Luận văn Capital structure and firm performance: case study: listed companies in hochiminh stock exchange

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY --- oOo --- HUỲNH ANH KIỆT CAPITAL STRUCTURE AND FIRM PERFORMANCE: CASE STUDY: LISTED COMPANIES IN HOCHIMINH STOCK EXCHANGE MASTER THESIS Ho Chi Minh City – 2010 MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HOCHIMINH CITY --- oOo --- HUỲNH ANH KIỆT CAPITAL STRUCTURE AND FIRM PERFORMANCE: CASE STUDY: LISTED COMPANIES IN HOCHIMINH STOCK EXCHANGE MAJOR: BUSINESS ADMINISTRATION MAJOR CODE: 60.34.05 MASTER THESIS INSTRUCTOR : PROFESSOR NGUYỄN ĐÔNG PHONG Ho Chi Minh City – 2010 i ACKNOWLEDGEMENT I would like to express my deepest gratitude to my research Instructor, Professor Nguyen Dong Phong for his intensive support, valuable suggestions, guidance and encouragement during the course of my study. My sincere thanks are also due to Dr. Vo Thi Quy and Dr. Tran Ha Minh Quan for their valuable time as the members of the proposal examination committee. Their comments and constructive suggestions were of great help in my completing this study. My sincere thanks is extended to Assistant Professor Nguyen Dinh Tho, Dr. Tran Ha Minh Quan, Dr. Truong Tan Thanh, Dr. Pham Huu Hong Thai, Dr. Bui Thanh Trang for their valuable time as members of examination committee. Their comments and suggestions were of great value for my study. I would like to express my sincere gratitude to all of my teachers at Faculty of Business Administration and Postgraduate Faculty, University of Econimics Hochiminh City for their teaching and guidance during my MBA course. I would like to specially express my thanks to all of my classmates, my friends from www.caohockinhte.vn for their support and encouragement. I would also like to avail this opportunity to express my appreciation to Professor Nguyen Dong Phong, UEH Board of Directors for creating MBA program in English and Dr. Tran Ha Minh Quan for his support during the course. Finally, I heartily dedicate this study to my beloved parents and my wife, Vu Thi Huyen who have always sacrificed to encourage and support me during my study. ii ABSTRACT This study investigates the relationship between firm capital structure and firm performance. The author explores both the effect of firm performance on firm captial structure as well as the effect of capital structure on firm market performance using cross-sectional data representing of 162 Vietnamese companies in Hochiminh Stock Exchange for 2008. According to the results, a firm profitability is found to have a significant and negative impact on all firm capital structure. This finding support pecking order theory of Myers and Majluf (1984). An interesting finding is that firm size has a positive and significant impact on the leverage, which consistent with a previous study of Rajan and Zingales (1995), and indicating that a firm size is an important determinant of corporate capital structure. Firm capital structure is confirmed to have positive and significant impacts on firm market performance which is measured by Tobin’s Q. The author also finds that firm growth opportunities have a positive and significant impact on the firm value Tobin’s Q. Keywords: Capital structure, corporate performance, Vietnam, HOSE. iii TABLE OF CONTENTS ACKNOWLEDGEMENT .............................................................................................................i ABSTRACT .................................................................................................................................. ii TABLE OF CONTENTS ............................................................................................................ iii LIST OF FIGURES ....................................................................................................................... v LIST OF TABLES ........................................................................................................................vi ABBREVIATIONS ..................................................................................................................... vii CHAPTER 1: INTRODUCTION ................................................................................................ 1 1.1 BACKGROUND .......................................................................................................................... 1 1.2 RESEARCH PROBLEMS ........................................................................................................... 3 1.3 RESEARCH OBJECTIVES ......................................................................................................... 4 1.4 RESEARCH METHODOLOGY AND SCOPE .......................................................................... 5 1.5 STRUCTURE OF THE STUDY .................................................................................................. 5 CHAPTER 2: LITERATURE REVIEW .................................................................................... 7 2.1 INTRODUCTION ........................................................................................................................ 7 2.2 CAPITAL STRUCTURE ............................................................................................................. 7 2.3 FIRM PERFORMANCE ............................................................................................................ 11 2.4 HYPOTHESIS AND EMPIRICAL MODEL ............................................................................ 12 2.4.1. Model 1: The Leverage Model ......................................................................................... 12 2.4.2. Model 2: The Firm Value Model ..................................................................................... 15 CHAPTER 3: RESEARCH DESIGN ........................................................................................ 18 3.1 INTRODUCTION ...................................................................................................................... 18 3.2 DATA ......................................................................................................................................... 18 3.3 RESEARCH DESIGN ................................................................................................................ 18 3.3.1. Research Sample .............................................................................................................. 19 3.3.2. Data Analysis Method ...................................................................................................... 20 3.4 VARIABLES MEASUREMENT FOR MODEL 1 ................................................................... 20 3.4.1. Dependent Variables ........................................................................................................ 20 3.4.2. Independent Variables ...................................................................................................... 21 3.5 VARIABLES MEASUREMENT FOR MODEL 2 ................................................................... 21 3.5.1. Dependent Variables ........................................................................................................ 21 3.5.2. Independent Variables ...................................................................................................... 22 3.6 FRAMEWORK OF THE STUDY ............................................................................................. 23 3.7 SUMMARY ................................................................................................................................ 24 CHAPTER 4: EMPIRICAL RESULTS OF THE RESEARCH............................................. 25 4.1 INTRODUCTION ...................................................................................................................... 25 4.2 CHARACTERISTICS OF RESEARCH SAMPLES ................................................................. 25 4.3 DESCRIPTIVE STATISTICS ................................................................................................... 26 4.4 REGRESSION ANALYSIS ....................................................................................................... 29 4.4.1. Model 1: The Leverage Model ......................................................................................... 29 4.4.2. Model 2: The Firm Value Model ..................................................................................... 32 CHAPTER 5: CONCLUSIONS, RECOMMENDATIONS AND LIMITATIONS .............. 38 5.1 INTRODUCTION ...................................................................................................................... 38 5.2 CONCLUSIONS ........................................................................................................................ 38 iv 5.3 RECOMMENDATIONS ............................................................................................................ 39 5.4 LIMITATIONS .......................................................................................................................... 40 REFERENCES ............................................................................................................................ 41 APPENDIX A ............................................................................................................................... 44 APPENDIX B ............................................................................................................................... 45 APPENDIX C ............................................................................................................................... 51 v LIST OF FIGURES Figure 1: The Leverage Model ........................................................................................ 14 Figure 2: The Firm Value Model .................................................................................... 17 Figure 3: Research Process .............................................................................................. 19 Figure 4: Framework of the study .................................................................................. 23 vi LIST OF TABLES Table 1: Dependent variables for model 1 ...................................................................... 20 Table 2: Independent variables for model 1 .................................................................. 21 Table 3: Dependent variables for model 2 ...................................................................... 22 Table 4: Independent variables for model 2 .................................................................. 22 Table 5: Summary Statistics of the Explanatory Variables ......................................... 26 Table 6: Correlation Matrix of the Explanatory Variables for Model 1 ..................... 28 Table 7: Correlation Matrix of the Explanatory Variables for Model 2 ..................... 28 Table 8: Estimate Results for Model 1 ............................................................................ 29 Table 9: Estimate Results for Model 2 Using TDTA ..................................................... 32 Table 10: Estimate Results for Model 2 Using TDTE ................................................... 33 Table 11: Estimate Results for Model 2 Using LTDTA ................................................ 34 Table 12: Estimate Results for Model 2 Using STDTA ................................................ 