Accepted Manuscript

Title: Capital Structure and Firm performance: Empirical

evidence from a developing country

Authors: Thi Phuong Vy Le, Nguyet Phan Thi Bich

PII: S0275-5319(16)30343-9
DOI: http://dx.doi.org/doi:10.1016/j.ribaf.2017.07.012
Reference: RIBAF 702

To appear in: Research in International Business and Finance

Received date: 14-10-2016

Revised date: 15-6-2017
Accepted date: 3-7-2017

Please cite this article as: Le, Thi Phuong Vy, Phan Thi Bich, Nguyet, Capital Structure
and Firm performance: Empirical evidence from a developing country.Research in
International Business and Finance http://dx.doi.org/10.1016/j.ribaf.2017.07.012

This is a PDF file of an unedited manuscript that has been accepted for publication.
As a service to our customers we are providing this early version of the manuscript.
The manuscript will undergo copyediting, typesetting, and review of the resulting proof
before it is published in its final form. Please note that during the production process
errors may be discovered which could affect the content, and all legal disclaimers that
apply to the journal pertain.
Capital Structure and Firm performance: Empirical evidence from
a developing country

Author: Le Thi Phuong Vy

University of Economics Hochiminh city, Vietnam
Tel. No: +84-933542255
E-mail: phuongvyqt@ueh.edu.vn
Address : 279 Nguyen Tri Phuong Street, District 10, Hochiminh City, Vietnam

Co-Author: Phan Thi Bich Nguyet

University of Economics Hochiminh city, Vietnam
Tel. No: +84-903845052
E-mail: nguyettcdn@gmail.com
Address : 279 Nguyen Tri Phuong Street, District 10, Hochiminh City, Vietnam

Graphical abstract
VIETNAM – A SMALL TRANSITION COUNTRY

Capital structure
(Book leverage, market leverage) Firm performance
(ROA, ROE, Tobin Q)
Firm characteristics: growth, investment,
liquidity, risk, dividend and cash flow

Abstract
The research uses unbalanced panel data from all non-financial listed firms during the period
2007–2012 to investigate the effect of capital structure on firm performance in Vietnam. The
results indicate that all debt ratios have significantly negative relation to firm performance. This
outcome is not in accordance with most studies conducted in developed countries, which posit a
positive relationship between capital structure and firm performance; however, it is consistent
with some studies in the context of developing markets. This paper argues that in typical
developing market like Vietnam, the benefits of debt from tax saving may be less than financial
distress cost. In addition, the monitoring role of debt is not substantial because of severe
information asymmetry and under-developed financial system. Our research results are robusted
by using different approaches.

Keywords: capital structure, firm performance, listed firms, Vietnam.

1. Introduction
Capital structure and its effect on firm performance is a core issue in finance and there are a
number of theories explaining this relationship. Modigliani–Miller (MM) theory (Modigliani &
Miller 1958), considered as the foundation theory, posits that the firm value is not influenced by
its capital structure. However, this theory is based on restrictive assumptions of a perfect capital
market that does not exist in the real world. To account for an imperfect market, the three main
theories that have been suggested as alternatives to MM theory are trade-off theory, pecking
order theory and agency theory. Trade-off theory (Kraus & Litzenberger 1973; Myers 1984)
claims that a firm will trade off costs and benefits of debt to maximize firm value. The benefit of
debt primarily comes from the tax shield of decreasing income through paying interest (Miller &
Modigliani 1963). The cost of debt is derived from direct and indirect bankruptcy costs through
the increase in financial risk (Kim 1978; Kraus & Litzenberger 1973). The pecking order theory
(Myers & Majluf 1984; Ross 1977) states that financing follows hierarchy: internal financing is
used first, then debt is issued, and equity is issued when no more debt can be approached.
Agency theory, developed by Jensen and Meckling (1976), Jensen (1986) and Hart and Moore
(1994), contends that an optimal capital structure to maximize firm value must be the one which
minimizes conflicts of interest among stakeholders.
However, an important noticeable point is that there is no single theory that can fully interpret
the effect of capital structure on firm performance. Adralan (2017) argues that all these theories
are based on many critical assumptions, while the real society is extremely complex and
diversified. He states that theorists are not always totally aware of the multifaceted natures of
society or tradition. Furthermore, most finance researchers are limited on the functionalist
paradigm, meanwhile each paradigm such as functionalist, interpretive, radical humanist or
radical structuralist leads to distinctive research approach, thus generates distinguished
understandings (Burrell and Morgan, 1979; Lagoarde-Segot, 2016). His study thus concludes
that the results of any model and the predictions of any theory might change when the underlying
assumptions are modified. In particular, the impact of capital structure on firm value could vary
significantly in different contexts or the statements of the traditional capital structure theories
could become questionable under different conditions. Lagoarde-Segot (2016) also indicates that
modern finance could be diversified by using different paradigm, new metaphors, and rigour in
puzzle-solving.

Before 1986, the time Vietnam started its Doi moi – a comprehensive economic renovation
program, capital structure was not an issue because most of enterprises are state-owned, so they
got funded by the government. With the recognition of existence of private sectors after the Doi
moi program, as well as the opening to the stock market in 2000 capital structure becomes a
concerning issues of the managers. Nevertheless, Vietnam is still an emerging market which
lacks of sufficient financial instruments as well as supporting policies and guidance for firms to
seek a suitable capital structure (World bank, 2011). Whether or not capital structure effects on
firm performance in a context of a small transition economy like Vietnam remains unanswered.
The above issues motivate new studies on the relationship between capital structure and firm
performance, specifically in Vietnam.

Although many studies have been conducted in other countries, there are few in-depth research
in Vietnam. In addition, empirical evidences recently show different and contradictory results
and indicates that this relationship depends significantly on the specific circumstances. Therefore
this study contributes to the theoretical perspective by providing an insight into the relationship
between capital structure and firm performance in an typical transition market. In addition, it
provides evidence for testing the validity of financial theories in explaining the relationship
between capital structure and firm performance in an transition and developing country like
Vietnam.

This paper is organized as follows. Section 2 provides an overview of research context. Section 3
gives a literature review; section 4 details the methodology and the empirical models; section 5
shows the results with a discussion; and section 6 is the conclusion.

