The affect of capital structure on firm performance: Evidence from the construction firms listed on the vietnam stock exchange

Nội dung text: The affect of capital structure on firm performance: Evidence from the construction firms listed on the vietnam stock exchange

1. THE AFFECT OF CAPITAL STRUCTURE ON FIRM PERFORMANCE: EVIDENCE FROM THE CONSTRUCTION FIRMS LISTED ON THE VIETNAM STOCK EXCHANGE Nguyen Minh Tuan*1- Doan Huong Quynh - Pham Thi Van Anh ABSTRACT: The topic of capital structure has been widely explored among the literature. Many research have tried to identify the optimum capital structure that would allow profit maximization for companies. However, with capital structure, there have been many divergent findings due to different sectors exhibiting different behaviors and model that attempt to establish relationship between capital structure and firm performance. This research therefore, seeks to identify the effect of capital structure on firm performance of 41 publicly listed construction firms listed on the VietNam Stock Exchange from 2014 to 2017. The objective of this research is to determine the effect and significance of capital structure on profitability, the relationship between LEV, SIZE, GROWTH, TAX and AGE with ROE.The researcher uses secondary data from audited financial statements of construction firms published from the construction firm’s website. The data collected were analyzed using excel and E-views 7 econometric software to come up with descriptive, regression and correlation results. The significance of data was measured using normality test and related, correlation, covariances , multicollinearity and heteroscedasticity of the data was investigated to check the significance of the model. The findings revealed that capital structure effect on financial performance of construction firms. Keyword: construction firms, capital structure, firm performance,VietNam Stock Exchange 1. INTRODUCTION Capital structure has been a popular research topic among the financial scholars. A significant number of research were identified the effect of capital structure on firm performance in developed and developing countries. In the developed countries aspect, Tailab (2014) did research on American energy, Tifow and Sayilir (2015) did research Turkey manufacturing firm and Abeywardhana (2016) did research on United Kingdom manufacturing sector small and medium enterprise (SME). From 2013 forward, most of the research done in capital structure was carried on developing countries. Ogebe, et al (2013) did research on Nigeria firm performance. Kajananthan and Nimalthasan (2013) did research on Sri Lankan manufacturing firm, Hasan, et al (2014) did research on Bangladesh food, fuel and power, pharmaceuticals and miscellaneous sectors companies, Mwangi, et al (2014) did research on Kenya non- financial listed companies performance, Zeitun and Tian (2014) did research on Jordanian non-financial listed companies, Leonard and Mwasa (2014) did research on Kenya listed companies and Akeem, et al (2014) did research on Nigeria manufacturing companies performance. * Tax Department of Ha Giang, 386 Nguyen Trai, Ha Giang, 20000, Viet Nam Academy of Finance, 58 Le Van Hien, Ha Noi, 10000, Viet Nam
2. 362 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA No research has been done to examine the effect of capital structure on firm performance of VietNam construction firms. Therefore this study will provide the empirical evidence on the effect of capital structure on performance firm of Vietnam construction firms from 2014 to 2017. This paper is divided into five parts: the second section reviews literatures related to the effect of capital structure on firm performance; the third section presents the methodology and data analysis; the fourth section deals with the results and dicussions; the main conclusion are discussed in the last section. 