35 vii ABBREVIATIONS HOSE Hochiminh Stock Exchange GROWTH Growth opportunities LTDTA Long-term debt to total assets PE Price-to-Earnings Ratio PROF Profitability ROA Return on assets ROE Return on equity ROI Return on investment SIZE Firm Size STDTA Short-term debt to total assets TA Asset tangibility TDTE Total debt to total equity TDTA Total debt to total assets TOBIN Tobin’s Q Capital Structure and Firm Performance Page 1 CHAPTER 1: INTRODUCTION 1.1 BACKGROUND The theory of the capital structure is an important reference theory in firm's financing policy. The capital structure refers to firm includes mixture of debt and equity financing. The topic of optimal capital structure has been the subject of many studies. The modern theory of the capital structure originate from the contribution of Modigliani and Miller in 1958, under the perfect capital market assumption1 Jensen and Meckling (1976) introduce the concept of agency costs and investigate the nature of the agency costs generated by the existence of debt and outside equity. When considering corporation tax, bankrupt costs and agency costs at the same time, trade-off theory can be introduced to derive the existence of the optimum capital structure. Leland (1994) extends the results of Merton (1974) and Black and Cox (1976) to include taxes, bankruptcy costs to derive the optimal capital structure. Deangelo and Masulis (1980) argue that the existence of non-debt corporate tax shields such as depreciation deductions is sufficient to overturn the leverages irrelevancy theorem. Hovakimian, Opler, and Titman (2001) test the hypothesis that firms tend to a target ratio when they either raise new capital or retire or repurchase existing capital. They found firms should use relatively more debt to finance assets in place and relatively more equity to finance growth opportunities. that if there is no bankrupt cost and capital markets are frictionless, if without taxes, the firm value is independent with the structure of the capital. In 1963, under considering the corporate taxes, Modigliani and Miller modified the conclusion to recognize tax shield. Because debt can reduce the tax to pay, so the best capital structure of enterprises should be 100% of the debt. But this seems to be unreasonable in the real world. It has also been argued that profitable firms are less likely to depend on debt in their capital structure than less profitable ones. It has been argued that firms with a high growth rate have a high debt to equity ratio. Bankruptcy costs (proxied by firm size) are also found to be an important effect on capital structure (Kraus and 1 Perfect capital markets means that the following assumptions hold: (a) there are no taxes, (b) there are no transaction costs, (c) there is symmetrical information, (d) there are homogenous expectations, and (e) investors can borrow at the same rate as corporations. Capital Structure and Firm Performance Page 2 Litzenberger, 1973; Harris and Raviv, 1991). If these three factors are considered as determinants of capital structure, then these factors could be used to determine the firm performance. In practice, firm managers who are able to identify the optimal capital structure are rewarded by minimizing a firm’s cost of finance thereby maximizing the firm revenue. If a firm capital structure influences a firm performance, then it is reasonable to expect that the firm capital structure would affect the firm health and its likelihood of default. From a creditor’s point view, it is possible that the debt to equity ratio aids in understanding banks’ risk management strategies and how banks determine the likelihood of default associated with financially distressed firms. In short, the issue regarding the capital structure and firm performance are important for both academics and practitioners. There is lack of empirical evidence about the effect of firm performance on capital structure in Vietnam. Then, the first objective of this study is to examine the effect which firm performance has on capital structure of listed companies in Hochiminh Stock Exchange. Trần Hùng Sơn and Trần Viết Hoàng (2008) find a positive and significant impact of firm leverage on firm accounting performance, but have not used market performance measures. Thus, the second objective of this study is to examine the effect which firm capital structure has on corporate market performance. This study contributes to literature in two directions: (1) by using ordinary least square regression model to investigate the relationship between capital structure and firm performance to fill the gap in corporate finance literature in Vietnam; (2) by employing different measures of capital structure such as short-term debt to total assets, long-term debt to total assets, total debt to total assets, and total debt to total equity to investigate the effect of the debt structure on corporate market performance in Vietnam. This study contributes to practical implications by investigating the effect of capital structure on corporate performance using market measures to provides evidence about whether the stock market is efficient or not. It also provides managers a structure approached to plan their firm capital structure strategies and improve the firm value. Capital Structure and Firm Performance Page 3 1.2 RESEARCH PROBLEMS Problem definition is essential before conducting a study, especially quantitative research. Zikmund (1997, p. 82) recommends that formal quantitative research should not begin until the problem has been clearly defined. In Vietnam, lack of empirical evidence, that investigate the relationship between firm capital structure and firm performance, is an issue for both academics and practitioners. There is lack of empirical evidence that investigate the relationship between firm capital structure and firm performance in Vietnam. In 2008, Trần Hùng Sơn and Trần Viết Hoàng tested the relationship between capital structure and firm performance by using data sample of 50 non-financial companies in Hochiminh Stock Exchange for the period September 2008. The results show that there is a positive correlation between a firm capital structure and performance, which is measured by average of return on assets and return on equity. The corporate performance has a strong quadratic or cubic correlation with the capital structure when they use the debt ratio under 100%. The performance has a positive correlation with the capital structure when the debt ratio is in the range from 0.9755 to 2.799. However, they have not used market performance measures and have not explored the optimal capital structure to maximize the performance of the firm. They have not tested the correlation between the distribution of debt ratio and corporate performance to each type of companies, as well as each industry. Their research recommended that further research should be implemented. Margaritis and Psillaki (2007) use a sample of 12,240 firms from the 2004 New Zealand Annual Enterprise Survey to investigate the effect of leverage on firm performance as well as the reverse causality relationship. They use quantitative regression analysis to show that the effect of efficiency on leverage is positive at low to mid-leverage levels and negative at high leverage ratios. In Vietnam, there is no empirical evidence related to the effect of firm performance on capital structure. Therefore, the problem to be addressed in this study is to examine the effect of firm performance on firm capital structure combined with others variables such as firm size, growth and asset tangibility on firm capital structure. In addition, the author will explore the effect of firm capital structure on firm market performance, known as firm value of listed firms in Hochiminh Stock Exchange. Capital Structure and Firm Performance Page 4 1.3 RESEARCH OBJECTIVES A research objective is the researcher’s version of a business problem. Objectives explain the purpose of the research in measurable terms and define standards of what the research should accomplish (Zikmund 1997, p. 89). In solving the research problem mentioned previously, this study has the following objectives: • Determine the effect of firm profitability, size, growth opportunities and asset tangibility on listed firm capital structure in Hochiminh Stock Exchange. • Determine the effect of capital structure on listed firm market performance combined with others variables such as firm size and growth opportunities in Hochiminh Stock Exchange. Research Questions Research questions involve the research translation of “problem” into the need for inquiry. The research problems defined above leads to the following research questions: • What are the relationship between firm capital structure and firm profitability, size, growth opportunities and asset tangibility of listed firms in Hochiminh Stock Exchange? • What are the relationship between firm capital structure, size, growth opportunities and firm market performance of listed firms in Hochiminh Stock Exchange? Two research variables of the topic: • Capital structure • Firm performance Capital Structure and Firm Performance Page 5 1.4 RESEARCH METHODOLOGY AND SCOPE The object of this research is all listed non-financial companies in Hochiminh Stock Exchange (HOSE) at the end 2008. Sample size: 162 (See more in Chapter 3). Quantitative research based on ordinary least square regression model to estimate the relationship between firm profitability, size, growth, asset tangibility and firm capital structure, as well as the relationship between firm leverage and firm market firm performance. This model was used in the previous studies of Tian & Zeitun (2007), Margaritis & Psillaki (2007), Rajan and Zingales (1995). The author use data analysis tools to implement the research such as: descriptive statistics, multiple regression models with Eviews 6 for Windows. 1.5 STRUCTURE OF THE STUDY The structure of the study consist five chapters: Chapter 1: Introduction This chapter presents research background of the study, as well as, research problems, research objectives, research methodology and scope. Chapter 2: Literature Review In this chapter, I summary the literature review and present the fundamental ideas on capital structure, as well as firm performance. This chapter also presents a research model of the study. Chapter 3: Research Design Based on the research objectives and scope, research methodology concerned in chapter 1, and literature review and empirical model presented in chapter 2, this chapter particularly presents the research methodology, data, research design and research process. Chapter 4: Empirical Results of the Research Chapter 4 presents the characteristics of research samples and measures concepts of the research. I use descriptive statistics to explore the features of explanatory variables, as well as the relationship between each variable in two models. Capital Structure and Firm Performance Page 6 Furthermore, I use regression analysis to explore the relationship between the capital structure and market performance of listed companies in Hochiminh Stock Exchange. Chapter 5: Conclusions, Recommendations and Limitations Chapter 5 presents main conclusions and recommendations based on the results of the previous chapters, as well as the limitations of this study. Capital Structure and Firm Performance Page 7 CHAPTER 2: LITERATURE REVIEW 2.1 INTRODUCTION Chapter 2 summaries the literature review and present the fundamental ideas on capital structure, as well as firm performance. This chapter also presents a research model of the study. 