Factors affecting the capital structure of companies listed on the Vietnamese stock exchange

PREFACE

 Research problem:

Optimizing the capital structure of companies is an important task of financial managers. There are many modern theories on corporate capital structure to explain the differences in the choice of capital structure of companies. However, in the economic context and institutional environment of Vietnam, there have been impacts on the choice of capital structure in companies. This topic focuses on analyzing the capital structure of companies.

listed companies on the Hanoi and Ho Chi Minh City stock exchanges to learn and

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Analyze the factors affecting the optimal choice of capital funding for the company. Currently, the trend of building the capital structure of Vietnamese enterprises is still an open issue, which is of great interest to business managers to find ways to increase the value of their enterprises. Therefore, this is a very practical issue, helping to adjust the effectiveness of financial operations of the enterprise, maximizing the value of the enterprise. Recognizing the problem during the learning process at school and the process of learning about the current situation of Vietnamese enterprises , I researched the topic : " Factors affecting capital structure in the current practice of Vietnamese enterprises "

 Research objectives:

General objective: To have a preliminary assessment of which factors affect the capital structure of enterprises, how and to what extent, and to find out the causes of that influence. Based on the analysis of capital structure data of joint stock companies in Vietnam in 2011, I used Eview software to run regression and give the results of the research.

Specific objectives: analyze and evaluate financial indicators that affect the capital structure decision of the enterprise such as:

- Characteristics of each industry in the economy

Growth factor

- Tangible fixed assets factor

- Business size factor

- Liquidity factor

- Internal factors of the enterprise affecting capital structure

Based on the impact of factors affecting capital structure, I have determined the speed of capital structure adjustment in Vietnam.

 Scope of research:

Range as of 21/04/2012.

Time: Research time from

February 13, 2012 to

Spatial scope: financial reports of 150 joint stock companies listed on the two stock exchanges of Ho Chi Minh City and Hanoi, data processing and analysis in 2011

 Research method:

By comparison method, collecting 2011 financial report data of 150 joint stock companies in all industries such as: seafood, transportation, insurance, mechanics, construction, consumer goods, .... listed on Ho Chi Minh City Stock Exchange, from there based on financial indicators to run regression model using Eview 5.1 to build capital structure model for current Vietnamese enterprises.

 Topic structure: includes 3 chapters:

Chapter 1: Basic issues of capital structure in enterprises and factors affecting capital structure in business practice.

Chapter 2: Identifying the model of factors affecting capital structure in current Vietnamese business practices.

Chapter 3: Recommendations

CHAPTER 1: BASIC ISSUES ON CAPITAL STRUCTURE IN ENTERPRISES AND FACTORS AFFECTING CAPITAL STRUCTURE IN ENTERPRISES

1.1. OVERVIEW OF CAPITAL STRUCTURE IN ENTERPRISES

1.1.1. Concept

Capital structure is a financial term used to describe the source and method of forming capital sources for businesses to use to purchase assets, physical facilities and business operations.

Capital structure is the combination of regular short-term debt, long-term debt, and equity.

preferential, industrial.

part commonly used for

Sponsorship

investment decision

of a business

Capital structure refers to how a company finances itself through a combination of equity, stock options, bond issues, and borrowing. The optimal capital structure is the one that has the lowest cost of capital and the highest stock price.

An appropriate capital structure is an important decision for every business not only because of the need to maximize the benefits obtained from individuals and organizations related to the business and its operations but also because of the impact of this decision on the business's ability to operate in a competitive environment.

The optimal capital structure involves a trade-off between the costs and benefits of the firm. Debt financing creates a “tax shield” for the firm, while reducing the dispersion of management decisions (especially with a limited number of business and investment opportunities). The burden of debt, on the other hand, puts pressure on the firm. The cost of debt has a significant impact on business operations, even leading to business closure. Equity financing does not create a cost of capital for the firm.

industry. However, the stocks

winter can

interfere with business operations

Investors' high expectations for business performance also put significant pressure on the management team.

1.1.2. Characteristics

1.1.2.1 Loan sources

In a market economy, almost no business operates with only its own capital, but must operate with many sources of capital, of which borrowed capital is a significant source.

Loan capital is a source of funding from outside the enterprise and the enterprise must repay the loans according to the committed term and at the same time pay interest at the agreed interest rate. Loan capital is important for the expansion and development of production and business of the enterprise. In the capital structure, we only consider medium and long-term loans.

a/ Short-term loans:

- Maturity period is less than one year

- Interest rates on short-term loans are usually lower than medium- and long-term loan interest rates due to lower credit risk.

- Often used to supplement working capital b/ Medium and long-term loans :

- Maturity period longer than 1 year

- Medium and long-term loan interest rates are higher than short-term loan interest rates due to risks.

higher

- Often used to supplement capital for basic construction or purchase of assets.

fixed assets

- This source of loan capital can be mobilized from financial institutions, banks or bond issuance. The use of this type of loan capital by enterprises

This depends more or less on the characteristics of the business in which stage of the production and business cycle it is in.

1.1.2.2. Owner's equity

Equity is the capital owned by the business owner and members of the joint venture or shareholders in joint stock companies.

There are three sources of equity: investors' capital contributions, total money generated from business operations (retained profits) and asset revaluation differences.