2. Overview of research context: Vietnam

Vietnamese economy
Vietnam followed a central planned model of socialism based on SOEs, agriculture and heavy
industry until 1986. At that time, the Vietnamese government launched an economic reform
programme called Doi Moi, or economic renovation, that transferred the central planned
economy to a market economy. The Vietnamese economy has undergone many significant
changes, achieving high and stable growth rates. In particular, the country has experienced high
growth rates of gross domestic product (GDP) in recent years and is one of the countries that
have a high economic growth rate in Asia (International Monetary Fund [IMF] 2010). It is also
one of the highest recipients of foreign direct investment (FDI), which averaged over 7% of its
GDP during 2005–2013 (World Bank 2014). Vietnam’s economy is forecasted to continue to
develop given its strong export performance within the Association of Southeast Asian Nations
(ASEAN) countries (Viet Capital Securities 2011) and high profitability expectations (Grant
Thornton 2011).
Vietnamese financial market
In recent years, the Vietnamese banking sector has diversified by type, size and ownership. It is
still concentrated in four state-owned commercial banks (SOCBs) that occupy nearly 50% of the
total loan and deposit market. A noticeable point is that nearly one-third of the bank loans of the
total market is distributed to SOEs while SOEs account for only around 1% of total registered
firms. In addition, SOEs normally have a higher debt ratio than non-state and foreign firms, their
returns are lower and they have a high proportion of non-performing loans (NPLs) (VPBank
Securities 2014). Given this, it can be hypothesised that ownership structure may affect the
ability of a Vietnamese firm to access bank loans.
Similarly, the Vietnam bond market is still dominated by entities that to some extent have a
relationship with the government. The majority of bonds, in both number and size, are issued or
guaranteed by the government, and the big holders are commercial banks, the four largest of
which belong to the government. The dominance of SOEs and large corporations in the corporate
bond market also prevents small to medium-sized enterprises (SMEs) from accessing this debt
financing option. Only few big joint-stock companies are able to raise local currency funds by
issuing bonds.
The formal equity market has been developing gradually since 2000, becoming an important
financing channel for corporations. An overview of the Vietnam stock market reveals that
foreign investors could be considered as leaders of most market movements. In addition, foreign
ownership in listed firms is increasing significantly, and foreign investors appear to be playing
an important role in the listed firms’ performance.
3. Literature review
3.1 Theoretical perspective
MM theory, created by Modigliani and Miller (1958), is regarded as the foundational theory on
this issue. The theory points out that a firm’s value is not influenced by its capital structure. In
particular, firm value will be determined by its own assets, not by the proportion of debt or
equity issued; that is, any mixture of debt and equity does not affect firm value. However, MM
theory is based on the following critical assumptions of a perfect capital market: no bankruptcy,
taxes or transaction costs exist; perfect information is available to all investors; value
maximisation is a common purpose among managers; investors can lend and borrow at the same
interest rate and they have homogeneous expectations about the firm’s profits; and firms
operating with similar conditions have the same risk level.
MM theory uses an arbitrage argument in which if a firm using debt has a higher value, investors
will sell this firm stock and then purchase stocks of a no debt company. Because there is no
transaction cost, investors using this arbitrage process earn profit without risk. This route will
continue until the stock prices of the two companies (with and without debt) are equal. The
process occurs very quickly in a perfect market; as a result, MM theory concludes that the firm
value does not depend on its leverage. However, in an imperfect market where these above-
mentioned assumptions do not exist, the result will be very different, implying that capital
structure does affect firm value.
Employing a different approach, the trade-off theory (Kraus & Litzenberger 1973; Myers 1984)
claims that a firm will trade off the costs and benefits of debt associated with tax savings and
financial distress to create an optimal capital structure for maximising firm value. The gain of
debt primarily comes from the tax shield (Miller & Modigliani 1963), which implies that a firm
can reduce tax liability by decreasing income through paying interest. The costs of debt mainly
derive from direct and indirect bankruptcy costs by increasing the financial risk (Kim 1978;
Kraus & Litzenberger 1973). In short, this theory asserts that the value of a firm with debt is
equal to that of a firm without debt plus tax shield after deducting financial distress costs.
The pecking order theory, conceived by Myers and Majluf (1984), states that financing follows
hierarchy. Firms prefer internal to external financing and debt to equity; that is, internal
financing is used first, then debt is issued and when no more debt can be approached, equity is
issued. The pecking order was traditionally clarified by transaction costs, issuing costs and
asymmetric information. Retained earnings involve fewer transaction costs, issuing costs than
other sources. Issuing debts acquire lower information costs than that of equity. Furthermore, this
theory argues that managers often have more information about their own firm than external
investors do. External investors require a higher return of equity because it has higher risk
compared with debt. Thus, retained earnings are better than outside funds and debt is better for
firms than equity if the firm needs external funds. In this theory, an optimal debt ratio to
maximise firm value is not mentioned. Changes of debt ratio derive from raising external
financing demand when internal funds are fully used.
Developed by Jensen and Meckling (1976), Jensen (1986) and Hart and Moore (1994), agency
cost theory contends that target conflicts exist among managers, shareholders and debt holders.
An optimal capital structure to maximise firm value is one that helps to minimise total agency
costs. Specifically, Jensen and Meckling (1976) claimed there are two kinds of agency costs. The
agency cost of equity is caused by the conflict between shareholders and managers, and the
agency cost of debt is caused by the conflict of debt holders and equity holders. The conflict
between managers and shareholders implies that managers try to achieve their personal aims
instead of maximising the firm’s value and shareholders’ returns. For example, with an excess
free cash flow, managers have opportunities to invest in non-profitable projects for personal
goals. Jensen (1986) argued that with high debt, managers are under pressure to invest in
profitable projects to create cash flow to pay interest. Therefore, through reducing agency cost
relating to managers and shareholders, debt can have a positive effect on firm value. Whereas
debt is an efficient means to reduce shareholder–manager conflict, it increases shareholder–debt
holder conflict (Myers 1977). This conflict arises because debt can lead shareholders to invest
suboptimally (Harris & Raviv 1991). In addition, Myers stated that when debt is high, debt
holders will require higher interest rates to compensate for the higher risk of liquidation or
underinvestment. Therefore, in this respect, debt does have a negative effect on a firm’s value.
Market timing theory states that the choice of debt or equity issuance depends on the history of
the firm’s market value (Baker & Wurgler 2002; Kayhan & Titman 2007; Myers 1984). In other
words, this theory maintains that capital structure decisions are influenced by the market
conditions of share prices or managers base on stock market to decide financing options. Indeed,
managers will issue stocks after an increase in stock prices or if their stocks are overvalued to
take advantage of the situation and tend to use debt following a decline of stock prices. There is
no notion of optimal capital structure to maximise firm value in this theory.
3.2 Empirical evidence
As mentioned, most of these theories agree that in an imperfect market in the real world, debt
can influence firm value or firm performance in several ways. However, the relationship between
capital structure and firm performance has been a debated subject, and the empirical evidence
leads to differing conclusions on this association.
Regarding the empirical evidence, most studies indicate that there is a positive relationship
between leverage and firm performance. Ross (1977) stated that a firm with worse prospects will
issue less debt than one with better prospects since the debt issuance may lead to a higher
probability of bankruptcy. Thus, the firm value can rise with debt level because an increase in
debt level enhances the market perception of the firm’s situation. Berger and Bonaccorsi di Patti
(2006), using data on the US banking industry, pointed out that a higher debt ratio is associated
with higher firm performance as represented by profit efficiency. In particular, an increase of 1%
in debt ratio leads to a 6% increase in profit efficiency. Even when the leverage is very high,
there is still a significant positive linkage between leverage and firm performance. They argued
that using more debt can reduce the agency cost of equity or encourage managers to act more in
the shareholders’ interests, when then boosts the firm’s value. Abor (2005), using correlations
and regression analyses to examine the relationship between capital structure and profitability in
firms listed on the Ghana Stock Exchange in the five years from 1998 to 2002, claimed that there
is a significant positive effect of debt measured by short-term debt to total assets and total debt to
total assets on return on equity. Using the same method as Abor (2005), Gill, Biger and Mathur
(2011) demonstrated that a significant positive association exists between capital structure
measured by total debt to total assets, short-term debt to total assets and long-term debt to total
assets and firm performance.
However, some studies, especially those conducted in emerging or transition economies have
shown a negative association between capital structure and firm performance. With an
unbalanced panel of 167 Jordanian companies during 1989 to 2003 and a random effect (RE)