2.2 CAPITAL STRUCTURE The modern theory of capital structure began with the celebrated paper of Modigliani and Miller (1958). In this paper they claim that under perfect capital market conditions, a firm value depends on its operating profitability rather than its capital structure. In 1963, Modigliani and Miller argued that, when there are corporate taxes then interest payments are tax deductible, 100% debt financing is optimal. In this framework, firms target an optimal capital structure based on tax advantages and financial distress disadvantages. Firms are thought to strive toward their target and can signal their future prospects by changing their structure. Adding more debt increases firm value through the market’s perception of higher tax shields or lower bankruptcy costs. But optimal capital structure at a 100% debt financing are clearly incompatible with observed capital structures, so their findings initiated a considerable research effort to identify costs of debt financing that would offset the corporate tax advantage. Since bankruptcy costs exist, deteriorating returns occur with further use of debt in order to get the benefits of tax deduction. Therefore, there is an appropriate capital structure beyond which increases in bankruptcy costs are higher than the marginal tax-sheltering benefits associated with the additional substitution of debt for equity. Firms are willing to maximize their performance, and minimize their financing cost, by maintaining the appropriate capital structure or the optimal capital structure. Harris and Raviv (1991) argue that capital structure is related to the trade-off between costs of liquidation and the gain from liquidation to both shareholders and managers. So firms may have more debt in their capital structure than is suitable as it gains benefits for both shareholders and managers. Since then, extensions of the Modigliani and Miller theory have been provided by the following researches. Robichek and Myers (1966) argue that the negative effect Capital Structure and Firm Performance Page 8 of bankruptcy costs on debt to prevent firms from having the desire to obtain more debt. Jensen and Meckling (1976) emphasize the importance of the agency costs of equity in corporate finance arising from the separation of ownership and control of firms whereby managers tend to maximize their own utility rather than the value of the firms. The general result of these extensions is that the combination of leverage related costs (such as bankruptcy and agency costs) and a tax advantage of debt produces an optimal capital structure at less than a 100% debt financing, as the tax advantage is traded off against the likelihood of incurring the costs. This leads us to Jensen’s (1986) “free cash flow theory” where as stated by Jensen (1986, p. 323) “the problem is how to motivate managers to disgorge the cash rather than investing it below the cost of capital or wasting it on organizational inefficiencies”. In other words complete contracts cannot be written. A higher level of leverage may be used as a disciplinary device to reduce managerial cash flow waste through the threat of liquidation (Grossman and Hart, 1982) or through pressure to generate cash flows to service debt (Jensen, 1986). Titman (1984) demonstrates an idea of indirect bankruptcy costs. He argues that stakeholders did not represent at the bankruptcy bargaining table, such as customers, could suffer material costs resulting from the bankruptcy. Leland (1994) demonstrates a standard trade-off model. At the optimal capital structure, marginal bankruptcy costs associated with firm’s debt are equated with marginal tax benefits. The static tradeoff theory is the original retort to the theory of capital structure relevance. However, as stated in the previous literature, underestimating the bankruptcy costs of liquidation or reorganization, or the aligned interest of both managers and shareholders may lead firms to have more debt in their capital structure than they should (see, for example, Harris and Raviv, 1991). Krishnan and Moyer, (1997) find a negative and significant impact of total debt to total equity (TD/TE) on return on equity (ROE). Another study by Gleason, Mathur and Mathur, (2000) find that firm capital structure has a negative and significant impact on firm performance measures return on assets (ROA), growth in sales (Gsales), and pre- tax income (Ptax). Therefore, high levels of debt in the capital structure would decrease the firm performance. However, not only does a firm’s level of leverage affect corporate performance and failure but also its debt maturity structure (Barclay and Smith, 1995 and Ozkan, 2002). Schiantarelli and Sembenelli (1999) investigate the effects of firm’s debt maturity structure on profitability for Italy and the United Kingdom. They find a positive relationship between initial debt maturity and medium term performance. Capital Structure and Firm Performance Page 9 A study by Barclay and Smith (1995) provide evidence that large firms and firms with low growth rates prefer to issue long-term debt. Another study by Stohs and Mauer (1996) suggest that larger and less risky firms usually make greater use of long-term debt. They also find that debt maturity is negatively related to corporate tax, the firm’s risk and earnings surprises. In other words, the choice of debt structure could have an impact on both corporate performance and failure risk. Furthermore, there are other factors, besides capital structure, that may influence firm performance such as firm size, age, growth, risk, tax rate, factors specific to the sector of economic activity, and factors specific to macroeconomic environment of the country. Dilip Ratha, et al (2003) studies the relationship between corporate performance (as measured by its profit rate or earnings before interest and taxes) and corporate finance (debt/assets ratio) in developing countries. First, they find out that both profits and earnings before interest, taxes, depreciation, and amortization decline as a percentage of assets as firms take on more debt relative to their assets. This is similar to the finding of Harvey, Lins, and Roper (2001) that; while some debt may improve market discipline in firms, the effect may be overcome by increasing financial risks. Second, the marginal (negative) effect of an increase in leverage on earnings is larger for firms that participate in international debt markets than for other firms. However, they have not used market performance measures to study the relationship of corporate finance and corporate performance. Wei Xu, et al (2005) analyzes the relationship between corporation performance and capital structure of 1,130 listed companies in China. The results show that the firm’s performance has a strong negative correlation with the capital structure. It does not agree with the western empirical result for the higher debt ratio. The corporation performance has a strong quadratic or cubic correlation with the capital structure when they use the debt ratio under 100%. The performance has a positive correlation with the capital structure when the debt ratio is in the range from 24.52% to 51.13%. Allan N. Berger, et al (2006) uses a new approach to test agency theory in US banking industry and the findings are consistent with the agency costs hypothesis - higher leverage or a lower equity capital ratio is associated with higher profit efficiency over almost the entire range of the observed data. And the results are statistically significant, economically significant, and robust. Margaritis and Psillaki (2007) use a sample of 12,240 firms from the 2004 New Zealand Annual Enterprise Survey to investigate the relationship between firm Capital Structure and Firm Performance Page 10 efficiency and leverage as well as the reverse causality relationship. They find evidence supporting the theoretical predictions of the Jensen and Meckling (1976) agency cost model. More precisely, they find support for the core prediction of the agency cost hypothesis in that higher leverage is associated with improved efficiency over the entire range of observed data. They use quantitative regression analysis to show that the effect of efficiency on leverage is positive at low to mid- leverage levels and negative at high leverage ratios. Thus their results suggest that in the upper range of the leverage distribution the income effect resulting from the economic rents generated by high efficiency dominates the substitution effect of debt for equity capital. They also show that the more efficient firms will choose higher debt ratios because higher efficiency acts as a buffer against the expected costs of bankruptcy or financial distress. The effect of tangibles and profitability on leverage is positive. Firm size has a negative effect on leverage at the lower half of the leverage distribution and a positive effect at the upper half of the distribution. The effect of intangibles and other assets is estimated to be negative. Tian & Zeitun (2007) examine the impact which capital structure has had on corporate performance in Jordan in which they controlled the effect of industrial sectors, regional risk, such as the Gulf Crisis 1990-1991 and the outbreak of Intifadah in the West Bank in September 2000. They have used a cross-sectional data representing of 167 Jordanian companies during 1989-2003. The results show that a firm capital structure has a significantly negative impact on the firm performance measures, in both the accounting and market measures. An interesting finding is that the short-term debt to total assets level has a significantly positive effect on the market performance measure (Tobin’s Q), which could to some extent support Myers (1977) argument that firms with high short-term debt to total assets have a high growth rate and high performance. Firm size is found to have a positive impact on a firm performance, as large firms have low bankruptcy costs. The insignificance of the market performance measure PE indicates that the Jordanian equity market is not efficient, so the best performance measure is the accounting performance measure ROA. In Vietnam, Trần Hùng Sơn and Trần Viết Hoàng (2008) test the relationship between firm capital structure and performance by using data sample of 50 non- financial companies in Hochiminh Stock Exchange for the period September 2008. The results show that there is a positive correlation between a firm capital structure and performance. The corporation performance has a strong quadratic or cubic correlation with the capital structure when they use the debt ratio under 100%. The performance has a positive correlation with the capital structure when the debt ratio is in the range from 0.9755 to 2.799. State owned ratio has negative impact on firm Capital Structure and Firm Performance Page 11 efficiency, but firm growth, size (measured by logarithm of the firm’s assets) and tangibility had no significant impact on firm performance. However, they have not used market performance measures and did not explore the optimal capital structure to maximize the performance of the firm. They have not test the correlation between the distribution of debt ratio and corporate performance to each type of companies, as well as each industry. 