2. LITERATURE REVIEW According to Myers (1984), capital structure is choose of debt, equity or hybrid securities for firm to finance their business while Harris and Raviv (1991) indicated capital structure as a part of solution problem overinvestment and underinvestment. Myers (2000) defines the capital structure is a mixture of the debt and equity securities used to finance real investment. Roshan (2009) indicated that capital structure is a financial structure of an entity, is combines of debt and equity fund maintained by an entity. Finally, Brendea (2011), stated that capital structure is the long term financing used by entity while Nirajini and Priya (2013) added that capital structure refer to the way which the entity financed a mixture of long term capital and short term liabilities. The first theory established from capital structure is the Modigliani and Millers (1958) which the research found that capital structure has no brought any impact to the firm’s market value and average cost of capital. M&M 1958 theory is based assumption of perfect capital market with no tax, no transaction cost and risk free debt (Modigliani & Miller, 1958). M&M’s 1958 has been supported by Cole, et al (2015) research, capital structure had no relationship with companies’ stock price. In year 1963, Modigliani and Millers have published a new research paper to correct their previous error and indicated debt finance given tax advantage to firm (Modigliani & Miller, 1963). Hence, the capital structure is relevant to the firm value and firm able to maximize firm value by raise debt level in their capital structure (Sabin and Miras, 2015). Nirajini and Priya (2013) research show support to this theory, a positive relationship between debt and firm performance. M&M theory (1858 and 1963) was criticized as unrealistic due to the impractical assumption (Sabin & Miras, 2015). Imperfect capital market, transaction cost and bankruptcy cost exist in real world lead the M&M’s theory to be limited applicability (Foo, et al., 2015). Deeds, et al (1995) also indicated M&M’s theory only suitable to explain the capital structure decision in small firm only. Even M&M theorem have some weakness, but it provided a basis concept for the capital structure and a foundation of other theories (Ahmad, et al., 2012). Ahmeti and Prenaj (2015) also supported MM theory goes beyond the propositions themselves. Trade-off theory was develop by multi research paper and grew up from the M&M relevant theory (Myers, 1984). Tradeoff theory indicated each financial source has own benefit and cost (Awan & Amin, 2014). The firm’s optimum capital structure is identified by the tradeoff of the benefit and the cost of debt finance (Myers, 1984). Trade-off theory indicated higher profitability firm will be able to take more tax advantage by increases borrowing without risking financial distress and apply a higher portion of debt finance in capital structure (Kausar, et al., 2014). Several studies such as Goyal (2013), Javed and Akhtar (2012), Salawu (2009), Coleman (2007) and Negasa (2016) provided empirical evidence to supporting tradeoff theory, a positive relationship between debt level and profitability. However, trade-off theory were criticizes that it is correct under the assumption of no cost of adjustment (Myers, 1984). Besides that, trade- off theory has ignored the effect of retain earning in the capital structure, retain earning is no cost and no
3. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 363 risk (Frank & Goyal, 2005). Pettit and Singer (1985) criticize that trade-off theory is not suitable for small firms, because small firms don’t have enough earning to trade-off cost of debt. In other hand Performance is a complex word and holds myriad of meanings, due to its dimensional nature. The word can be viewed at different angle: financial and company. An entities performance can be derived by using variable that represent yield, revenue, growth and consumer satisfaction. On the other hand, financial performance, which demonstrate the maximization of shareholders wealth, can be measured by looking at a company‘s productivity. The calculation of financial performance is done by using profitability ratios such as Return on Assets, Retained Income, Earnings per share, Return on Investment, Price per Earning ratio, Market Capitalization, etc. When determining which profitability ratio is to be used, the objectives of firms plays a crucial role in this matter. In this research, it focuses more on firm‘s performance, which increases market value. Return on Assets and Return on Equity are the most popular profitability ratio used (Tudose, 2012). Previous researches have demonstrated a positive relationship between Return on Assets and capital structure. For instance, John (2013), conducted a research on the effect of capital structure on firm performance in Nigeria. By utilizing correlation analysis, and regressing data from 2007 to 2011 and employing Return on Equity (ROE) and Return on Asset (ROA) as dependent variable, and Long term Debt to Capital (LDC), Debt to Capital (DC), Debt to Common Equity (DCE), Short term Debt to Total Debt (SDTD) and Age of the Firm (AGE) as proxy for independent variable (capital