model for unbalanced data, Tian and Zeitun (2007) revealed that debt has a negative influence on
firm performance, in both the accounting and the market performance. In the study, the market
performance of the firms was measured by their market value to book value, price per share to
the earnings per share, market value of equity to the book value of equity, while ROE, ROA, and
earnings before interest and tax plus depreciation to total assets were employed as measures
representing accounting performance. Their explanation based on an argument of Harris and
Raviv (1991) is that underestimating bankruptcy costs of liquidation or reorganisation may lead
firms to have more debt than they should; therefore, high debt ratio will decrease firm
performance. Joshua (2007), using a panel regression model with a sample of SMEs in Ghana
and South Africa, found that the long-term and total debt level is negatively associated with firm
performance measured by Tobin’s Q. This result implies that to reduce conflicts of interest
between managers and shareholders, firms may actually use a higher debt ratio than an
appropriate level; consequently, a high debt ratio produces a low performance. Majumdar and
Chhibber (1999), using a regression model to investigate over 1,000 Indian firms, also found that
there is a negative relationship between capital structure (measured by debt to equity) and firm
profitability (measured by the percentage of profit to sales). However, their interpretation was
based on Indian market conditions, where the role of debt as a monitoring channel to improve
firm performance is not considerable. Thus, large cash flow from debt can lead managers to
undertake discretionary behaviour or negatively affect firm performance.
In addition, some studies have found a non-linear relationship between capital structure and firm
performance; that is, capital structure has both positive and negative effects on firm performance.
Stulz (1990) developed a model in which debt can have both effects on firm performance. In
particular, the positive effect of debt is that debt payment obligates managers to pay out cash
flow and hence reduces overinvestment. The negative effect of debt is that debt payments may
exhaust cash flow or reduce available funds for profitable investment, thus exacerbating the
underinvestment problem. Lin and Chang (2009) explored the relation between debt ratio and
firm performance by employing an advanced panel threshold regression model to test whether
there is a threshold debt ratio. Specifically, they used a sample of 196 Taiwanese listed firms
over 13 years (1993–2005) and measured firm performance by Tobin’s Q. They claimed that
there are two threshold effects between debt ratio and firm performance. When debt ratio is less
than 9.86%, an increase of 1% in the debt ratio leads to an increase of 0.0546% in Tobin’s Q (a
proxy of firm value). When debt ratio is between 9.86% and 33.33%, Tobin’s Q increases
0.0057% with an increase of 1% in the debt ratio. When debt ratio is higher than 33.33%, there is
no relation between debt ratio and firm value. Margaritis and Psillaki (2010) investigated the
linkage between capital structure and firm performance in French manufacturing firms. They
employed a quadratic functional form that included debt ratio and the square of debt ratio to
allow the relationship between capital structure and profit efficiency to be non-monotonic and
reverse signs when debt ratio is high. They found a positive relationship between leverage and
firm performance measured by X-inefficiency; however, this relationship switches from positive
to negative at a high leverage in some industries.
3.4 Hypothesis development
Empirical evidence regarding the linkage of capital structure and firm performance provides
mixed and contradictory results, and little research has been conducted on emerging or transition
economies. Furthermore, while most theories relating to capital structure and empirical evidence
conducted in developed countries posit a positive relationship between capital structure and firm
performance, some studies investigating this relationship in emerging markets have found a
negative relationship between capital structure and firm performance. Specifically, the studies of
Berger and Bonaccorsi di Patti (2006), Gill, Biger and Mathur (2011) and Margaritis and Psillaki
(2010) conducted in the United States and France found that a higher debt ratio is associated with
higher firm performance because use of more debt reduces agency costs of equity or encourages
managers to act more in the shareholders’ interests. However, Tian and Zeitun (2007), Joshua
(2007) and Majumdar and Chhibber (1999), studying in Jordan, Ghana, South Africa and India,
found a negative effect of leverage on firm performance. They argued that underestimating
bankruptcy costs of liquidation may lead firms to have more debt than they should; therefore, a
high debt ratio will decrease firm performance. Additionally, the role of debt as a monitoring
channel to improve firm performance is not considerable in emerging markets. Thus, large cash
flow from debt can lead managers to undertake discretionary behaviour or negatively affect firm
performance. Using Vietnam as a typical emerging market, it was therefore hypothesised that:
H1: There is a negative relationship between leverage and firm performance in Vietnamese
listed firms.
A number of recent studies have found a non-linear relationship between capital structure and
firm performance, that is, capital structure can have both positive and negative effects on firm
performance. Specifically, at a low level, debt can increase firm performance through the tax
shield, reducing agency costs of equity or informing a better prospect. However, when leverage
is sufficiently high, an increase of debt ratio can decrease firm performance because the benefits
of debt are overcome by the costs of debt, including financial distress and agency costs of debt
(Jensen 1986; Kraus & Litzenberger 1973; Myers 1984; Myers & Majluf 1984). Therefore, this
research also allowed for the presence both effects of debt level, including positive and negative
influences on firm performance, using a quadratic function, as used by Berger and Bonaccorsi di
Patti (2006) and Margaritis and Psillaki (2010). The study hypothesised that:
H2: There is a non-linear inverted U-shaped relationship between capital structure and firm
value in Vietnam listed firms (leverage is associated positively with firm value; however, at a
high leverage, the relationship switches from positive to negative).
4.Methodology
4.1 Data
The sample for this research is non-financial firms that were listed on the Vietnam stock market
over the six-year period from 2007 to 2012. The starting date for the data was chosen because of
major difficulties encountered in collecting sufficient data in the period prior to 2007 as well as
the implementation of the country’s Law on Securities in 2007. The industry classifications used
in this study, which are based on the Industry Classification Benchmark (ICB), are oil and gas,
basic materials, industrials, consumer goods, health care, consumer services,
telecommunications, utilities, financial services, construction and real estate, and technology.
Firms in the financial industry classification, including banks, insurance and financial services,
were excluded because their financial statements differ substantially from those of other firms
(Basil & Khaled 2011; Pandey 2001).
A panel of secondary annual data of Vietnamese listed firms’ financial figures and stock prices
from 2007 to 2012 were utilised in this research. The raw data were obtained from Datastream.
These data include details of all Vietnamese listed firms’ annual reports, stock prices, stock
volumes and ownership structures extracted from explanation reports on financial statements.
The data were set up in a panel form to utilise the advantages of estimation with increased
numbers of observations or degrees of freedom, thereby improving the efficiency of estimators.
In addition, analysis of the panel data provides control of unobserved time-invariant
heterogeneity such as culture factors or the differences across companies; enables testing of the
dynamics of individual behaviours that cannot be estimated in cross-sectional data. Finally,
instrument variables are easier to obtain with panel data to treat endogeneity, which is a common
issue in research—specifically, exogenous variables in previous times employed as instruments
for endogenous variables in the current period (Arellano & Bond 1991). Therefore, panel data
provide an abundance of instruments.
4.2 The variables
4.2.1 Measure of firm performance
Three measures for firm performance were used: ROA; ROE, which is based on studies of
Jiraporn and Liu (2008) and Tian and Zeitun (2007); and Tobin’s Q, which is based on studies of
Nigel and Sarmistha (2007) and King and Santor (2008). While Tobin’s Q was used to capture
the firm’s market performance, ROA and ROE were employed for presenting accounting
performance. The Tobin’s Q indicator was calculated as the firm’s market value to book value.
The firm’s market value contains the market value of debt and market value of equity. The
market value of debt can be considered the book value, while the current market capitalisation of
equity was used as the market value of equity. ROA was calculated by dividing earnings after
interest and tax into total assets and ROE was calculated by dividing earnings after interest and
tax into total equity.
4.2.2 Measure of capital structure
Capital structure refers to a company’s funding source for its assets and the mix of equity and
debt (Brounen, De Jong & Koedijk 2006). Capital structure can be measured in different ways,
including long-term debt to total assets, short-term debt to total assets, and total debts to total
assets (Céspedes, González & Molina 2010; Chakraborty 2010; Kayo & Kimura 2011; Pandey
2001). In addition, each debt ratio may be determined using the book value and/or the market
value (Frank & Goyal 2009). This research used the ratios of long-term debt, short-term debt and
total debts to book value and market value of total assets to measure capital structure.
Specifically, the ratios of total debt to book value of total assets were employed primarily, and
the other ratios were used in the robustness test.
4.2.3 Measure of control variables
This study used a number of control variables, based on studies by Brailsford, Oliver and Pua
(2002), Fazlzadeh (2011), Kayo and Kimura (2011), Gurcharan (2010), Chakraborty (2010),
Huang and Song (2006) and Pandey (2001). Table 1 provides details of the control variables
used in this study together with their measures.
[Table 1]