2.3 FIRM PERFORMANCE The concept of performance is a controversial issue in finance largely due to its multidimensional meanings. Research on firm performance emanates from organization theory and strategic management (Murphy et al., 1996). Performance measures are either financial or organizational. Financial performance such as profit maximization, maximizing profit on assets, and maximizing shareholders' benefits are at the core of the firm effectiveness (Chakravarthy, 1986). Operational performance measures, such as growth in sales and growth in market share, provide a broad definition of performance as they focus on the factors that ultimately lead to financial performance (Hoffer and Sandberg, 1987). The usefulness of a measure of performance may be affected by the objective of a firm that could affect its choice of performance measure and the development of the stock and capital market. For example, if the stock market is not highly developed and active then the market performance measures will not provide a good result. The most commonly used performance measure proxies are return on assets (ROA) and return on equity (ROE) or return on investment (ROI). These accounting measures representing the financial ratios from balance sheet and income statements have been used by many researchers (e.g., Demsetz and Lehn, 1985; Gorton and Rosen, 1995; Mehran, 1995; and Ang, Cole and Lin, 2000). However, there are other measures of performance called market performance measures, such as price per share to the earnings per share (PE) (Abdel Shahid, 2003), market value of equity to book value of equity (MBVR), and Tobin’s Q. Tobin’s Q mixes market value with accounting value and is used to measure the firm's value in many studies (e.g., Morck, Shleifer, and Vishny, 1988; McConnel and Serveas, 1990; and Zhou, 2001). The performance measure ROA is widely regarded as the most useful measure to test firm performance (Reese and Cool, 1978; Long and Ravenscraft, 1984; Abdel Shahid, 2003, among others). The stock Capital Structure and Firm Performance Page 12 market efficiency and other economic and political factors could affect a firm performance and its reliability (See Abdel Shahid, 2003). Firm performance may also affect the choice of capital structure. As Berger and Bonaccorsi di Patti (2006) point out, regressions of firm performance on leverage may confound the effects of capital structure on performance with the reverse relationship from performance on capital structure. This reverse causality effect is in essence a feature of theories considering how agency costs (Jensen and Meckling, 1976; Myers, 1977; and Harris and Raviv, 1990); corporate control issues (Harris and Raviv, 1988); and in particular, asymmetric information (Myers and Majluf, 1984; Myers, 1984) and taxation (DeAngelo and Masulis, 1980; and Bradley et al., 1984) are likely to affect the value of the firm. 2.4 HYPOTHESIS AND EMPIRICAL MODEL 2.4.1. Model 1: The Leverage Model Profitability (PROF) is used to measure firm performance to test the impact of firm performance on firm capital structure. Profitability is calculated by pre-interest and pre-tax operating surplus plus depreciation divided by total assets. There are conflicting theoretical predictions on the effects of profitability on leverage (Harris and Raviv, 1991; Rajan and Zingales, 1995; Barclay and Smith, 2001; and Booth et al., 2001). Myers and Majluf (1984) predict a negative relationship because they argue that firms will prefer to finance new investments with internal funds rather than debt. According to their pecking order theory, because of signaling and asymmetric information problems, firms financing choices follow a hierarchy in which internal cash flows (retained earnings) are preferred over external funds, and debt is preferred over equity financing. Thus, they argue, we should expect a negative relationship between past profitability and leverage. On the other hand, using arguments based on the trade-off and contracting cost theories we can predict a positive relation between profitability and leverage. For example, the trade-off theory suggests that the optimal capital structure for any particular firm will reflect the balance (at the margin) between the tax shield benefits of debt and the increasing agency and financial distress costs associated with high debt levels (Jensen and Meckling, 1976; Myers, 1977; and Harris and Raviv, 1990). Similarly, Jensen (1986) argue that if the market for corporate control is effective and forces firms to pay out cash by levering up, then there will be a positive correlation between profitability and leverage. Thus, the hypothesis 1 is: Capital Structure and Firm Performance Page 13 H1: The firm profitability has a positive correlation with firm capital structure. Growth opportunities (GROWTH) are likely to put a strain on retained earnings and push the firm into borrowing (Michaelas et al., 1999). On the other hand, Myers (1977) argues that firms with growth potential will tend to have lower leverage. He argues that growth opportunities can produce moral hazard effects and can push firms to take more risk. This may explain why firms with ample growth opportunities may be considered as risky and thus face difficulties in raising debt capital on favorable terms. Thus, hypothesis 2 can be stated as follows: H2: Growth opportunities decrease firm leverage. Firm size (SIZE) is measured by the logarithm of the firm’s sales (Titman and Wessels, 1988; Rajan and Zingales, 1995; and Ozkan, 2001). As larger firms are more diversified and tend to fail less often than smaller ones, I would expect that size will be positively related to leverage. However, Rajan and Zingales (1995) discuss the possibility that size may also be negatively correlated with leverage. They argue that size may act as a proxy for the information outside investors have, and that informational asymmetries are lower for large firms which implies that large firms should be in a better position to issue informational sensitive securities such as equity rather than debt. Thus, hypothesis 3 can be stated as: H3: Firm size is expected to have a positive influence on a firm capital structure. Asset Tangibility (TA) is measured by the ratio of fixed tangible to total assets (Titman and Wessels, 1988; Rajan and Zingales, 1995; Frank and Goyal, 2003; and Hall et al., 2004). The existence of asymmetric information and agency costs may induce lenders to require guarantees materialized in collateral (Myers, 1977; Scott, 1977; and Harris and Raviv, 1990). For example, if a firm retains large investments in land, equipment and other tangible assets, it will normally face smaller funding costs compared to a firm that relies primarily on intangible assets. Moreover, Berger and Udell (1994) show that firms with close relationship with creditors need to provide less collateral. They argue this is because the relationship (and more informed monitoring by creditors) substitutes for physical collateral. If so, I should find tangibility mattering less in the “bank oriented” countries. Thus, I would expect that tangibility should be positively related to debt. And, hypothesis 4 is: H4: Asset Tangibility is expected to be positively related to corporate leverage. I use the basic ordinary least squares regression model to test the hypotheses that a firm profitability, growth opportunities, size, asset tangibility influence its capital structure for my data. The empirical models to be estimated as follows: Capital Structure and Firm Performance Page 14 Model 1: yi = β0 + β1PROFi + β2Growthi + β3Sizei + β4TAi + u Where i refers to the individual companies, and y is leverage for firm i. The independent variables are represented by Prof, Growth, Size and TA. Four measures of leverage are used in the study: total debt to total assets (TDTA), total debt to total equity (TDTE), long-term debt to total assets (LTDTA), short-term debt to total assets (STDTA). i Based on the hypotheses, the author presents the leverage model (Figure 1): • Dependent variable: Firm Capital Structure is alternatively measured by total debt to total assets (TDTA), total debt to total equity (TDTE), long- term debt to total assets (LTDTA), short-term debt to total assets (STDTA). • Independent variables: Firm Profitability, Firm Growth, Firm Size, Firm Asset Tangibility. Firm Profitability (PROF) Firm Growth (Growth) Firm Size (Size) Firm Asset Tangibility (TA) Firm Leverage (TDTA, TDTE, STDTA, LTDTA) H1 H2 H3 H4 Figure 1: The Leverage Model Capital Structure and Firm Performance Page 15 2.4.2. Model 2: The Firm Value Model A firm performance could be affected by the capital structure choice and by the structure of debt maturity. Debt maturity affects a firm investment options. Also, the tax rate is expected to have an impact on a firm performance. So, investigating the impact of capital structure variables on a firm performance will provide evidence of the effect of capital structure on firm performance. The author uses two measures of corporate market performance, known as firm value: market value of equity plus book value of debt to the book value of assets (Tobin’s Q), and price per share to the earnings per share (PE). Tobin’s Q has been used as a major indicator of firm performance. Even Tobin’s Q, as agreed by many researchers, is a noisy signal. Because of the limitations of Tobin’s Q, other performance measures, PE is employed as supplementary measures. Using market measures of performance may shed light on the stock market activity and if there is other factors that may affect corporate performance. If capital structure does affect a firm performance and value, then a strong correlation between the firm performance and capital structure would be found. So, I argue that a firm debt ratio affects its performance and value negatively. Furthermore, it has been argued that short-term debt influences a firm performance negatively, because short-term debt exposes firms to the risk of refinancing. It is expected that the debt maturity ratios (short-term debt and long-term debt) will have a significant impact on corporate performance because of the banking credit policy. Thus, the hypothesis is: H5: A firm capital structure does influence its market performance. Myers (1977) argues that firms with high growth opportunities have high agency costs of debt and will be able to borrow less. In contrast, the pecking order theory suggests that high growth firms have a greater need for funds and therefore can be expected to borrow more. Wei Xu (2005) shows that there is a strong positive correlation between growth and return on equity (ROE). So, it is expected that firms with high growth opportunities have a high value, as growth firms are able to generate profit from investment. Growth opportunities are expected to positively affect a firm market performance. Thus, hypothesis 6 can be stated as follows: H6: Growth opportunities increase firm market performance. A firm size is measured by log of sales (SIZE). The firm size is hypothesized to be positively related to the firm performance, as bankruptcy costs decrease with size. Capital Structure and Firm Performance Page 16 Thus, a firm size is expected to have a positive influence on a firm performance, because potential bankruptcy costs make up a smaller proportion of value for larger firms. In addition, there are economies of scale in transactions costs associated with long-term debt that are not available to smaller firms. Gleason, among