structure), He found out that all independent variables were directly and significantly related to ROA, with the exception of LDC which delivered a negative but significant correlation. On the other hand, Riaz (2015) regressed data ranging from 2009 to 2013 using panel least square technique and correlation analysis. By using yearly reports of 28 listed companies in chemical industry of Pakistan, his findings showed that Total Debt Ratio (TDR) and Short-Term Debt to Total Asset (STDA) had a significant negative impact on ROA. But LTDA showed an insignificant negative effect on ROA. The relationship between ROA and Time InterestEarned (TIE) was positive as well as significant. However, Debt to Equity Ratio (DER) and Long- Term Debt to Asset LTDA) had negative and insignificant influence on ROA. In many research conducted, ROE has delivered a negative but insignificant relationship.Khan (2012), stated in his research that financial leverage and company‘s profitability, represented by ROE demonstrated a negative relationship which was not significant. To represent leverage, he used Total Debt to Total Assets Ratio as well as Short Term Debt to Total Asset. Likewise, Hassan, et al. (2014) also noticed the lack of significance between capital mix and profitability measured by ROE Also, Baharuddin et al. (2011), by regressing data of construction companies from 2001-2007 of 42 construction firms listed in bursa Malaysia, and using debt to asset ratio as their independent variable, they came to a conclusion that there was a negative but significant relationship between profitability and debt to total asset ratio. Similar result was obtained by Youssef & El-Ghonamie (2015) who employed debt ratio as independent variable with the research focusing on Egyptian construction firms Overall literature shows that there is a negative but significant relationship between debt to asset and debt to equity with net profit margin in construction sector 3. METHODOLOGICAL FRAMEWORK Hypothesis development LEV: The agency theory predicts that, when firm uses more debt, the manager will face more risk of bankruptcy and then be more efficient, agency cost decreases and a better performance of company is
4. 364 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA expected. So under the agency theory, there should be a positive relationship between leverage and the firm’s performance. When a firm is operating well, the potential bankruptcy risk is low and the firm can be able to use a heavier leverage. However, under pecking order theory, firms with better profitability will tend to use less debt. As the franchise-value hypothesis in Berger and di Patti (2002) goes, the firms may use equity to protect the rents or franchise value, they will still maintain equity when they are performing well. And when a firm is over-leveraged, additional cost of debt will damage the performance of company. So the relationship between leverage and firm performance is mixed. Hypotheses: There is a positive relationship between LEV and firm performance SIZE: Size is an important determinant of a firm’s performance. Larger firms are usually more diversified, better-managed and have a larger risk tolerance. Small firms, on the other hand, may find it more difficult to solve the information asymmetry problem and thus may appear to perform worse than big companies. Penrose (1959) argues that bigger company is easier to achieve economic of scale and then results in a better performance. The paper expects a positive relationship between firm size and firm performance. The following hypotheses will be tested: Hypotheses: There is a positive relationship between size and firm performance. AGE: When firms grow older, they are usually more experienced. During the growth, firms invest in research and development, store their human capital resource, and gradually discover what they are good at. Hopenhayn (1992) shows that older firms are expected to enjoy better performance. The paper expects a positive relationship between firm age and firm performance. The following hypotheses will be tested: Hypotheses: There is a positive relationship between age and firm performance. GROWTH: It is obvious that growth opportunity is important to a firm’s performance. The paper uses sales growth as proxy. Brush (1999) argues that sales growth influence the firm’s ability to catch opportunities of investment, the use of new technology and provides opportunities for economic of scale, thus benefiting the health of the whole company. The paper expects a positive relationship