4.3 Data analysis

Multiple regression analysis on the panel data was undertaken to investigate the degree and
direction of the variables’ relationships, after controlling for firm characteristics. In general,
pooled OLS, FE and RE estimation methods are common techniques for estimation of panel
data. Specifically, the linear model can be presented as follows:
= + , ∗ +

where i is firm and t is time and

: the dependent variable of firm i in year t
, : K x 1 vector of explanatory variables
: K x 1 vector of constants
: error term

If unobserved heterogeneity is missing altogether and the is independent to , the estimators

of OLS are unbiased and consistent. If the unobserved individual effects (firm specific effects)
appear, which is common in non-experimental research (Baltagi 2005), the FE or RE estimators
are better than the OLS method. In this case, it is assumed that equals plus , with
individual error component at firm level and idiosyncratic error, that which is independent
with both and . The model therefore becomes:
= + , ∗ + +
If is correlated to , meaning that is correlated to , the FE model would give consistent
estimators whereas OLS estimators would be inconsistent. If is not correlated to , OLS
estimators would be consistent but inefficient because is heteroskadistic and serial
autocorrelated. To increase the efficiency, the RE model is then suggested.
To determine which model is better, an F-test for the FE model, the Breusch-Pagan Lagrange
Multiplier (LM) test for RE and the Hausman test for both fixed and random models were
conducted. Based on the results of these tests, the suitable models for this research were chosen
as detailed in Table 2.
[Table 2]

Moreover, to increase the efficiency of the model, testing for groupwise heteroskedasticity
through the Wald test and autocorrelation by the Wooldridge test were conducted. If
heteroskedasticity and autocorrelation exist in the model, robust standard errors will be
calculated to enhance the efficiency of estimators.

Although a model-adjusted standard error can deal with heteroskedasticity problems and
autocorrelation, Wintoki, Linck and Netter (2012) have claimed that bias relating endogeneity
still exists. This is because the FE and RE models mainly control for unobserved heterogeneity.
They do not account for the endogeneity problem, which is caused by the measurement errors,
time-invariant endogenous variables and reverse causality that often take place in the field of
finance research. Therefore, using FE or RE models could still be biased, especially in short
panel data (Cameron & Trivedi 2005). To deal with this issue, some previous studies have
suggested using instrument variable estimators (IV estimators) or dynamic panel GMM.
However, the problem when applying IV estimators is the difficulty in finding variables that can
serve as valid instruments because with weak instruments, the IV estimators are likely to be
biased. In other words, IV estimates with invalid instruments could offer no improvement over
OLS estimators. Therefore, this research applied the dynamic panel GMM explored by Arellano
and Bond (1991) to deal with the endogeneity issue.
One of the advantages of the GMM model over the instrument estimator method is that it is
much easier to have instrument variables as exogenous variables in other time periods or lag of
variables can be used as instruments for endogenous variables in the current time period.
Therefore, GMM provides an abundance of instrument variables, which makes it easier to
achieve the conditions of valid instruments and overidentification of estimators. In addition, the
Arellano and Bond estimator is suitable for short panel data that have small T and large N,
meaning few time periods and many individuals. In a large T panel, the specific characteristics of
firms that appear in the error term will decrease with time and the correlation of lagged variables
with the error term is insignificant (Roodman 2006). In this case, other methods can be better
than the Arellano and Bond estimator. This research used short panel data with large companies
and only six years, so the GMM method introduced by Arellano and Bond (1991) was employed
and believed to be appropriate.
An issue of the original Arellano and Bond (1991) estimator, which is called difference GMM, is
that lagged variables can be weak instruments if the variables in regressions are close to a
random walk, because lagged levels transfer little information about changes in the future. In
addition, the difference GMM has a weakness when there are many gaps in unbalanced panels
(Roodman 2006). Therefore, Arellano and Bover (1995) and Blundell and Bond (2000)
developed the system GMM, in which the original equation is added to the system to increase
instruments, thereby increasing the efficiency of the estimators. In this estimator, lagged
differences are employed as instrument variables for equations in levels and lagged levels are
used as instruments for equations in first differences.
Arellano and Bond (1991) suggested two key tests to check for the validity of the GMM model.
The first test is the Sargan test or Hansen test of overidentification. GMM requires that the
overidentifying restrictions be valid. The second test is the Arellano-Bond test for
autocorrelation errors. The residuals in first differences AR (1) are expected to correlate, but
there should be no serial correlation in second differences AR (2). The condition for the second-
order serial correlation test is that any historical value of dependent variables beyond the certain
lags, which control for the dynamic aspects of an empirical relationship, is a valid instrument
because it will be exogenous to the current shocks of dependent variables (Wintoki, Linck &
Netter 2012).
Although GMM estimators are now becoming increasingly popular, one disadvantage of the
difference and system GMM is that they are quite complicated and so easily create invalid
estimates (Roodman 2006). Therefore, this research reported all results of OLS, RE, FE and
GMM to compare and ensure the reliability of the findings.
Finally, for checking the robustness of the results, this research ran regressions in which industry
and year dummy variables were included to capture industry- or year-specific FE. In addition,
alternative measurements of dependent or independent variables were applied to retest the
results.
4.4 Empirical model
To test the relationship between capital structure and firm performance, this research used the
following model:
, = + , + , + , (1)
where FPi,t is firm performance of firm i at time t and measured by Tobin Q, ROA and ROE;
CSi,t is a capital structure of firm i at time t and measured by the ratios of long-term debt, short-
term debt and total debts to book value and market value of total assets; Zi,t is a vector of control
variables.

According to hypothesis 1 (H1), leverage would have a negative effect on firm performance,
hence, a negative sign on in model 1 was expected.
To capture the industry- and year-specific FE, this research employed the following models:
, = + , + , + . + ,

, = + , + , + . + ,

In addition, testing the linear relationship between capital structure and firm performance, this
research used the quadratic function underpinned by the studies of Berger and Bonaccorsi di
Patti (2006) and Margaritis and Psillaki (2010) to allow a non-linear relation.

