Abstract
The paper examines the impact of capital structure in the context of foreign ownership on firm performance on non-financial companies in Vietnam between 2008 and 2018. The study employs Pooled OLS, Fixed effect, random effect, and Generalized Least Square to analyze the data. The study finds a non-linear relationship of foreign ownership and firm performance, so that the relationship, which is at first a positive one, becomes negative beyond a certain level of foreign ownership (30-45% ownership depending on the measure of performance). This insight is then combined with a generally inverse relationship between capital structure and performance. Besides, we find that the firm’s size (SIZE) has a positive influence on profitability and financial leverage, while both financial leverage (LEV) and the number of listed years of company (AGE) impact negatively on firm performance. Furthermore, growth of sales (GROWTH) has a positive effect on the debt ratio, and growth rate (GDP) has a negative effect on financial leverage. This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium provided the original work is properly cited.
Highlights
Diversification of components in the capital structure plays an important role in funding decisions
With similar business characteristics and macro situation. Following such studies, we propose: H1: Capital structure has negatively effect on firm performance which we actualize with the proposed models: TOBINQit = α + β1 LEVit + β2 FOREIGNit + β3 SIZEit + β4 GROWTHit + β5 GDPt + β6 AGEit + εit (1)
When foreign ownership increases to a certain extent, will there be a linear impact on efficiency: H2: Foreign ownership has an inverted U-shaped relationship with firm performance which we operationalize with the proposed models: so that x = − β1 2β2 where, because foreign ownership cannot be negative (x >/= 0), we have β1 > 0 and β2 < 0
Summary
Diversification of components in the capital structure plays an important role in funding decisions. Ferris and Park [7], Viet [8], and Phung and Mishra [9] determine a more concave relationship between foreign ownership and firm performance Such studies suggest that companies benefit from monitoring by foreign shareholders, with a reduction of agency costs and an enhanced corporate governance, but only up to a point, beyond which a high concentration of foreign ownership leads to conflict between shareholders. Such a non-linear relationship is consistent with corporate government theory that holds that large shareholders have a positive effect due to their monitoring function, but that large shareholders engage in expropriation activities and management entrenchment [8, 10]. Paper’s research method (Section 3), our empirical results (Section 4) and our conclusions (Section 5)
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