Empirical Studies on Corporate Capital Structure in Vietnam

Abstract

The purpose of the study is to examine the influence of firm characteristics (profitability, investment opportunity “market-to-book ratio”, tangibility, size, growth) and industry effect to capital structure of stock companies in Vietnam. The study uses OLS regression method to analyze a data set consisting of 522 non-financial companies listed in the two stock exchanges Ho Chi Minh Stock Exchange (HSX) and Ha Noi Stock Exchange (HNX) during the period from 2008 to 2011. The aggregate market-based leverage ratio in Vietnam is about 0.29. Despite the differences in business environment and management, this ratio is consistent to the statement from Frank and Goyal (2007) “Over the past half century the aggregate market-based leverage ratio has been about 0.32”. The empirical results show that profitability, tangibility, and growth are the major three determinants to debt ratios. The strong negative correlation between profitability and all debt ratios supports the prediction of the pecking order theory and it is considered as a serious defect of the trade-off theory. Tangibility has a strong positive correlation with long-term debt ratio but it has a negative correlation with short-term debt ratio. This result is consistent with the maturity mismatch principle “Firms tend to use long-term debt to finance fixed assets to prevent maturity mismatch; consequently, firms with high fraction of tangibility are expected to have high long-term debt ratio but low short-term debt ratio”. The strong positive correlation between growth and all debt ratios is consistent to the statement of Jensen and Meckling, 1976 “Debt disciplines managers and mitigates agency problems to free cash flow since debt must be repaid to avoid bankruptcy”. However, the fact that firms that have cash on hand actually issue debts is considered a serious problem of the pecking order theory (Frank and Goyal, 2007). As per the empirical results the corporate capital structure of the whole data is dominated by short-term debt, but the corporate capital structure at industry level is sometimes dominated by long-term debt. It is consistent with the result of Gilson (1997) “Industry leverage is used as a proxy for target capital structure”. According to Hovakimian et al. (2001), firms actively adjust their debt ratios towards the industry average. And similar persistence at firm level is reported in Lemmon et al. (2007). The differences of corporate capital structure at industry level and the similar persistence of capital structure at firm level reflect the role of industry effect as the crucial determinant of the target debt ratios.