, = + , + , + , + , (2)
Hypothesis 2 (H2) proposed that there would be an inverse U-shaped relationship between
capital structure and firm value. In particular, leverage is associated positively with firm value;
however, at a high leverage, the relationship switches from positive to negative. This quadratic
function allows that the relationship between capital structure and firm performance may not be
monotonic, that is, it may switch from positive to negative at higher debt ratio. The adequate
condition for the inverse U-shaped relationship between capital structure and firm value is that
> 0 and < 0.
Control variables in the models
Based on studies of King and Santor (2008), Tian and Zeitun (2007), Margaritis and Psillaki
(2010), some other main factors affecting firm performance are detailed as follows:
Growth
Most previous studies posit that growth is positively correlated to firm performance because
firms with a high growth rate are able to create more profit and value from investment
opportunities. King and Santor (2008) found a positive association between growth rate
measured by sales growth and firm performance measured by Tobin’s Q. Tian and Zeitun
(2007), Gleason, Mathur and Mathur (2000) and Jiraporn and Liu (2008) found that a firm’s
growth opportunity has a positive and significant effect on firm performance measured by ROA.
Margaritis and Psillaki (2010) found a positive relationship between sale growth and firm
efficiency.
Investment
Prior studies agree that firm performance is related to investment opportunities. Cho (1998)
argued that firms with many investment opportunities may have high firm performance as a
result of their investing. Hoshi, Kashyap and Scharfstein (1991), studying in Japanese firms, and
Kaplan and Zingales (1995) conducting research in the United States, provided evidence that the
effect of investment on Tobin’s Q is significant and positive.
Liquidity
Cho (1998) argued that liquidity was one of the signals of firm performance and prospects. Firms
with high liquidity are expected to have good performances and more investment opportunities.
In addition, firms with a high level of cash can support their new projects, pay dividends or
mitigate financial distress problems. Therefore, liquidity is predicted to relate positively to firm
performance.
Profitability
Most prior studies have indicated a positive effect of profitability on firm performance. They
have argued that firms with high profitability are generally better performers and more efficient,
and thus are expected to have high firm performance (Margaritis & Psillaki 2010).
Risk
Tian and Zeitun (2007) pointed out that there is a significant negative relationship between risk
and firm value because a higher risk implies higher financial distress cost, thereby reducing firm
performance. Bloom and Milkovich (1998) observed that high risk level may be related to poor
firm performance because the greater variability in a firm’s outcomes increases the probability of
corporate ruin. In addition, they indicated that high business risk makes firms more difficult to
formulate a strategy or future actions, thus negatively affecting firm performance.
Cash flow
Jensen (1986) stated that with high cash flow, firms may invest in inefficient projects; hence, it
will harm the firm’s performance. In a study by Chung, Firth and Kim (2005), cash flow raised
the agency problems between the insiders and outsiders. Managers of firms with large cash flow
have opportunities to increase the scope of their authority. As a result, it leads to
underinvestment and reduces the wealth of shareholders. However, Gregory (2005) and Chang,
Chen and Huang (2007) documented a positive association between cash flow and firm
performance. These authors explained that high cash flow enables firms to undertake positive
investment without raising external funds at high cost.
Dividend
In a perfectly competitive market, dividend policy is irrelevant to firm performance (Miller &
Modigliani 1963). However, in an imperfect market, dividend policy is seen a relevant to firm
performance. Dhanani (2005) provided evidence on the positive relationship between dividends
and firm performance. The author argued that dividends can resolve agency problems or
information asymmetry between managers and shareholders, thereby enhancing the firm
performance. Amidu (2007) argued that dividends are the best and most reliable signal of firm
prospects. A high dividend payout signals that the firm is confident of its strong earnings in the
future.
5. Findings
5.1 Descriptive statistics of data
Summary statistics of all variables as proxies of capital structure, firm performance, ownership
structure and control variables are shown in Table 3. The average of total book leverage (TLEV)
and total market leverage (MTLEV) overall account for 51.92% and 53.52% during the period
from 2007 to 2012 and widely disperses, from 0.26% to 97.79% and from 0.26% to 98.12%,
respectively. These ratios reveal that Vietnamese firms overleveraged compared with those in
other countries. Specifically, they are higher than firms in developed countries: 22% observed by
De La Bruslerie and Latrous (2012) for French companies during the period 1998–2009; 33.4%
reported by Lin et al. (2011) for 22 Western European and East Asian countries from 1996 to
2008; and only relatively the same 47% reported by Zou and Xiao (2006) for China listed firms.
This is possibly due to, as mentioned in the context analysis, the domination of the banking
sector and the early stage of development of the country’s stock market and financial market. In
other words, Vietnamese listed firms are mainly financed by the banking sector rather than the
stock market or other sources. In addition, the mean ratio of short-term debt (short-term leverage
[SLEV]) is 41.09% and much higher than long-term debt ratio (long-term leverage [LLEV]),
which is only 10.83 %. Similarity, while market long-term debt [MLLEV] is only 11.02%,
market short-term debt [MSLEV] accounts up to 42.59% in total capital structure. This indicates
that Vietnamese listed firms are heavily dependent on short-term debt rather than long-term one,
which could lead to a substantial effect on firm’s performance as short-term debt drives firms to
the risks of refinancing and liquidity. It also needs to be noted that all debt ratios based on
market value (MTLEV, MLLEV and MSLEV) are slightly higher than those measured by the
book value (TLEV, LLEV and SLEV). This could be a result of the depreciation of the
Vietnamese stock market during this period.
Firm performance indicators are presented by ROA, ROE and Tobin Q. The average of returns
on equity and assets for the full sample as a whole are 6.3% and 10.3%, respectively. The
average values of Tobin Q represented market performance is 1.15, which is lower than that
observed for Singapore firms (2.03), Malaysian firms (1.77) (Mak & Kusnadi 2005) and Chinese
firms (1.41) (Ruan, Tian & Ma 2011). Figures also show that the value of Tobin’s Q of listed
firms varies from 0.26 to 20.93. The two alternative measures of firm performance, ROA and
ROE, suggest a large spread in their value. The ROA of listed firms ranges from –0.83 to 0.59,
and the ROE of those firms ranges from –15.28 to 0.95. This implies that there was a significant
gap in firm performance among Vietnamese listed firms during this period.
[ Table 3]
5.2. Correlation analysis
The correlation coefficients between variables used in the regression models are presented in
Table 4. It can be observed that the correlation of debt ratios used as proxies of capital structure
are high. In particular, the correlation coefficient between market total debt ratio (MTLEV) and
book total debt ratio (TLEV) is 0.82. Therefore, instead of combining both debt ratios in only
one regression, this research separately examined the effect of each type of debt ratio on firm
performance to minimise the multicollinearity problem. Other correlation coefficients are quite
small (below 0.5), implying that other variables are suitable in the regression models.
Debt ratios, including market total debt ratio (MTLEV) and book total debt ratio (TLEV), were
found to be negatively related to ROA, ROE and Tobin Q because all coefficients of pairwise
correlation among these variables are negative and significant at the 5% level. Specifically, the
correlation coefficients presenting the link of TLEV with ROA, ROE and Tobin Q are –0.4305, –
0.1294 and –0.1679, while the figures of MTLEV are –0.5730, –0.1805 and –0.4398,
respectively.
[ Table 4 ]
5.3 Pooled OLS regression
First, the OLS regression (pooled OLS) was performed. Table 5 presents the pooled OLS results
for firm performance equation using ROA, ROE and Tobin’s Q as dependent variables,
respectively. While ROA and ROE were used to capture accounting performance, Tobin Q was
employed to capture market performance.
[ Table 5 ]
As shown in Table 5, capital structure is negatively associated with firm performance because
the coefficients estimators for the debt ratios are significantly negative at the 1% level.
Specifically, the coefficient of book total debt ratio and market total debt ratio in columns 1 and
2 are –0.105 and –0.132, which denotes that an increase of 1% in total debt ratio will lead to a
decrease of approximately 0.1% in ROA, holding all other variables constant. However, the
coefficients of debt ratios in columns 3 and 4 are around –0.2, suggesting that when total
leverage rises 1%, the ROE will fall about 0.2%, all else held equal. Remarkably, the coefficient
of market total debt ratio in Tobin Q regression is –1.101, which is much higher than other debt
ratio coefficients in other regressions (from –0.1 to –0.2), implying that the effect of debt ratios
on Tobin Q is much stronger than on ROA and ROE.
Another significant point is that overall F-tests with all p-values below 1% report good fitness of
the models. In addition, most adjusted R-squared values are moderate, from 0.1327 to 0.6484.
Especially in ROA regressions, the values of adjusted R-squared are around 0.60, reflecting that
the models can explain 60% the change of ROA. However, as discussed in the methodology
chapter, regression using the OLS method cannot control for unobserved individual effects,
which commonly appear in most research using cross-sectional data. Therefore, FE and RE
modelling were conducted alongside pooled OLS for unobserved individual effects.
5.4 Random and fixed effect regression

