Abstract
This paper aims to explore the capital structure of listed Vietnamese companies in an updated context of financial development (the recent situation of domestic equity and debt capital market). By applying Random Effect model for panel data, we analyze 05 firm-specific and 01 country-specific determinants of capital structure based on the data set of 228 firms listed on Ho Chi Minh Stock Exchange during the period 2010 – 2014. The results indicated that The Pecking Order theory better explains the financing behaviors of Vietnamese listed firms. Accordingly, although in recent years, Vietnam’s equity market and corporate debt capital market have evolved considerably, the capital structure of Vietnamese companies are still dominated by the use of short-term financing sources. High-growth firms or large-sized firms still rely heavily on external debt rather than equity issuance while State-owned enterprises (SOE) are reported to have positive association with the use of long-term financing sources. This study proposed some recommendations to the policymakers in two dimensions: improving the efficiency and role of capital markets to mitigate the reliance on short-term funds and ensuring that bank finance is allocated on a commercial basis.
Highlights
This paper aims to explore the capital structure of listed Vietnamese companies in an updated context of financial development
There are no studies of Vietnamese companies with updated data which considers post-financial crisis period and takes into consideration the impact of Equitization scheme of State-owned enterprises initiated by the Government since 2011
Okuda and Lai (2012) reported that companies listed on Ho Chi Minh Stock Exchange are less dependent on borrowing funds than those listed on Hanoi Stock Exchange
Summary
In 1958, two famous Nobel laureates, Franco Modigliani and Merton Miller, set the background for later researchers by the introduction of the Miller-Modigliani irrelevance model (hereafter known as M&M theory) – (Modigliani & Miller, 1958). A static tradeoff theory argues that a firm may set a target debt-to-value ratio where the tax benefit from an extra dollar in debt is exactly equal to the cost from the increased probability of financial distress, and the firm can move gradually to that target. A firm trades off the benefits of debt financing (favorable corporate tax treatment) against higher interest rates, financial distress related costs and agency costs. The Free cash flow theory of Jensen (1986) states that if a firm generates too much free cash flow the managers may misuse or waste money for personal purposes and other useless expenditures which are not beneficial for the firm and the shareholders’ rights Under such circumstances, the firm can reduce excess cash flow by either paying higher dividends or stock repurchases or acquiring more debt in their capital structure. Stated that debt creation can mitigate the agency conflicts since debt obligations will bond the promise to pay out future cash flow and force managers to be more disciplined and careful otherwise the firm may face the threat of bankruptcy
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