:
Determining the effects of factors: profitability, size, growth opportunities,
tangible assets for capital structure of companies listed on the Hanoi Stock
Exchange.
Determining the effects of the capital structure on the company’s market value
combined with other variables such as the company size and growth opportunities
on the Hanoi securities trading floor (specifically effects of capital structure on the
company’s market value are these factors: the company size and growth
opportunities on Hanoi Stock Exchange)
In order to achieve the research objectives, research questions are developed as
following:
What is capital structure characteristics of companies listed in Hanoi Stock
Exchange?
Is there any relationship between capital structure and firm performance of
companies listed in Hanoi Stock Exchange?
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1.3 Research object and scope
This study is to have access to scientific researches on the capital structure of foreign and
domestic scientists as well as to have access to the basic theory on capital structure.
Object of the research: All of the non-financial companies on the Hanoi Securities trading
floor in early 2012
Research scope:
In terms of content, a number of issues on the capital structure and performance of
companies listed on Hanoi stock market are studied in the research; recommendations
are made to improve the operational efficiency of enterprises.
Statistics that are used in this research are extracted from the audited 2009 financial
reports of companies listed in Hanoi stock exchange until March 2010 and the
market value of these companies’ shares in 2009 – 2010.
1.4 Research approach
The research uses the main following methods:
Quantitative research that is based on the multiple linear regression model
estimates the relationship between profitability, size, growth level, value of
tangible asset and the capital structure; as well as the relationship between
financial leverage and the company’s market price.
Tools that are used to analyze data to conduct research are descriptive statistics,
multiple linear regression models with SPSS program
1.5 Research significance
Research results on corporate financial structure worldwide as well as the domestic
ones are systematized to make base for the research of this topic.
Trends of capital structure of companies in Hanoi stock market are identified and
discovered.
Determine effects of these factors: profitability, size, growth opportunities, value
of tangible assets on capital structure of companies listed on Hanoi stock
exchange and effects of capital structure on the market value of companies on
Hanoi stock exchange.
Some solutions are proposed to help those companies have orientation in
determining their financial structure.
1.6 Research materials
To conduct this research, materials used by author are economic, commercial dictionaries, a
number of monographs, textbooks on finance, articles, domestic and international scientific
articles, some master’s dissertations on the same major, companies’ data, information on websites
related to capital structure and enterprises’ performance and websites of stock companies in
Vietnam in current period.
1.7 Research structure
Apart from introduction, conclusion, references, appendix, the dissertation comprises of:
Chapter 1: General introduction about the dissertation
Chapter 2: Present theoretic framework of on the capital structure and corporate
performance of enterprises
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Chapter 3: Research methodology used to achieve the study purposes of this
dissertation
Chapter 4: Discussion on the results observed from analysis of determining
factors that affect the capital structure and performance relationship of the capital
structure and firm performance of companies listed on Vietnamese Stock
Exchange
Chapter 5: Summary the achievements concluded from this study as well as
propose recommendations
Chapter 2. Literature Review
2.1 Overview on corporate capital structure
2.1.1 Concept of corporate finance
2.1.2 Structure of corporate finance
Table 2-1 Corporate financial structure
Short term debt
Liabilities Long and medium term debt
Equity Equity
Table 2-2 Relationship between asset structure and capital resource structure
Current assets Short term debt
Fixed assets Medium and long term debt
Equity
2.2 Empirical research on factors affecting corporate capital structure
2.2.1 Firm size
Table 2-3 Impacts of firm size on financial structure
Impact Adverse impact Not affected
Kurshev and Strebulaev (2007)
Chai (2010)
González. and González (2012)
Jiraporn and Liu (2007)
San and Heng (2011)
Nguyen et al. (2012)
Garvey and Hanka (2002)
Frank and Goyal (2003)
Lemmon and Zender (2010)
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2.2.2 Business performance
2.2.3 Business risk
2.2.4 Asset allocation
2.3 Relationship between capital structure and firm performance
2.4 Empirical model and criteria
2.5 Summary
This chapter has provided literature review on corporate capital structure through the
concepts and structures of corporation finance. In order to select the variables for the study
(indicated in further chapter), the prior researches in regards of factors affecting corporate
capital structure has been examined. Moreover, the relationship between capital structure and
firm performance investigated previously is presented in order to develop the research
hypothesis (mentioned in next chapter).
Chapter 3. Methodology
As mentioned above, the study is in interests in considering the relationship between firm
profit, firm size, development opportunities, and fixed assets to capital structure as well as
understands impact of capital structure on market activities of companies on the Hanoi stock
exchange until March 2012. The research paradigm is presented as following:
Figure 3-1 Research paradigms
3.1 Research design
Figure 3-2 Research process
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3.2 Data interpreting
3.2.1 Sampling
3.2.2 Data analysis
3.3 Research model
3.3.1 Model 1: Leverage model
Table 3-1 Symbols for dependent variables in model 1
Firm’s capital structure (dependent variable) Symbol
Total Debt to Total Assets TDTA
Total Debt to Total Equity TDTE
Long-term Debt to Total Assets LTDTA
Short-term Debt to Total Assets STDTA
Table 3-2 Symbols of independent variables model 1
Independent variable Symbol
Firm performance determined by profit PROF
Growth opportunities GROWTH
Firm size SIZEL
Fixed assets TANG
Figure 3-3 Model 1: Leverage Model
3.3.2 Model 2: Firm value model
Table 3-3 Symbols of dependent variables in model 2
Firm performance(dependent variable) Symbol
Price to earnings ratio PE
Table 3-4 Symbols of independent variables in model 2
Independent variables Symbol
Total Debt to Total Assets TDTA
Total Debt to Total Equity TDTE
Long-term Debt to Total Assets LTDTA
Short-term Debt to Total Assets STDTA
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Growth Opportunities GROWTH
Firm Size SIZEL
Fixed assets TANG
Figure 3-4 Model 2: Firm Value Model
3.3.3 Summary
Chapter 4. Result and Discussion
4.1 Hanoi Stock Exchange
4.1.1 Hanoi Stock Exchange
4.1.2 Duties and authorities of Hanoi Stock Exchange
4.1.3 Issuance and listed securities
4.1.4 Current practice:
4.2 Capital structure characteristics of companies listed
4.2.1 General situation of business performance of companies listed
4.2.2 Actual financial structure of listed companies
4.3 Empirical results
4.3.1 Sample characteristic
4.3.2 Sample description
4.3.3 Regression analysis
4.4 Summary
Through studying actual practice of financial structure of listed companies, it can be seen
that companies have financial structure with relatively low debt ratio; their financial
autonomy capability is quite high. In loan structure, short term loan is the main to supplement
for current assets demand. However, to assess factors affecting capital structure above and
the capital structure’s effect on corporate value, each specific factor as well as capital
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structure need to be analyzed. In summary, for companies on HNX, capital structure is not
the crucial to their market operations. There is no significant impact of market performance
measure of P/E pointing out the inefficiency of Vietnam asset market.
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Chapter 6. Learning Statement
6.1 What I have studied
6.2 Improvement of limitation and future study
6.3 Contribution to personal development and career
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