Table 6 shows the outcomes of FE and RE models. Both models’ results provide that the
coefficients of leverage ratio are negative but differ slightly in the significance levels. To select
the appropriate model between FE and RE, the Hausman test was performed. The results of chi-
square statistics are all significant at the 1% level, favouring the FE model over the RE model.
The Wald test also shows that the FE model is better than pooled OLS. Hence, the FE estimator
was used to investigate the effect of leverage on firm performance.
The results of the empirical model using the FE method in Table 5.17 confirm that the
relationship between capital structure and firm performance is negative. Columns 1 to 4 report
the results of examining the relationship between capital structures on ROA, columns 5 to 8
present the results of regression using ROE as a dependent variable and columns 9 to 12 report
the results of Tobin Q regression. In general, it reveals a negative relationship between capital
structure and firm performance because most estimated coefficients of debt ratios measured by
total book debts and total market debts are negative and statistically significant at the 1% level
except the coefficient of book leverage in Tobin Q regression. On average, a 1% increase in total
book debt will decrease 0.134% in ROA, 0.393% in ROE and 0.303 units in Tobin Q. Similarly,
when market total debt increases 1%, ROA, ROE and Tobin Q will decline 0.137%, 0.281% and
2.06 units respectively, holding all other variables constant.
Besides unobserved individual factors, other potential concerns are heteroskedasticity and the
autocorrelation phenomenon, which can lead to inefficiency of the model coefficients. Therefore,
the Wald test for heteroskedasticity and the Wooldridge test for autocorrelation were conducted.
[ Table 6 ]
The results of the Wooldridge test for autocorrelation are not deemed reliable when the time
period is short. In this study, the data spans six years; therefore, it is widely accepted that the
autocorrelation issue could be neglected in the short panel data. However, this research still
conducted the Wooldridge test for autocorrelation as a reference. The results of the Wald test (all
Prob > Chi2 = 0.000) report that the heteroskedasticity problem exists in the models. Similarly,
the Wooldridge test revealed a presence of autocorrelation in all regressions. To control these
issues, the study then adopted the FE model with adjusted standard errors.
Table 7 reports the outcomes on the relationship between capital structure and firm performance,
which were estimated by the FE estimator with adjusted standard error. Overall, all results
remain similar with the FE model reconfirming the negative relationship between leverage and
firm performance in Vietnamese listed firms. Specifically, most coefficients of capital structure
variables are negative and statistically significant at the 1% level except the coefficient of book
debt ratio in Tobin Q regression, which is still negative but insignificant. This means that an
increase in the total debt ratios, ceteris paribus, is associated with a decrease in firm
performance. Results also demonstrate that the effect of leverage ratio on Tobin Q is stronger
than that of leverage ratio on ROA and ROE because the coefficients of book debt and market
debt ratios in Tobin Q regression are much higher than those in ROA and ROE regression. A
worthy point is that the R-squared values in all regressions are quite good, from 0.1460 to
0.7147. In particular, these figures in the ROA model are considerably high (around 0.70),
implying that the model could explain up to 70% of the change of ROA in Vietnamese listed
firms. In addition, the F-test results show that the fitness of models is fairly good.
[ Table 7 ]

5.5 GMM estimator

Using the FE model with robust standard error can help to control unobserved effects as well as
heteroskedasticity; however, the endogenous issue, which leads to biased and inconsistent
estimators, may still exist. This is caused by the inability to ascertain if a simultaneous reverse
relation link exists between capital structure and firm performance (i.e. firm performance also
affects capital structure decisions). In addition, capital structure can be considered simply an
indicator of unobserved features that influence performance. To strengthen the research
outcomes, system two-step GMM with adjusted standard error was applied to cope with the
endogenous problem.
The outcomes of the system GMM are reported in Table 8. It once again confirms the negative
relationship between capital structure and firm performance. This negative relation is mostly
statistically significant at the 5% and 1% levels in most models, except the coefficient of total
debt ratios in the Tobin Q equation and the coefficients of market total debt ratios in the ROE
equation. These are negative but insignificant. The results also reveal that the signs of most
control variables, including growth rate, risk business, cash flow and dividend yield, are
consistent with OLS, RE and FE methods, but slightly different in significance level.
The results of the specification tests of the models are reported in Table 5.19. While AR(1) and
AR(2) test the first- and second-order serial correlation, the Hansen J tests the overidentifying
restrictions. All p-values of AR(2) tests in the table are higher than 0.10, which means that the
null hypothesis of no second-order serial correlation cannot be rejected. Similarly, the results of
the Hansen J tests reveal that the null hypothesis that instrument variables are valid or cannot be
rejected.
[ Table 8 ]
5.6 Results

