Capital Structure and Financial Efficiency: Evidence from Ho Chi Minh Stock Exchange of Vietnam

Abstract

Capital structure and its utilization is one of the most crucial determinants to the growth and development of a business Thomas (2013). However, the level of financial leverage varies across firms and periods of time due to differences in business culture, administration, industry, or business strategy. In principle, there is no theoretically fixed perfect level for the proportion of financial leverage in a firm’s capital structure (Modigliani and Miller, 1958). Various capital structure theories have been mentioned in the literature such as trade-off theory (Miller, 1977) and the pecking order theory (Myers and Majluf, 1984). However, they always come with specific assumptions and contexts which cause the issue of empirical capital structure to remain debatable, especially in terms of an emerging market. Vietnamese stock markets, with a history of less than two decades of development, rapid growth, and with the establishment of derivative market in 2017 (The State Bank of Vietnam, 2017) is regarded as a typical one. Thus, this research aims to investigate the impact of capital structure on firm financial efficiency in Vietnamese listed companies. The panel data were collected from 85 firms listed on the Ho Chi Minh Stock Exchange (HSX) during the period 2006 to 2017 (excluding the financial sector). The results reveal that short term leverage of listed firms is significantly positively correlated with its financial efficiency.