Owner's equity includes: business capital (contributed capital and retained earnings).

division), difference in revaluation of assets, enterprise funds such as: development fund, reserve fund, welfare reward fund... In addition, equity also includes capital for basic construction investment and career funds (funds allocated by the State budget without refund...)

Thus, when talking about equity capital, we are talking about the first source of capital that a business can mobilize. Because, before starting production and business activities, a business must have charter capital (contributed capital if it is a joint stock company or capital from the state budget if it is a state-owned enterprise). The proportion of equity capital in total assets reflects the financial initiative of the business.

1.2. FACTORS AFFECTING CAPITAL STRUCTURE IN ENTERPRISES.

1.2.1. Internal factors of the enterprise

1.2.1.1. Business size

Measured by the logarithm of total assets. According to the Trade-Off Theory, firm size is positively (+) related to debt, because large firms tend to have low bankruptcy risk and low bankruptcy costs. In addition, firms

Large firms have lower agency costs of debt, lower monitoring costs, less information asymmetry than smaller firms, less volatile cash flows, easier access to credit markets, and use more debt to benefit more from tax shields. Studies by Wiwattnakantang (1999), Huang and Song (2002) and Chen (2004) in developing countries; studies by Titman and Wessels (1988) and Rajan and Zingales (1995) in developed countries show that firm size and financial leverage have a positive (+) relationship. On the other hand, studies by Beven and Danbolt (2002) show that firm size is negatively related to short-term debt and positively related to long-term debt.

1.2.1.2. Business solvency

Measured by the ratio of current assets to total current liabilities. This liquidity has both (+) and (-) effects on capital structure decisions. Firstly, companies with high liquidity ratios can use more debt because the company can pay short-term debts when they come due. This means that the liquidity of the company has a positive (+) relationship with debt. On the other hand, companies with many liquid assets can use these assets to finance their investments. Therefore, the liquidity of the company has an inverse (-) relationship with financial leverage.

1.2.1.3. Business growth rate

Another factor that influences capital structure is growth potential. The positive relationship between growth opportunities and debt is consistent with the relationship observed in developed European countries. According to the trade-off theory of capital structure, firms holding future growth opportunities use less debt than firms with more tangible assets, since growth opportunities are intangible assets.

Usually measured by Tobin's Q (ratio of market value to book value of total assets). Firms with future growth prospects tend to rely on equity financing. This can be explained by the agency cost theory. According to Myers(1984), if a firm has

high financial leverage, the company's shareholders tend not to invest

The costs of investing in a company's projects are significant, and high-growth companies with many profitable projects rely more on equity than on debt. Thus, financial leverage has an inverse relationship with growth opportunities.

1.2.1.4. Corporate tax shield

In business practice, one advantage of using debt is the reduction of corporate income tax. It is said that debt creates a “tax shield” for the firm, thereby creating a higher overall business efficiency than using only the firm’s own capital, also known as equity. However, the tax savings from depreciation are called non-debt tax shields. DeAngelo and Masulis (1980) argue that non-debt tax shields will replace the tax benefits from debt financing and that firms with larger non-debt tax shields will use less debt. There is a lot of empirical evidence to confirm this assumption.

1.2.1.5. Management policy of company leaders

Myers' pecking order theory suggests that there is no such thing as a target capital structure. This theory implies that firms prefer internal financing. Debt is usually issued first and equity is issued last. Internal financing avoids the disclosure and regulatory scrutiny that comes with selling new securities.

Management’s willingness to accept risk often has a major impact on the capital structure a firm chooses. Some managers are risk averse and others are risk averse. Firms will incur bankruptcy costs when capital is used inefficiently.

Owners and partners do not want to issue additional shares for fear of losing some or all of their control over the operation of the business. If a company's common stock is available to the public, a business

Large companies can buy control of a business relatively easily. Therefore, owners hold on to their shares and finance growth with debt, preferred stock, or retained earnings rather than issuing more common stock. Even if this slows growth, it is better than losing control.

1.2.1.6. Tangible assets of the enterprise

Asset specificity can be measured by the ratio of cost of goods sold to net sales or the ratio of R&D expenses to total sales. Firms with unique products tend to have low financial leverage because if the firm goes bankrupt, there may not be a competitive secondary market for the firm's inventory and production equipment. Therefore, asset specificity is negatively related to financial leverage.

1.2.2. External factors of the enterprise

1.2.2.1. Corporate income tax rate

Measured as the tax a company pays on its earnings before interest and taxes (EBIT), that is, the actual tax the company has to pay. Companies with high actual tax rates will use more debt to take advantage of the tax shield, so taxes are positively related (+) to financial leverage. The value of the tax shield is controversial. The net tax savings from debt will be equal to the marginal corporate income tax rate multiplied by the interest payments on debt securities. Most economists believe in the benefits of tax shields. However, in reality, there are many companies with high profits but almost no debt. But debt can be an advantage for some companies but not for others when the profits earned are not enough to cover the interest expenses.

1.2.2.2. Expected market interest rate

If interest rates are going to rise and borrowing will become difficult, then the degree of financial leverage should be increased now. And vice versa if interest rates are expected to fall.

Factors affecting the capital structure of companies listed on the Vietnamese stock exchange - 2

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