Capital structure
A negative relationship between capital structure and firm performance is supported by all
models. The consistency of the debt ratios sign under the different methods applied illustrates the
robustness of the findings. Remarkably, the effect magnitude of market total debt ratio is
considerably higher than those of book total market. These results are not consistent with the
studies of Berger and Bonaccorsi di Patti (2006), Gill, Biger and Mathur (2011) and Margaritis
and Psillaki (2010), but are in line with work by Majumdar and Chhibber (1999), Tian and
Zeitun (2007) and Joshua (2007). This could be explained by Harris and Raviv (1991), who
suggested that underestimating bankruptcy costs of liquidation or reorganisation may lead firms
to have more debt than the appropriate level; therefore, a high debt ratio would decrease firm
performance. In addition, large cash flow from debt can lead managers to undertake
discretionary behaviour or negatively affect firm performance. Furthermore, Stulz (1990) argued
that interest payments from issuing debt may exhaust firm cash flow and reduce available funds
for profitable investment, which negatively affects firm performance. Further discussion in the
next chapter sheds more light on this argument.
Control variables
In reference to control variables, whereas growth rate, cash flow, investment, liquidity, and risk
have significant coefficients in most regressions, the others have not consistent effects on firm
performance.
The estimated coefficients of growth rate and investment are positive and statistically significant,
indicating that firms with higher growth opportunities can enhance their performance measured
by ROA, ROE and Tobin Q. The result is consistent with the studies of Tian and Zeitun (2007),
Gleason, Mathur and Mathur (2000), Jiraporn and Liu (2008) and Margaritis and Psillaki (2010),
which argued that firms with high growth rate are able to create more profit and value from
investment opportunities.
The coefficient estimates of cash flow are positive and statistically significant at the 1% level in
all models, suggesting that cash flow is an important factor affecting firm performance. This
result is in line with the studies of Gregory (2005), Chang, Chen and Huang (2007). These
authors explained that firms with high cash flow could undertake positive investment without
using external funds at high cost. The coefficients of the liquidity factor are positively significant
at the 1% level in the ROA equation, but insignificant in ROE and Tobin Q equations. The
explanation could lie in Cho (1998), which argued that high liquidity enables firms to have more
investments and mitigates financial distress problems, thereby increasing firm performance.
Conversely, the risk of business is negatively related to firm performance as its coefficients are
significantly negative at 1% level in OLS, RE and FE regressions, but not significant in all GMM
estimators. This finding is consistent with most previous studies, for example the studies of Tian
and Zeitun (2007) and Bloom and Milkovich (1998). This could explain that higher risk leads to
higher financial distress costs or increases the probability of corporate ruin, thereby reducing
firm performance. In addition, high risk makes firm more difficult to decide a future strategy,
thus negatively affecting firm performance.
5.7 Robustness check
The results of the robustness tests conducted are consistent with the main results of this study
and generally support the conclusion that there is a negative relationship between capital
structure and firm performance. A noted point is that the tables that show the regression results
are not reported in this paper to conserve space.
First, the research conducted estimations in which dummy variables were included to capture
industry- and year-specific fix effect. The outcomes indicate that there is no important change on
major variables. To be specific, both total book debt ratio and total market debt ratio are
negatively associated with firm performance at the 1% level of significance. When there is a 1%
increase in total book debt ratio, the firm ROA, ROE and Tobin Q decrease approximately 0.1%,
0.2% and 0.2 units respectively, holding all other variables constant.
The research then uses the alternative measure of capital structure to test the robustness of the
original empirical model. Long-term debt and short-term debt based on book and market value
were used as proxies for capital structure instead of total debt ratios. In line with the previous
empirical results of this study, the coefficients of leverage in ROE, ROA and Tobin Q are all
negatively significant at the 1% and 5% level when using the proxy of long-term debts to market
value of total assets. Likewise, the coefficient of book leverage in the ROA equation is negative
and significant at the 1% level, respectively. These figures in ROE and Tobin Q equations are
insignificant under the proxy of long-term debts to book value of total assets. Similarly, the
results have the same sign as the original models, which use total debt ratios as proxies of capital
structure. The coefficients of leverage are significant and negative at 5% but the coefficients of
ROA and Tobin Q are insignificant. The results of other variables of growth rate, risk, liquidity
or dividend yield appear to be robust under different equations of capital structure proxies.
5.8 Non-linear relationship between capital structure and firm performance
Tests were conducted to determine the existence of a non-linear relationship between capital
structure and firm performance. The quadratic function that is underpinned by the work of
Berger and Bonaccorsi di Patti (2006) and Margaritis and Psillaki (2010) was used to allocate a
non-linear relation. The result reported in Table 13 shows that a non-linear relationship only
appears when performance is measured by ROE and capital structure measured by total and
short-term debt. The coefficient of debt ratio is positively significant and square of debt ratio
significantly negative in the ROE equation, but these coefficients are negative and insignificant
in ROA and Tobin Q regressions. This indicates that debt ratio is negatively related with ROA
and Tobin Q even at a high level. Meanwhile, at low levels, debt ratio is associated positively
with ROE; however, at a high level, the relationship switches from positive to negative. The
results could be due to ROE measured by ROA multiplied by financial leverage. At low levels,
an increase of debt ratio will increase ROE through rising financial leverage. However, an
increase of debt ratio also decreases ROA. Therefore, at a high level of debt ratio, when the
decline of ROA overwhelms the increase in financial leverage, ROE will reduce. It could be
concluded that capital structure generally negatively affects firm performance. In the special case
of ROE, the existence of a non-linear relationship between ROE and capital structure is simply
due to the usage of financial leverage.
[ Table 9 ]
6. Conclusion and discussion
This study provided evidence of capital structure negatively affecting firm performance.
Specifically, when testing the linear relation between leverage and firm performance, the finding
indicates that all ratios of long-term debt, short-term debt and total debt in both book and market
value are significantly and negatively related to ROA, ROE and Tobin Q. When allowing a non-
linear relation between capital structure and firm performance, the research shows that the non-
linear relation only appears when performance is measured by ROE and capital structure
measured by total debt and short-term debt. This outcome is consistent with the research of Tian
and Zeitun (2007), Joshua (2007) and Majumdar and Chhibber (1999) in the context of emerging
markets; however, it is not in accordance with most studies conducted in developed countries,
which posit a positive relationship between capital structure and firm performance. This may be
due to the stage of development and transition that Vietnam is currently at but suggest that
similar findings may be for similar countries in transition or in economic transition. So, this
paper argues that the traditional theories which work in western countries should be carefully
examined or adjusted when applying in emerging and transition markets like Vietnam.
The negative relationship found between capital structure and firm performance may be
explained by a few factors. As a transitional and emerging market, Vietnam may have unique
aspects when compared with other developed countries. First, although in the early 1990s
Vietnam initiated an economic reform programme that transferred the central planned economy
to a market economy, the financial system is underdeveloped (IFC 2007; Leung 2009). The
Vietnamese financial market is dominated by a banking sector in which SOCBs still control
deposit and credit markets. Majumdar and Chhibber (1999) argued that state-owned financial
institutions do not suffer from bad loan decisions made by their own principals as privately
owned companies do, because their owner, the government, theoretically always has deep
pockets. Therefore, the incentive for monitoring their customers in state-owned financial
institutions is not very significant. Thus, in the Vietnam context, the benefit of debt as a
monitoring manager to reduce the equity agency cost may be not substantial. Furthermore, from
the firms’ point of view, managers are aware of the debt monitoring inefficiency, so an increase
in debt can help them to acquire more cash to undertake discretionary investments, which
negatively affects firm performance.
Second, interest rates in Vietnam, both deposit and lending rates, increased sharply and to a
much higher level than other countries in the period from 2007 to 2011. Specifically, the deposit
and lending rates nearly doubled in 2011 compared with 2009 (Mirae Asset Securities 2011).
Therefore, interest payments have become a burden for most Vietnamese firms. Additionally, the
research shows that tax is not a significant determinant of capital structure decisions; in other
words, Vietnamese firms have not taken advantage of tax shields by issuing debt. Therefore, the
benefits of debt from tax saving overcome by the costs of debt including financial distress and
liquidity issues. Furthermore, Stulz (1990) argued that interest payments may exhaust firm cash
flow and reduce available funds for profitable investments, which negatively affects firm
performance. With the high interest rates, this may have occurred for Vietnamese firms.
In addition, as outlined in the data description, short-term debt accounts for most of the capital
structure of Vietnamese listed firms, which frequently occurs in developing countries. To be
specific, while the average long-term debt ratio is only 10.83%, the mean ratio of short-term debt
is 41.09%. Meanwhile, it is widely agreed that short-term debt pushes firms to the risk of
refinancing, thereby negatively affecting firm performance. Furthermore, a low ratio of long-
term debt implies a low level of long-term investment and thus low profit in the future.
Finally, McConnell and Servaes (1995) and Stulz (1990) posited a positive relationship between
firm performance and leverage in low-growth firms; conversely, firm performance is negatively
associated to leverage for those with high growth. A reasonable explanation is that a positive
effect appears in firms with fewer growth opportunities because an increase in debt prevents
managers from investing in unprofitable projects or reduces the overinvestment problem.
Conversely, in high-growth-opportunity firms, there is a negative effect of debt on firm
performance because an increase in debt forces managers to forego profitable projects or
increase the underinvestment issue. In contrast, high-growth firms are common in fast-growing
countries (Ruan, Tian & Ma 2011) and Vietnam is one of the world’s highest growth rate
countries (Deutsche Bank Research 2007; World Bank 2011). Therefore, a negative relationship
may exist between capital structure and firm performance in Vietnamese firms.
References
Abor, J. (2005). The effect of capital structure on profitability: an empirical analysis of listed firms in
Ghana. The Journal of Risk Finance, 6(5), 438-445.
Amidu, M. (2007). How does dividends policy affect performance of the firm on Ghana Stock Exchange
Investment Management and Financial Innovation, 4, 102-112.
Ardalan, K. (2017). Capital structure theory: Reconsidered. Research in International Business and
Finance, 39, 696-710.
Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an
application to employment equations. The review of economic studies, 58(2), 277-297.
Arellano, M., & Bover, O. (1995). Another look at the instrumental variables estimation of
errorcomponents models. Journal of Econometrics, 68, 29-51.
Baker, M., & Wurgler, J. (2002). Market timing and capital structure. Journal of Finance, VII(1), 1-32.
Baltagi, B. H. (2005). Econometric Analysis of Panel Data (Third ed.). West Sussex, England: John Wiley
& Sons, Ltd.
Basil, A.-N., & Khaled, H. (2011). Revisiting the capital-structure puzzle: UK evidence. Journal of Risk
Finance, 12(4), 329-338.
Berger, A. N., & Bonaccorsi di Patti, E. (2006). Capital structure and firm performance: A new approach
to testing agency theory and an application to the banking industry. Journal of Banking &
Finance, 30(4), 1065-1102.
Bloom, M., & Milkovich, G. T. (1998). Relationships among risk, incentive pay, and organizational
performance. Academy of Management Journal, 41(3), 283-297.
Blundell, R., & Bond, S. (2000). GMM Estimation with persistent panel data: an application to production
functions. Econometric Reviews, 19(3), 321-340.
Booth, L., Aivazian, V., Demirguc-Kunt, A., & Maksimovic, V. (2001). Capital Structures in Developing
Countries. The Journal of Finance, 56(1), 87-130.
Brailsford, T. J., Oliver, B. R., & Pua, S. L. H. (2002). On the relation between ownership structure and
capital structure. Accounting and Finance, 42(1), 1-26.
Brounen, D., de Jong, A., & Koedijk, K. (2006). Capital structure policies in Europe: Survey evidence.
Journal of Banking & Finance, 30(5), 1409-1442.
Burrel, G., & Morgan, G. (1979). Sociological paradigms and organizational analysis, Hants, England:
Gower Publishing Company Limited.
Cameron, A. C., & Trivedi, P. K. (2005). Microeconometrics: Methods and Applications. New York:
Cambridge University Press.