others, finds that firm size has a positive and significant effect on firm performance (ROA). Tian & Zeitun (2007) find that firm size has a positive and significant impact on firm performance ROA, PROF, and Tobin’s Q. In contrast, many other researchers such as Mudambi and Nicosia (1998), Lauterbach and Vaninsky (1999), Durand and Coeuderoy (2001), and Tzelepis and Skuras (2004) have found an insignificant effect of firm size on the firm performance. Based on this discussion, hypothesis 7 can be stated as: H7: A firm size is expected to have a positive influence on a firm market performance. I use the basic ordinary least squares regression model to test the hypotheses that a firm capital structures influence its market performance for my data. The empirical models to be estimated as follows: Model 2: yi = β0 + β1Leveragei + β2Growthi + β3Sizei + u Where i refers to the individual companies, y is alternatively Tobin’s Q, PE, for firm i as a measure of market performance. The independent variables are represented by Leverage, Growth and Size. Four measures of leverage are used in the study: total debt to total assets (TDTA), total debt to total equity (TDTE), long- term debt to total assets (LTDTA), short-term debt to total assets (STDTA). I use more than one proxy for leverage as different hypotheses for leverage were developed to investigate their effect on corporate value. For example, the STDTA and LTDTA are used to investigate the effect of short-term and long-term debt on a firm performance. The proxy of TDTE was used in the study to validate the result. i Based on the hypotheses, the author presents the empirical model (Figure 2): • Dependent variable: Firm Value is alternatively measured by Tobin’s Q, PE. • Independent variables: Firm Leverage, Firm Growth, Firm Size. Capital Structure and Firm Performance Page 17 Firm Leverage (Leverage) Firm Growth (Growth) Firm Size (Size) Firm Value (Tobin’s Q, PE) H5 H6 H7 Figure 2: The Firm Value Model Capital Structure and Firm Performance Page 18 CHAPTER 3: RESEARCH DESIGN 3.1 INTRODUCTION Based on the research objectives and scope, research methodology concerned in chapter 1, and literature review and empirical model presented in chapter 2, this chapter particularly presents the research methodology, data, research design and research process. 3.2 DATA As mentioned in the chapter 1, the author was interested in examining the relationship between firm profitability, size, growth opportunities, asset tangibility and capital structure, as well as exploring the effect of capital structure on corporate market performance of listed firms in Hochiminh Stock Exchange. This study used the accounting and market data of 171 listed companies in the Hochiminh Stock Exchange (HOSE) for the period 2008. The data set contained detailed information of each firm. The items of interest were: balance sheets, income statements, interest paid, depreciation, and market valuation. By law, the full financial statements were available from firms. This data set was collected from Vietnam Financial Information Company website (www.vinabull.com) 3.3 RESEARCH DESIGN This study was a quantitative research based on ordinary least square regression model to estimate the relationship between firm profitability, size, growth opportunities, asset tangibility and capital structure, and the effect of capital structure on corporate market performance. The research process was presented as figure 3: Capital Structure and Firm Performance Page 19 3.3.1. Research Sample As mentioned in the Chapter 1, I was interested in examining the relationship between firm profitability, size, growth opportunities, asset tangibility and capital structure, as well as explore the effect of capital structure on corporate market performance of listed firms in Hochiminh Stock Exchange. Literature Review (Capital Structure, Firm Performance, Hypotheses, Model) Colleting financial statement of 171 companies in HOSE (n=171) Test the regression model (Adjust the sample to n=162) Quantitative research: • Sample size: 162 • Calculating the data set from the financial statement. • Encode and input the data set • Descriptive Statistics • Regression Analysis Writing the report Figure 3: Research Process Capital Structure and Firm Performance Page 20 The author used a sample of 171 companies listed in Hochiminh Stock Exchange from the 2008 Annual Enterprise Financial Statements. The financial statements, which I needed for the study, contained: balance sheets and income statement. I also collected the market valuation of these companies stock in HOSE on 31 December 2008, in order to measure Tobin’s Q and price per share to the earnings per share (PE) of corporate market value performance. After collecting the data set, the author excluded 7 financial companies, such as banks, insurance firms, funds and financial firms, in this analysis as their characteristics are different. Two manufacturing corporations, Bach Tuyet Cotton Corporation (BBT) and Tribeco Saigon Beverages Joint Stock Company (TRI), were also excluded from the data set. Bach Tuyet Cotton Corporation had failed to deliver its statement for 2008, while the equity of Tribeco Saigon Beverages Joint Stock Company was negative in its balance sheets due to its bad business in 2008. Consequently, the final data set included 162 listed companies in HOSE. 3.3.2. Data Analysis Method After having the final data set, I used formulas that are defined in the Appendix A to calculate the explanatory variables. Subsequently, I encoded and input data by Eviews 6 for Windows. 3.4 VARIABLES MEASUREMENT FOR MODEL 1 3.4.1. Dependent Variables I used total debt to total assets (TDTA), total debt to total equity (TDTE), long- term debt to total assets (LTDTA), short-term debt to total assets (STDTA) as proxies for firm leverage. These proxies could be easily collected from the balance sheet. These measures were used by Zeitun and Tian (2007). Table 1: Dependent variables for model 1 Firm’s Capital Structure Symbol Total Debt to Total Assets TDTA Total Debt to Total Equity TDTE Long-term Debt to Total Assets LTDTA Short-term Debt to Total Assets STDTA Capital Structure and Firm Performance Page 21 3.4.2. Independent Variables Profitability was measured by pre-interest and pre-tax operating surplus plus depreciation divided by total assets. Profitability was used by many researchers (Titman and Wessels, 1988; and Fama and French, 2002; Margaritis and Psillaki, 2007). Growth opportunities were measured by growth of assets and were defined by book value of total assets minus book value of equity plus market value of equity divided by the book value of total assets. Growth opportunities were presented by Myers (1977) and were used by many researchers (e.g., Zeitun and Tian, 2007, Wei Xu, 2005, Margaritis and Psillaki, 2007). Firm size was defined by log of sales. These measures were used by many researchers (e.g., Mudambi and Nicosia, 1998, Lauterbach and Vaninsky, 1999, Durand and Coeuderoy, 2001, Tzelepis and Skuras, 2004). Asset Tangibility was defined by the ratio of fixed tangible assets to total assets. These measures were used by many researchers (e.g., Titman and Wessels, 1988, Rajan and Zingales, 1995, Frank and Goyal, 2003, Hall et al., 2004). Table 2: Independent variables for model 1 Independent Variables Symbol Firm performance was defined by Profitability PROF Growth Opportunities GROWTH Firm Size SIZE Asset Tangibility TA 3.5 VARIABLES MEASUREMENT FOR MODEL 2 3.5.1. Dependent Variables In order to investigate whether the market performance measures were explained by capital structure, I used market value of equity plus book value of debt to the book value of assets (Tobin’s Q), and price per share to the earnings per share (PE) as proxies for firm value. These measures were used to measure firm value in many studies (e.g., Morck, Shleifer, and Vishny, 1988, McConnel and Serveas, 1990, and Zhou, 2001). Capital Structure and Firm Performance Page 22 Table 3: Dependent variables for model 2 Firm’s Performance Symbol Market value of equity plus book value of debt to the book value of assets TOBIN Price per share to the earnings per share PE 3.5.2. Independent Variables I used total debt to total assets (TDTA), total debt to total equity (TDTE), long- term debt to total assets (LTDTA), short-term debt to total assets (STDTA) as proxies for firm leverage. Others independent variables such as firm size (SIZE) and growth opportunities (GROWTH) were the same as independent variables in Model 1. Table 4: Independent variables for model 2 Independent Variables Symbol Total Debt to Total Assets TDTA Total Debt to Total Equity TDTE Long-term Debt to Total Assets LTDTA Short-term Debt to Total Assets STDTA Growth Opportunities GROWTH Firm Size SIZE Capital Structure and Firm Performance Page 23 3.6 FRAMEWORK OF THE STUDY The framework of the study was presented as figure 4: RESEARCH PROBLEM LITERATURE REVIEW HYPOTHESES REGRESSION ANALYSIS DESCRIPTIVE STATISTICS CONCLUSIONS, RECOMMENDATIONS AND LIMITATIONS EMPIRICAL MODEL INTRODUCTION RESEARCH QUESTIONS RESEARCH OBJECTIVES Figure 4: Framework of the study Capital Structure and Firm Performance Page 24 3.7 SUMMARY The study was done by quantitative research method with sample size 162. The object of the study was all companies listed on Hochiminh Stock Exchange for the period 2008. The performance factors were measured by market value of equity plus book value of debt to the book value of assets (Tobin’s Q) and price per share to the earnings per share (PE). The leverage factors were measured by total debt to total assets (TDTA), total debt to total equity (TDTE), long-term debt to total assets (LTDTA), short-term debt to total assets (STDTA). The author also used other variables to investigate their effect on corporate performance and corporate capital structure: firm growth opportunities (GROWTH), firm size (SIZE) and asset tangibility (TA). Capital Structure and Firm Performance Page 25 CHAPTER 4: EMPIRICAL RESULTS OF THE RESEARCH 4.1 INTRODUCTION Chapter 4 presents the characteristics of research samples and measures concepts of the research. The author used descriptive statistics to explore the features of explanatory variables, as well the relationship between each variables in two models. Furthermore, the author used regression analysis to explore the relationship between the capital structure and market performance of listed companies in Hochiminh Stock Exchange. 