between firm sales growth rate and firm performance. The following hypotheses will be tested: Hypotheses: There is a positive relationship between sales growth rate and firm performance. TAX: Tax levels and tax structure will all influence the profitability and performance of company. When a firm is performing well, it receives a better profit, which means the firm will have more profit before tax, so it will tend to pay more tax. So this paper expects a positive relationship between firm tax burden and firm performance. The following hypotheses will be tested: Hypotheses: There is a positive relationship between firm tax burden and firm performance. Variable and Regresion Model • The dependent variable There are many different mearsurement of firm profitability which are used to study the relation between capital structure and firm performance. The simplest form among these measurement is ROA, which is measured by dividing net income with total assets. Beside that, to measure the owner’s profitability ROE is used. Based on the literature and empirical studies, ROE are chosen the proxies for profitablity, • Regression Model This research will use two OLS regressions to study the relationship between capital structure and
5. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 365 firm performance. The first regression is set without square of LEV; the second regression is set with square of LEV to exam if there is a non-linear relationship between the dependent variable and the independent variable. All variables other than LEV are control variables which control for the characters of firms that may affect firm performance. Robustness check is added to both regressions in case of heterogeneity problem. All data and regressions are run by Eview 7.1. The two regression formulas are shown below: ROE = β1 LEV + β2SIZE + β3GROWTH +β4 TAX+ β8AGE + C 2 ROE = β1 LEV + β2DE + β3SIZE + β4GROWTH +β5TAX+ β6AGE + C Variable measurement Table 1: Variable measurement Variable Definitions Construction ROE Return on Equity Gross profit / Total equity LEV Debt/Asset Total Debt/Total Asset LEVsquare Square of LEV Square of LEV SIZE Size of firm Log (Asset) GROWTH Sales growth in previous year Sales of N/ Sales of N-1 - 1 TAX Tax burden Tax / Gross profit AGE Age in operation YEAR(N) – Birthday + 1 Methodology and Data Analysis VietNam Stock Exchange (HNX and HOSE) host approximately 739 companies (Source: State Security Commission of Vietnam 30/06/2018) listed that comes from 25 different idustries within the economy. This reseach used the secondary data of construction firms to determine the affect of capital structure on firm performance. We use the data of 41 construction listed companies on the VietNam Stock Exchange in the period of 4 year from 2014 to 2017. Data was collected from financial statements officially published for a fiscal year from 1/1/N to 31/12/N on both Hanoi Stock Exchange (HNX) and Ho Chi Minh Stock Exchange (HOSE) and from the construction firm’s website.Since we controlled for the condition of ongoing bussiness in this period our sample was well balance. Which are the dependent variables (Return of equity) and independent variables (LEV, SIZE, GROWTH, TAX, AGE). An Eviews 7.1 Econometric solfware will be use for this purpose. The aim is to obtain the objective of this research which it to establish whether there is a relationship between capital structure and profitability of construction firms and whether such relationship is significant or not. 4. RESULT AND DICUSSIONS Table 2: Summary of variables ROE LEV SIZE GROWTH TAX AGE Mean 0,051925 0,679023 5,729068 0,277170 0,618855 11,59756 Median 0,067474 0,725740 5,742024 0,102363 0,458561 12,00000 Maximum 0,502989 1,000000 7,200777 6,115587 8,336630 18,00000 Minimum -1,732476 0,012106 1,000000 -0,930426 -0,729129 4,000000 Std, Dev, 0,226678 0,167448 0,621809 0,830909 0,879907 2,823476 Skewness -4,606103 -1,906312 -2,370763 3,533394 5,533894 -0,102926 Kurtosis 32,21984 7,891625 22,24572 20,60189 43,48554 2,579738 Jarque-Bera 6414,202 262,8380 2684,679 2458,401 12037,43 1,496470
6. 366 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA Probability 0,000000 0,000000 0,000000 0,000000 0,000000 0,473201 Sum 8,515663 114,6398 939,5671 45,45586 101,4922 1902,000 Sum Sq, Dev, 8,375380 4,570331 63,02337 112,5367 126,2006 1299,439 Observations 164 164 164 164 164 164 Table 2 present statistically: the average ROE of firms was 5.19%, the lowest was -173% and the highest was 50%.The lowest value is a very negative number because in these businesses, there are ineffective businesses that make profit before interest, tax or negative profit after tax. Leverage (LEV) in company reached an average of 0.68, the highest was 1 and the lowest was 0.01. The debt in capital structure is approximately equal to 1 because of the inefficient business situation in some enterprises, resulting in negative profit after tax for many consecutive years, reducing the size of equity. decrease, negative equity. Growth rate of the business listing are built at the average value at the 27,72%, low gain -93%, high gain 611%. Growth speed for business are not allowed in the construction company. Table 3: Correlation matrix Table 3 presents the correlation coefficients for all variables considered. As can be seen that there is the negative relation between profitability and the leverage (LEV). ROE LEV SIZE GROWTH TAX AGE ROE 1,000000 LEV -0,187030 1,000000 SIZE 0,142434 0,183767 1,000000 GROWTH 0,117048 -0,294767 -0,074478 1,000000 TAX 0,047635 0,134066 0,066865 -0,018792 1,000000 AGE 0,152221 0,312124 0,219174 -0,163553 -0,020486 1,000000 Table 4: Regression Model with out square Dependent Variable: ROE Method: Least Squares Date: 07/25/18 Time: 10:08 Sample: 1 164 Included observations: 164 Variable Coefficient Std, Error t-Statistic Prob, LEV -0,362024 0,112137 -3,228418 0,0015 SIZE 0,052675 0,028180 1,869264 0,0634 GROWTH 0,023579 0,021401 1,101767 0,2722 TAX 0,020597 0,019499 1,056312 0,2924 AGE 0,017646 0,006447 2,737120 0,0069 C -0,220724 0,167880 -1,314770 0,1905 R-squared 0,117981 Mean dependent var 0,051925 Adjusted R-squared 0,090069 S,D, dependent var 0,226678 S,E, of regression 0,216228 Akaike info criterion -0,189064 Sum squared resid 7,387243 Schwarz criterion -0,075654 Log likelihood 21,50325 Hannan-Quinn criter, -0,143024 F-statistic 4,226900 Durbin-Watson stat 1,949501 Prob(F-statistic) 0,001238
7. INTERNATIONAL CONFERENCE STARTUP AND INNOVATION NATION 367 Table 4 above represent the result of the return on equity regression model. According to the results obtained, the constant value of the model is -0.2207. Meaning return on equity will amount to -0.2207, when other factors affecting it are reduced to zero. The coefficient for the return on equity against LEV is -0.3620 Hence, from the regression result, the following model was derived. ROE= -0.3620LEV + 0.0526SIZE + 0.0235GROWTH + 0.0205TAX + 0.0176AGE - 0.2207 In pursuit to the above model, a unitary increment in debt to asset (LEV) will reduce the return on equity of the company by 0.3620. The debt to asset has also an inverse relationship with return on equity. Hence, to increase return on equity, the debt to asset will need to be reduced. This value can be explained because existence of debt would mean that the company has to pay fixed interest to its creditors, thereby reducing the total earnings of shareholders from invested capital. Table 5: Regression Model with square of DE Dependent Variable: ROE Method: Least Squares Date: 07/25/18 Time: 10:09 Sample: 1 164 Included observations: 164 Variable Coefficient Std, Error t-Statistic Prob, LEVSQUARE -0,929186 0,337690 -2,751592 0,0066 LEV 0,668133 0,390176 1,712389 0,0888 SIZE 0,047864 0,027667 1,730021 0,0856 GROWTH 0,033080 0,021252 1,556553 0,1216 TAX 0,022313 0,019116 1,167216 0,2449 AGE 0,015586 0,006361 2,450273 0,0154 C -0,413146 0,178742 -2,311406 0,0221 R-squared 0,158559 Mean dependent var 0,051925 Adjusted R-squared 0,126402 S,D, dependent var 0,226678 S,E, of regression 0,211867 Akaike info criterion -0,223967 Sum squared resid 7,047386 Schwarz criterion -0,091655 Log likelihood 25,36528 Hannan-Quinn criter, -0,170253 F-statistic 4,930791 Durbin-Watson stat 1,879919 Prob(F-statistic) 0,000120 The results of the study in Table 5 show that the performance of company has the highest correlation with the capital structure when the debt ratio of company reaches 69.53% (the extreme value of the second function). This means that the performance was positively correlated with the capital structure as the debt ratio increased to 69.53% and had a negative correlation with the capital structure when the debt ratio exceeded 69.53%. Thus, the statistic in Table 2 shows that the average debt ratio of these enterprises is 67.9% which is positively correlated with the business performance. In this model, the size of the company influences the business performance of listed companies in the construction industry; increased turnover rate; The tax rate on the net profit and the life of the business have the same impact on business performance in the construction industry.