4.2 CHARACTERISTICS OF RESEARCH SAMPLES The research samples included 162 listed companies in Hochiminh Stock Exchange. In these 162 samples, there were 05 companies in Travel & Leisure Sector; 01 company in Tobacco Sector; 02 companies in Technology Hardware & Equipment Sector; 01 company in Software & Computer Services Sector; 07 companies in Real Estate Sector; 06 companies in Pharmaceuticals & Biotechnology Sector; 04 companies in Personal Goods; 01 company in Oil Equipment Services & Distribution; 03 companies in Mining Sector; 01 company in Media Sector; 01 Companies in Leisure Goods Sector; 18 companies in Industrial Transportation Sector; 03 companies in Industrial Metals Sector; 02 companies in Industrial Engineering Sector; 09 companies in Household Goods Sector; 11 companies in General Retailers Sector; 09 companies in General Industrials Sector; 05 companies in Gas, Water & Multi-utilities Sector; 02 companies in Forest & Paper Sector; 27 companies in Food Producers Sector, 05 companies in Electronic & Electrical Equipment Sector; 05 companies in Electricity Sector; 06 companies in Chemicals Sector; 26 companies in Construction & Materials Sector; 01 company in Beverages Sector; 01 company in Automobiles & Parts Sector. In these samples, the Food Producers Sector gains the highest ratio: 16.7%; next is Construction & Materials Sector: 16% (See more in Appendix C). Capital Structure and Firm Performance Page 26 4.3 DESCRIPTIVE STATISTICS Table 5: Summary Statistics of the Explanatory Variables Variable Mean Median Max Min Std. Dev. Skewness Kurtosis Jarque-Bera Probability TDTA 0.432888 0.450650 0.866500 0.030900 0.224362 -0.001167 1.928074 7.755954 0.020693 TDTE 1.246424 0.834100 6.489800 0.031900 1.364461 2.040727 7.184002 230.6079 0.000000 LTDTA 0.104263 0.031900 0.693000 0.000000 0.153879 1.914029 5.994398 159.4380 0.000000 STDTA 0.328623 0.310200 0.855300 0.028100 0.196542 0.514847 2.454419 9.166013 0.010224 TOBIN 1.205579 1.002500 5.381400 0.213100 0.783774 2.676495 13.36807 919.0215 0.000000 PE 24.30095 6.662800 1,128.516 -436.7769 112.3259 6.403847 63.90002 26,141.73 0.000000 PROF 14.08572 11.94895 103.0916 -14.98230 12.46333 2.626848 18.86718 1,885.738 0.000000 GROWTH 1.077432 0.931100 4.549500 0.429800 0.609185 3.334689 16.53316 1,536.483 0.000000 SIZE 26.91065 26.88145 30.43010 24.11910 1.186553 0.178563 2.945791 0.880720 0.643805 TA 0.229886 0.168400 0.987000 0.001100 0.206125 1.459111 5.160072 88.97803 0.000000 Note: TDTA = total debt to total assets; TDTE = total debt to total equity; LTDTA = long-term debt to total assets; STDTA = short-tern debt to total assets; TOBIN = equity market value + liabilities book value / equity book value + liabilities book value; PE = market price of common stock / earnings per share; PROF = ebit + depreciation / total assets; GROWTH = total assets - book value of equity + market value of equity / total assets; SIZE = ln(sales); TA= fixed tangible assets / total assets. Table 5 reported summary statistics for the variables used in the study. The total debt to total assets (TDTA) for the sample as a whole was 43.28%, minimum was 3.09%, maximum was 86.65% and standard deviation of TDTA was 22.43%. This ratio was lower than the average TDTA ratio of East Asia companies (54%) and nearly equalled to the average TDTA ratio of Latin America companies (45%) (Dilip Ratha, et al, 20032). The average TDTA ratio of Chinese companies on Shenzhen listed market and Shanghai listed market is 49.83% (Wei Xu, et al, 2005)3 is slightly higher than Vietnamese companies in Hochiminh Stock Exchange. If we compared to the international data in Rajan and Zingales (1995)4 The average total debt to total equity (TDTE) was about 124.64%, minimum was 3.19%, maximum was 648.98% and standard deviation of TDTE was 136.44%. If we compared to the international data in Rajan and Zingales (1995) , Vietnamese companies can be regarded as relatively high in term of TDTA (i.e., 43% versus 31% (United States); 35% (Japan); 20% (Germany); 26% (France); 28% (Italy); 21% (United Kingdom); 36% (Canada)). 5 2 Figure 5.6, p.112 , Vietnamese companies could be regarded as lower than G7 countries in term of TDTE (i.e., 125% versus 194% (United States); 201% (Japan); 257% (Germany); 220% (France); 206% (Italy); 136% (United Kingdom); 151% (Canada)). 3 Table 1, row Debt (average), p.51 4 Table III, Panel A, column Debt to total assets (means), p.40 5 Table II, calculated by liabilities - total divide shareholders equity, p.39 Capital Structure and Firm Performance Page 27 The average long-term debt to total assets (LTDTA) was 10.42%, minimum was 0.00%, maximum was 69.30% and standard deviation was 15.38%. This ratio was higher than the average LTDTA ratio of Chinese companies (6.62%) (Wei Xu, et al, 2005)6. The average short-term debt to total assets (STDTA) was about 32.86%, minimum was 2.81%, maximum was 85.53% and standard deviation of STDTA was 19.65%. The average STDTA of Vietnamese companies was lower than the average STDTA ratio of Chinese companies (43.21%) (Wei Xu, et al, 2005)7. If we compared to the G7 countries data in Rajan and Zingales (1995), ratio of Vietnamese companies LTDTA was relatively low8 The descriptive data of leverage indicated that Vietnamese companies in Hochiminh Stock Exchange reply on short-term debt than long-term debt as the main source of fund for their business operations. Since stock markets, bond markets and Mutual Funds markets was undeveloped, commercial banking systems play an important role in providing lending to Vietnamese firms. (i.e., 10.42% versus 33% (United States); 25% (Japan and France); 42% (Germany); 24% (Italy); 18% (United Kingdom); 37.2% (Canada)). In term of STDTA (32.86%), the STDTA of Vietnamese companies was similar to United States (33%), slightly higher than Germany (30%), relatively higher than Canada (23%), and lower than the rest of countries (i.e., 42% (Japan); 43% (France and Italy); 40% (United Kingdom)). The average value of Tobin’s Q was 1.2, minimum was 0.21, maximum was 5.38 and standard deviation was 0.78. This market performance measure was lower than the average Tobin’s Q of Jordanian companies on Amman Stock Exchange (Tian & Zeitun, 2007)9. The average value of PE was about 24.3, minimum was -436.77, maximum was 1128.51 and standard deviation was 112.32. Compared to Jordanian companies of Tian & Zeitun (2007)10 , PE of Vietnamese companies was slightly higher (i.e., 24.3 versus 21.25). 6 Table 1, row Ldebt (average), p.51 7 Table 1, calculated by minus average debt to average ldebt, p.51 8 Table II, calculated by average liabilities - total minus average current liabilities – total, p.39 9 Table 1, row Tobin’s Q (mean), p.48 10 Table 1, row PE (mean), p.48 Capital Structure and Firm Performance Page 28 Table 6: Correlation Matrix of the Explanatory Variables for Model 1 PROF GROWTH SIZE TA PROF 1 GROWTH 0.461739 1 SIZE -0.071749 -0.002035 1 TA 0.136078 0.102802 -0.114289 1 Note: PROF = ebit + depreciation / total assets; GROWTH = total assets - book value of equity + market value of equity / total assets; SIZE = ln(sales); TA= fixed tangible assets / total assets. Table 7: Correlation Matrix of the Explanatory Variables for Model 2 TDTA TDTE LTDTA STDTA GROWTH SIZE TDTA 1 TDTE 0.845076 1 LTDTA 0.512491 0.480281 1 STDTA 0.740290 0.588665 -0.197898 1 GROWTH -0.063144 0.044704 0.060870 -0.119728 1 SIZE 0.261731 0.196178 0.036044 0.270581 -0.002035 1 Note: TDTA = total debt to total assets; TDTE = total debt to total equity; LTDTA = long-term debt to total assets; STDTA = short-tern debt to total assets; GROWTH = total assets - book value of equity + market value of equity / total assets; SIZE = ln(sales); TA= fixed tangible assets / total assets. The correlation matrix for the variables in the reported in Table 6 in order to examine the correlation between the explanatory variables for model 1. The results show that there was a positive relationship between growth and profitability, growth and asset tangibility, except size, which was negative, while size had a negative relationship with profitability and asset tangibility. This implied that companies with high growth opportunities had higher profitability ratio, but companies with smaller size in sales had higher profitability for the period 2008. It also implied that small firms had high growth opportunity which was consistent with Myers (1977). This result was similar to the result of Tian & Zeitun (2007) research. The correlation matrix for the variables in the reported in Table 7 in order to examine the correlation between the explanatory variables for model 2. The results showed that there was a positive relationship between growth and TDTE, growth and LTDTA, while TDTA and STDTA had a negative relationship with growth. Firm size had a positive relationship with all leverage ratios. This implied that Vietnamese companies with high growth opportunities generally use more long- term debt and use less short-term debt for financing. It is also implied that larger companies in sales tend to have higher leverage ratio than smaller ones. Capital Structure and Firm Performance Page 29 4.4 REGRESSION ANALYSIS 4.4.1. Model 1: The Leverage Model Table 8: Estimate Results for Model 1 TDTA TDTE LTDTA STDTA Constant -0.873102 -4.622503 -0.241070 -0.632159 PROF -0.005438 -0.036765 -0.002539 -0.002899 t-Statistic -3.640823 -3.985310 -2.623803 -2.207294 Prob. 0.0004 0.0001 0.0096 0.0287 GROWTH 0.022092 0.421161 0.026783 -0.004691 t-Statistic 0.726986 2.244020 1.360481 -0.175562 Prob. 0.4683 0.0262 0.1756 0.8609 SIZE 0.048965 0.213809 0.009991 0.038979 t-Statistic 3.512934 2.483681 1.106431 3.180438 Prob. 0.0006 0.0141 0.2702 0.0018 TA 0.17883 0.779893 0.362726 -0.183887 t-Statistic 2.212831 1.562532 6.928428 -2.587811 Prob. 0.0284 0.1202 0.0000 0.0106 No. Observations 162 162 162 162 R-squared 0.162133 0.135869 0.252491 0.155863 Adjusted R-squared 0.140786 0.113853 0.233446 0.134356 S.E of regression 0.207970 1.284441 0.134726 0.182863 Sum squared resid 6.790464 259.016600 2.849721 5.249888 Log likelihood 27.07020 -267.8810 97.40235 47.91251 F-statistic 7.595122 6.171335 13.25770 7.247170 Prob (F-statistic) 0.000013 0.000123 0.000000 0.000022 Mean dependent var 0.432888 1.246424 0.104263 0.328623 S.D. dependent var 0.224362 1.364461 0.153879 0.196542 Akaike info criterion -0.272472 3.368901 -1.140770 -0.529784 Schwarz criterion -0.177175 3.464198 -1.045474 -0.434488 Hannan-Quinn criter. -0.233780 3.407593 -1.102078 -0.491092 Durbin-Watson stat 1.964366 1.876261 1.955806 2.203875 Note TDTA = total debt to total assets; TDTE = total debt to total equity; LTDTA = long-term debt to total assets; STDTA = short-tern debt to total assets; PROF = ebit + depreciation / total assets; GROWTH = total assets - book value of equity + market value of equity / total assets; SIZE = ln(sales); TA= fixed tangible assets / total assets. Capital Structure and Firm Performance Page 30 The results of the estimation of model 1 with each of the leverage measures and for the full sample of observations for the period 2008 were displayed in Table 8. From Hypothesis 1, the firm profitability has a positive correlation with firm capital structure. Four capital structure variables were used, TDTA, TDTE, LTDTA, and STDTA. From the regression results in Table 8, the coefficient of profitability variable was negatively and significantly related to those variables. This result was contrary to the predictions of trade-off theory but consistent with the pecking order theory. According to this theory, companies prioritized their sources of financing (from internal financing to equity) according to the law of least effort, or of least resistance, preferring to raise equity as a financing means of last resort. Hence, internal funds were used first, and when that was depleted, debt was issued, and when it was not sensible to issue any more debt, equity was issued. Jensen (1986) predicted that if the market of corporate control was effective, the relationship between profitability and leverage was positive. If it was ineffective, however, managers of profitable firms prefer to avoid the disciplinary role of debt, which would lead to a negative correlation between profitability and debt. Finally, the result indicated that corporate control of Vietnamese firms was ineffective, and the profitability was negatively correlated with leverage. If in the short run, dividends and investments were fixed, and if debt financing was the dominant mode of external financing, then changed in profitability would be negatively correlated with changes in leverage. Therefore, based on the result, I rejected the Hypothesis 1: the firm profitability has a positive correlation with firm capital structure. Hypothesis 2 predicts that growth opportunities decrease firm leverage. From the regression results in Table 8, the coefficient of growth opportunities was negatively and insignificantly related to STDTA. However, growth opportunities was positively and significantly correlation with TDTE, while the coefficient of growth opportunities was found to be positively related to TDTA and LTDTA, but statistically insignificant. These findings were inconsistent with the Myers (1977) and predicted that Vietnamese firms with expected growth opportunities would maintain low short-term debt levels, but the growth opportunities also put pressure on retained earnings and pushed Vietnamese firms into borrowing long-term debt. According to the result above, I rejected the Hypothesis 2: growth opportunities decrease firm leverage. From Hypothesis 3, the firm size is expected to have a positive influence on a firm capital structure. From the regression results in Table 8, Size was found to have a positive and significant effect on the leverage measures TDTA, TDTE, STDTA, but was not significantly related to LTDTA leverage measure. An explanation for the positive effect of size on leverage was provided by Rajan and Zingales (1995) that larger firms were better diversified and had a lower probability of being in financial distress or safeguard against the expected costs of bankruptcy. Lower expected bankruptcy costs enabled them to take on more leverage. Size might be a Capital Structure and Firm Performance Page 31 proxy for the (inverse) probability of default. If so, it should not be strongly positively related with leverage in countries, where costs of financial distress were low. The results indicated that the financial distress costs of Vietnamese companies in HOSE were low and Vietnamese companies with higher sizes of sales would use more debt to finance their operating. Therefore, based on the result, I accepted the Hypothesis 3: the firm size is expected to have a positive influence on a firm capital structure. Hypothesis 4 predicted that asset tangibility is expected to be positively related to corporate leverage. From the regression results in Table 8, the coefficient of assets tangibility was negative and significantly related to STDTA. This result showed that if firm tangible assets were large, the ratio of short-term debt to total assets would be lower. However, the asset tangibility had positive and significant impact on TDTA and LTDTA, but was insignificantly related to TDTE. This findings was consistent with Rajan and Zingales (1995), Margaritis and Psillaki (2007). They argued that if a large fraction of a firm's assets are tangible, then assets should serve as collateral, diminishing the risk of the lender suffering the agency costs of debt (like risk shifting). They should also retain more value in liquidation. Therefore, the greater the proportion of tangible assets on the balance sheet (fixed assets divided by total assets), the more willing should lenders be to supply loans, and leverage should be higher. So, the result of regression model showed that Vietnamese companies had high ratio of fixed assets to total assets would use more long-term debt as a main source of financing. Therefore, based on the result, I accepted the Hypothesis 4: asset tangibility is expected to be positively related to corporate leverage. To summarize, the firm profitability was a significant determinant of firm capital structure. This finding supported the argument that firm profitability decrease firm leverage level. Another important finding was that firm size had a positive and significant impact on the leverage measures TDTA, TDTE, STDTA. Furthermore, the firm asset tangibility increased the firm leverage level. The regression results also showed that growth opportunities had significant impact only on Vietnamese firm total debt to total equity. Capital Structure and Firm Performance Page 32 4.4.2. Model 2: The Firm Value Model Table 9: Estimate Results for Model 2 Using TDTA TOBIN PE Constant 1.020104 136.8876 TDTA -2.011764 26.45088 t-Statistic -281.7428 0.641030 Prob. 0.0000 0.5224 GROWTH 1.005241 4.676144 t-Statistic 396.0540 0.318812 Prob. 0.0000 0.7503 SIZE -0.000993 -4.796432 t-Statistic -0.737274 -0.615972 Prob. 0.4620 0.5388 No. Observations 162 162 R-squared 0.999388 0.004436 Adjusted R-squared 0.999376 -0.014467 S.E of regression 0.019578 113.1355 Sum squared resid 0.060559 2022342 Log likelihood 409.3622 -993.8739 F-statistic 85960.14 0.234694 Prob (F-statistic) 0.000000 0.872090 Mean dependent var 1.205579 24.30095 S.D. dependent var 0.783774 112.3259 Akaike info criterion -5.004471 12.31943 Schwarz criterion -4.928234 12.39567 Hannan-Quinn criter. -4.973518 12.35038 Durbin-Watson stat 2.209864 2.063560 Note: TOBIN = equity market value + liabilities book value / equity book value + liabilities book value; PE = market price of common stock / earnings per share; TDTA = total debt to total assets; GROWTH = total assets - book value of equity + market value of equity / total assets; SIZE = ln(sales). Capital Structure and Firm Performance Page 33 Table 10: Estimate Results for Model 2 Using TDTE TOBIN PE Constant 1.421871 98.07088 TDTE -0.27458 -3.183458 t-Statistic -19.7284 -0.476915 Prob. 0.0000 0.6341 GROWTH 1.07937 4.387799 t-Statistic 35.3104 0.299294 Prob. 0.0000 0.7651 SIZE -0.038535 -2.769519 t-Statistic -2.410103 -0.361165 Prob. 0.0171 0.7185 No. Observations 162 162 R-squared 0.911000 0.003282 Adjusted R-squared 0.909311 -0.015643 S.E of regression 0.236031 113.2010 Sum squared resid 8.802281 2024687 Log likelihood 6.051375 -993.9677 F-statistic 539.0962 0.173423 Prob (F-statistic) 0.000000 0.914242 Mean dependent var 1.205579 24.30095 S.D. dependent var 0.783774 112.3259 Akaike info criterion -0.025326 12.32059 Schwarz criterion 0.050911 12.39683 Hannan-Quinn criter. 0.005628 12.35154 Durbin-Watson stat 1.977042 2.062094 Note: TOBIN = equity market value + liabilities book value / equity book value + liabilities book value; PE = market price of common stock / earnings per share; TDTE = total debt to total equity; GROWTH = total assets - book value of equity + market value of equity / total assets; SIZE = ln(sales). Capital Structure and Firm Performance Page 34 Table 11: Estimate Results for Model 2 Using LTDTA TOBIN PE Constant 2.719633 113.9763 LTDTA -1.494015 4.96757 t-Statistic -7.794511 0.085407 Prob. 0.0000 0.9320 GROWTH 1.074631 3.989722 t-Statistic 22.2098 0.271733 Prob. 0.0000 0.7862 SIZE -0.093499 -3.511319 t-Statistic -3.768377 -0.466371 Prob. 0.0002 0.6416 No. Observations 162 162 R-squared 0.777369 0.001893 Adjusted R-squared 0.773142 -0.017058 S.E of regression 0.373308 113.2799 Sum squared resid 22.01873 2027508 Log likelihood -68.21609 -994.0805 F-statistic 183.8985 0.099903 Prob (F-statistic) 0.000000 0.959959 Mean dependent var 1.205579 24.30095 S.D. dependent var 0.783774 112.3259 Akaike info criterion 0.891557 12.32198 Schwarz criterion 0.967794 12.39822 Hannan-Quinn criter. 0.922510 12.35293 Durbin-Watson stat 2.157704 2.058518 Note: TOBIN = equity market value + liabilities book value / equity book value + liabilities book value; PE = market price of common stock / earnings per share; LTDTA = long-term debt to total assets; GROWTH = total assets - book value of equity + market value of equity / total assets; SIZE = ln(sales). Capital Structure and Firm Performance Page 35 Table 12: Estimate Results for Model 2 Using STDTA TOBIN PE Constant 1.386044 140.2637 STDTA -1.666116 31.71192 t-Statistic -12.99965 0.667846 Prob. 0.0000 0.5052 GROWTH 0.987569 5.285529 t-Statistic 24.80830 0.358382 Prob. 0.0000 0.7205 SIZE -0.0259 -4.908051 t-Statistic -1.228819 -0.628534 Prob. 0.2210 0.5306 No. Observations 162 162 R-squared 0.851062 0.004657 Adjusted R-squared 0.848234 -0.014242 S.E of regression 0.305336 113.1229 Sum squared resid 14.73036 2021894 Log likelihood -35.65551 -993.8559 F-statistic 300.9475 0.246415 Prob (F-statistic) 0.000000 0.863794 Mean dependent var 1.205579 24.30095 S.D. dependent var 0.783774 112.3259 Akaike info criterion 0.489574 12.31921 Schwarz criterion 0.565811 12.39545 Hannan-Quinn criter. 0.520527 12.35016 Durbin-Watson stat 1.967021 2.073206 Note: TOBIN = equity market value + liabilities book value / equity book value + liabilities book value; PE = market price of common stock / earnings per share; STDTA = short-tern debt to total assets; GROWTH = total assets - book value of equity + market value of equity / total assets; SIZE = ln(sales). The results of the estimation of model 2 with each of the leverage measures and for the full sample of observations for the period 2008 were displayed from Table 9 to Table 12. From regression results in Table 9, Table 10, Table 11, Table 12, the coefficient of TDTE was insignificantly and negatively related to price per share to earnings per share (PE), while coefficient of TDTA, LTDTA, STDTA were insignificantly and positively related to PE. And the R-squared value of the model 2 using TDTA, TDTE, LTDTA, STDTA to test the relationship between capital structure and PE were 0.44%, 0.33%, 0.19%, 0.46%, respectively and the Adjusted R-squared value Capital Structure and Firm Performance Page 36 of the model 2 using TDTA, TDTE, LTDTA, STDTA were -1.45%, -1.56%, -1.70%, -1.42%, respectively. The low R-squared and adjusted R-squared value showed that PE variable was not suitable to measure the relationship between capital structure and firm market performance in Vietnam. Hence, I excluded the regression model using PE from the analysis. The reason for the insignificance of PE could be that the share price did not reflect the actual situation for the firm. There might be other factors affecting a firm market performance other than the variable used in the study. Another reason could be that most investors still depended on the accounting measure of performance rather than the PE measure due to the investor favored payment of dividends or the inactivity of the stock market. Furthermore, including some firms in our sample that had negative PE affects the validity of the PE as a measure of performance. The results of the estimation of the model 2 made the Tobin’s Q the most powerful measures of performance in Vietnamese firm case, because the R-squared value of model 2 using TDTA, TDTE, LTDTA, STDTA to test the relationship between capital structure and Tobin’s Q were 99.93%, 91.1%, 77.73%, 85.10%, respectively. Therefore, my discussion would concentrate on this measure of market performance. Hypothesis 5 predicted that a firm capital structure does influence its market performance. From the regression results in Table 9, Table 10, Table 11, and Table 12, as expected the coefficient of TDTA, TDTE, LTDTA, STDTA, were significantly and negatively related to the market performance measure Tobin’s Q. For example, the LTDTA was significantly and negatively related to Tobin’s Q. This result showed that higher long-term debt lead to lower Tobin’s Q. Furthermore, it might provide support for the proposition that due to agency conflicts, companies over-leveraged themselves, thus affecting their performance negatively. My