8. 368 HỘI THẢO KHOA HỌC QUỐC TẾ KHỞI NGHIỆP ĐỔI MỚI SÁNG TẠO QUỐC GIA 5. CONCLUSION Given the specification of constructional firm, as well as Vietnam’s emerging market, an insight into the determinants and mechanism of capital structure is vital on its own merit. In spite of the large number of studies concerning the literature of capital structure, the drivers behind the choice of financing are still open for further researches. The primary purpose of this research is to shed light on determinants of capital structure in constructional companies in Vietnam’s developing economies. From that purpose, we attempt to implement comprehensive and accurate data set from Vietnam’s stock exchange, to filter the companies based on the nature of industry, and to formulate two different models in order to minimize the threat of endogeneity. The findings offered some difference and meaningful results. The analyses of the capital structure indicate that there is a significant negative relation between LEV and the profitability. This means that the construction firms should give more attention to the capital structure and in the long term, construction firms should consider the markets factors to forecast and make the appropriate plan for the future. That helps these firms determine the optimal capital structure. Beside that, due to the industry nature, construction firms have to come up with new solutions to cut costs and improve the productivity, such as develop the system LEAN-BIM-Prefabrication/Modularization which create a closed construction process from design to construct and assemble the building components. In conclusion, the study examined the impact of capital structure on firm’s performance selected construction firms listed on the Vietnamese Stock Exchange for the period from 2014 to 2017.These findingshave important implications for both capital structure and firm’s performance of Vietnamese construction firms. Even though highly attempts in bring about clear evidence cuts via empirical results, our study still remains a lot of limitation with highly demand for future fulfilment: sample size is limited; the study is based on secondary data. Future studies should be done to include a wider number of Vietnamese construction firms and firms from similar Asian contexts. REFERENCES: Myers C.S., S.N. Majluf, (1984) “Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have”, Journal of Financial Economics, Vol. 13, No. 2, pp. 187-221. Murillo Campello, (2007) “Asset Tangibility and Firm Performance under Nigel Driffield, Vidya Mahambare, Sarmistha Pal. (2006), “How Does Ownership Structure Affect Capital Structure and Firm Performance? Recent Evidence from East Asia.” Noel Capon; John U. Farley; Scott Hoenig. (1990), “Determinants of Financial Performance: A Meta-Analysis.” Management Science, Vol. 36, No. 10, Focussed Issue on the State of the Art in Theory and Method in Strategy Research. (Oct., 1990), pp. 1143-1159. Onaolapo, Adekunle A, Kajola, Sunday O. (2010), “Capital Structure and Firm Performance: Evidence from Nigeria” European Journal of Economics, Finance and Administrative Sciences ISSN 1450-2275 Issue 25 (2010). Penrose, E.T (1959): The Theory of the Growth of the Firm. New York, Wiley. Pinegar, M and Wilbricht, L (1989): “What managers think of capital structure theory: a survey. Financial Management, Winter, pp 82- 91. Rajan, R., and Zingales, L. (1995), ‘Is there an Optimal Capital Structure? Some Evidence from International Data,’ Journal of Finance, 50, 1421-60. Shyan- Rong Chou, Chen-Hsun Lee. (2007), “The research of the effects of capital structure on firm performance and evidence from the non-financial industry of Taiwan 50 and Taiwan mid-cap from 1987 to 2007”
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