results were consistent with the findings of previous study such as Krishnan and Moyer (1997), Tian & Zeitun (2007). The negative and significant coefficient of LTDTA did not support Brick and Ravid’s (1985) argument that long-term debt increased a firm value, which could be due to the low ratio of long- term debt in the capital structure of Vietnamese companies. According to the results, I accepted the Hypothesis 5: A firm capital structure does influence its market performance. From Hypothesis 6, growth opportunities increase firm market performance. From the regression results from Table 9 to Table 12, Growth was found to have a positive and significant effect on the market performance measure Tobin’s Q. The high growth rates were associated with the lower cost of capital and high firm value Tobin’s Q. This finding was not consistent with Myers (1977), but supports the pecking order theory that high growth firms had a greater need for funds and therefore could be expected to borrow more. According to the result, I accepted the Capital Structure and Firm Performance Page 37 hypotheses that growth opportunities increase firm market performance (Tobin’s Q). Hypothesis 7 predicted that a firm size is expected to have a positive influence on a firm market performance. From the regression results from Table 9 to Table 12, the coefficient of firm size was significantly and negatively related with Tobin’s Q for model 2 using TDTE and LTDTA. The significant of firm size indicated that large firm had lower market value compared to smaller firm. This result was inconsistent with previous findings of Gleason, Mathur, and Mathur (2000) and Tian & Zeitun (2007). However, the coefficient of firm size was insignificantly and negatively related with Tobin’s Q for model 2 using TDTA and STDTA. The insignificant effect of firm size on firm market value was consistent with previous studies of many researchers such as Mudambi and Nicosia (1998), Lauterbach and Vaninsky (1999), Durand and Coeuderoy (2001), and Tzelepis and Skuras (2004). Based on the regression results, I rejected the Hypotheses that a firm size is expected to have a positive influence on a firm market performance. To summarize, the firm capital structure was a significant determinant of firm market performance. A firm leverage had negative and significant effect on firm value Tobin’s Q. The insignificance of the market performance measure PE indicated that the Vietnamese equity market was not efficient, so the best market performance measure was Tobin’s Q. Firm growth opportunities had a positive and significant impact on the firm value Tobin’s Q. Furthermore, firm size had a negative impact on firm value. This finding was not support the argument that bankruptcy costs decreased with size, as well as economies of scale in transactions costs associated with long-term debt that were not available to smaller firms. Capital Structure and Firm Performance Page 38 CHAPTER 5: CONCLUSIONS, RECOMMENDATIONS AND LIMITATIONS 5.1 INTRODUCTION Chapter 4 particularly discussed about the results of the research. Chapter 5 presents main conclusions and recommendations based on the results of the previous chapters, as well as the limitations of this study. 5.2 CONCLUSIONS This paper examines the impact which firm performance has had on corporate capital structure combined with others variables such as firm size, growth opportunities and asset tangibility, and the impact which firm capital structure has had on corporate firm value. There is no single study formulated in Vietnam that investigates the impact of capital structure on a firm market performance and lack of study formulated in Vietnam that investigate the impact of profitability, growth opportunities, size, asset tangibility on a firm capital structure. This study tries to fill the gap in this field by investigating the effect of firm performance on capital structure, as well as the effect of capital structure on firm market performance by taking listed firm on Hochiminh Stock Exchange as a case study. Furthermore, this paper employ different measures of capital structure such as short-term debt to total assets, long- term debt to total assets, total debt to total assets, and total debt to total equity in order to investigate the effect of the debt structure on corporate market performance. Investigating the effect of capital structure on corporate performance using market measures can be valuable as it provides evidence about whether the stock market is efficient or not. A cross-sectional data of 162 companies is studied in this paper. A firm profitability is found to have a significant and negative impact on all firm capital structure measures TDTA, TDTE, LTDTA, STDTA. These findings could to some extent support pecking order theory of Myers and Majluf (1984). They argue that internal funds are used first, and when that is depleted, debt is issued, and when it is not sensible to issue any more debt, equity is issued. An interesting finding is that firm size has a positive and significant impact on the leverage measures TDTA, TDTE, STDTA. This finding is consistent with a previous study of Rajan and Zingales (1995), and indicating that a firm size is an important determinant of corporate capital structure. Firm asset tangibility is found to have positive and significant impact on TDTA and LTDTA, while have insignificant impact on Capital Structure and Firm Performance Page 39 TDTE. This finding supports the argument of previous researchers such as Rajan and Zingales (1995), Margaritis and Psillaki (2007). They argue that the greater the proportion of tangible assets on the balance sheet, the more willing should lenders be to supply loans, and leverage should be higher. Firm growth opportunities have significant impact only on Vietnamese firm TDTE, which is inconsistent with Myers (1977). For the model testing the relationship between firm capital structure and firm value, the result from this paper shows that firm capital structure is a significant determinant of firm value, Tobin’s Q, in Vietnam. The insignificance of the market performance measure PE indicates that the Vietnamese equity market is not efficient. Firm growth opportunities have a positive and significant impact on the firm value Tobin’s Q. This finding supports the pecking order theory of Myers and Majluf (1984) that high growth firms can be expected to have high leverage level. Firm size, which is measured by log of sales, is negatively related to firm value Tobin’s Q. This result is not support the argument that bankruptcy costs decrease with size, as well as economies of scale in transactions costs associate with long- term debt that are not available to smaller firms. 5.3 RECOMMENDATIONS From the regression results of model 1, exploring the relationship between firm leverage and four factors; profitability, growth opportunities, size and asset tangibility, a firm total debt to total assets is affected strongly by firm size, measured by log of sales (Beta is 0.049). Hence, if a manager wants to decrease a company’s ratio of debt, he should pay attention to sales volume. For example, if a manager is planning to increase the sales volume in the next month budgeting, he should be prepared for an increasing in debt of a company. Focus on the detail, asset tangibility impact strongest on long-term debt to total assets (Beta is 0.363) and short-term debt to total assets (Beta is -0.184). Therefore, if a manager invests more in tangible assets, he should notice on the increasing in long-term debt, but decreasing in short-term debt. In reality, this results seem to be reasonable in Vietnam, for a reason that Vietnam stock markets, bond markets and mutual funds markets is undeveloped, so commercial banking systems play an important role in providing lending to Vietnamese firms. From the regression results, firm’s profitability plays an important determinant of firm leverage. So, manager also should notice that if in the short run, dividends and investments are fixed, and if debt financing is the dominant mode of external financing, then changes in profitability will be negatively correlated with changes in leverage. From the regression results from the model 2, exploring the relationship between firm value and three factors: firm leverage, growth opportunities and size, firm leverage affect strongly on firm’s value, which is measured by Tobin’s Q (Beta is - Capital Structure and Firm Performance Page 40 2.01, -0.27, -1.49, -1.66 respectively for four models using four proxies of firm capital structure: total debt to total assets, total debt to total equity, long-term debt to total assets, short-term debt to total assets). Thus, a manager can increase the firm value by decreasing the ratio of using debt financing. 5.4 LIMITATIONS The limitations of this study are restrictions in the research scope. There are only 162 companies in HOSE are used as cross-sectional data in the study. The research measures the effect of firm performance on firm capital structure combine with firm size, growth and asset tangibility on firm leverage, but it seems not to be enough variables. From the regression results, the adjusted R-Squared of the leverage model using 4 leverage proxies (TDTA, TDTE, LTDTA, STDTA) are respectively 0.14, 0.11, 0.23, 0.13. These results prove that there are others factors; besides profitability, size, growth opportunities, asset tangibility; have an impact on the firm leverage variables in Vietnam. For example, Abdel Shahid, S. (2003) find that firm ownership structure have a significant impact on firm accounting performance measures, but insignificant relate to firm market performance measures. If this factor has an impact on firm performance, then it may have an impact on firm capital structure. The study also has limitations that the author does not test the correlation between the distribution of debt ratio and corporate performance to each type of companies, as well as each industry. And the author has not explored the optimal capital structure to maximize the market value of a firm. Hence, more research should be implemented to explore these above limitations. This study is only stopped as an academic research. It shows us a relationship between firm capital structure and firm performance, and a generally initial assessment about the effect of firm performance on firm capital structure, as well as the effect of firm capital structure on firm market performance. Based on this research, researchers and corporate managers can be continue to implement more research, in order to evaluate more precisely about the relationship between firm capital structure and firm performance in Vietnam. Capital Structure and Firm Performance Page 41 REFERENCES Abdel Shahid, S. (2003). 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Understanding the Determinants of Managerial Ownership and the Link Between Ownership and Performance: Comment. Journal of Financial Economics 62, 559-571. Capital Structure and Firm Performance Page 44 APPENDIX A Variable definitions The Variables are defined as the following formulas: Price-to-Earnings Ratio (PE) = Market Price of Common Stock Earnings Per Share Tobin’s Q = ( Equity Market Value + Liabilities Book Value ) ( Equity Book Value + Liabilities Book Value ) Profitability (PROF) = EBIT + Depreciation Total Assets Total Debt to Total Assets (TDTA) = Total Debt Total Assets Total Debt to Total Equity (TDTE) = Total