27
Céspedes, J., González, M., & Molina, C. A. (2010). Ownership and capital structure in Latin America.
Journal of Business Research, 63(3), 248-254.
Chakraborty, I. (2010). Capital structure in an emerging stock market: The case of India. Research in
International Business and Finance, 24(3), 295-314.
Chan, S., Chen, S., A.;, H., & C.W.;, H. (2007). Investment opportunities, free cash flow, and stock
valuation effects of secured debt offering. Reviewing of Quantitative Finance and Accounting, 28,
135-145.
Cho, M.-H. (1998). Ownership structure, investment, and the corporate value: An empirical analysis.
Journal of Financial Economics, 47(1), 103-121.
Chung, R., M.;, F., & J.;, K. (2005). Free-cash flow, agency costs, earnings management and investor
monitoring. Corporate ownership and control, 2, 51-61.
Deutsche Bank Research. (2007). Understanding Vietnam: A look beyond the facts and figures.
Retrieved Feb 21, 2012, from <http://www.dbresearch.biz/>
Dhanani, A. (2005). Corporate Dividend Policy: The Views of British Financial Managers. Journal of
Business Finance and Accounting, 32(8), 1625-1672.
Fazlzadeh, A. (2011). The Examination of the Effect of Ownership Structure on Firm Performance in
Listed Firms of Tehran Stock Exchange Based on the Type of the Industry. International Journal
of Business and Management, 6(3), 249-266.
Frank, M. Z., & Goyal, V. K. (2009). Capital Structure Decisions: Which Factors are Reliably Important?
Financial Management Association International, vol. 38(1)(03), 1-37.
Gleason, K. C., Mathur, L. K., & Mathur, I. (2000). The Interrelationship between Culture, Capital
Structure, and Performance: Evidence from European Retailers. Journal of Business Research,
50(2), 185-191.
Grant Thornton. (2011). Grant Thornton International Business Report. The global economy in 2012: a
rocky road to recovery: Grant Thornton.
Greogry A. (2005). The long run abnormal performance of UK acquirer and the free cash flow hypothesis
Journal of Business Finance and Accounting, 32, 777-814.
Gurcharan, S. (2010). A Review of Optimal Capital Structure Determinant of Selected ASEAN Countries.
International Research Journal of Finance and Economics(47), 30-41.
Gill, A., Biger, N., & Mathur, N. (2011). The Effect of Capital Structure on Profitability: Evidence from
the United States. International Journal of Management, 28(4), 3-15,194.
Hart, O., & Moore, J. (1994). A Theory of Debt Based on the Inalienability of Human capital. Quarterly
Journal of Economics, 109, 841-879.

28
Hoshi, T., Kashyap, A., & Scharfstein, D. (1991). Corporate structure, liquidity, and investment: Evidence
from Japanese industrial groups. The Quarterly Journal of Economics, 106(1), 33-60.
Huang, G., & Song, F. M. (2006). The determinants of capital structure: Evidence from China. China
Economic Review, 17(1), 14-36.
IFC. (2007). Vietnam capital market Diagnostic review. Retrieved Feb 22, 2012, from
<http://www.ifc.org/>
IMF. (2010). Vietnam:2010 Article IV concultation- Staff report and Public Information Notice.
Retrieved 10 April, 2012, from http://www.imf.org/external/country/vnm/index.htm
Jensen. (1986). Agency costs of free cash flow, corporate finance and takeovers. American Economic
Review, 76(2), 323-330.
Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and
Ownership Structure. Journal of Financial Economics, 3, 305–360.
Jiraporn, P., & Liu, Y. (2008). Capital Structure, Staggered Boards, and Firm Value. Financial Analysts
Journal, 64(1), 49-60.
Joshua, A. (2007). Debt policy and performance of SMEs: Evidence from Ghanaian and South African
firms. Journal of Risk Finance, The, 8(4), 364-379.
Kaplan, S. N., & Zingales, L. (1995). Do financing constraints explain why investment is correlated with
cash flow? : National Bureau of Economic Research.
Kayhan, A., & Titman, S. (2007). Firms' histories and their capital structures. Journal of Financial
Economics, 83(1), 1-32.
Kayo, E. K., & Kimura, H. (2011). Hierarchical determinants of capital structure. Journal of Banking &
Finance, 35(2), 358-371.
Kim, E. H. (1978). A Mean-Variance Theory of Optimal Capital Structure and Corporate Debt Capacity.
Journal of Finance 33, 33, 45-63.
King, M. R., & Santor, E. (2008). Family values: Ownership structure, performance and capital structure
of Canadian firms. Journal of Banking &amp; Finance, 32(11), 2423-2432.
Kraus, A., & Litzenberger, R. H. (1973). A State Preference Model of Optimal Financial Leverage.
Journal of Finance, 9, 911-922.
Lagoarde-Segot, T. (2016). Prolegomena to an Alternative Study of Finance. In Finance Reconsidered:
New Perspectives for a Responsible and Sustainable Finance (pp. 89-110). Emerald Group
Publishing Limited.
Leung, S. (2009). Banking and financial sector reforms in Vietnam. ASEAN Economic Bulletin, 26(1),
44+.

29
Lin, F.-L., & Chang, T. (2009). Does debt affect firm value in Taiwan? A panel threshold regression
analysis. Applied Economics, 43(1), 117-128.
Majumdar, S. K., & Chhibber, P. (1999). Capital structure and performance: Evidence from a transition
economy on an aspect of corporate governance. Public Choice, 98(3-4), 287-305.
Margaritis, D., & Psillaki, M. (2010). Capital structure, equity ownership and firm performance. Journal
of Banking & Finance, 34(3), 621-632.
McConnell, J. J., & Servaes, H. (1995). Equity ownership and the two faces of debt. Journal of Financial
Economics, 39(1), 131-157.
Miller, M. H., & Modigliani, F. (1963). Corporate Income Taxes and the Cost of Capital: A Correction.
American Economic Review, 53(3), 433-443.
Milton, H., & Raviv, A. (1991). The Theory of Capital Structure. The Journal of Finance, 46(1), 297-355.
Mirae Asset Securities. (2011). Annual report Vietnam 2011: Macro economic review and outlook for
2012. Retrieved Feb 24, 2012, from http://www.stockbiz.vn/Reports
Modigliani, F., & Miller, M. (1958). The cost of capital, corporation finance, and the theory of investment.
American Economic Review, 48, 655-669.
Myers, & Majluf. (1984). Corporate financing and investment decisions when firms have information that
investors do not have. Journal of Financial Economics, 13, 187-221.
Myers, S. (1977). Determinants of corporate borrowing. Journal of Financial Economics, 5, 147-175.
Myers, S. (1984). The capital structure puzzle. Journal of Finance, 39(3), 575-592.
Nahum, B., Nam, V. N., & Quyen, X. H. (2007). Chapter 15 The determinants of capital structure:
Evidence from Vietnam Asia-Pacific Financial Markets: Integration, Innovation and Challenges
(8, 307-326): Emerald Group Publishing Limited.
Nigel, D., & Sarmistha, P. (2007). How Does Ownership Structure Affect Capital Structure and Firm
Value? Recent Evidence from East Asia: Centre for Economic Development and
Institutions(CEDI), Brunel University.
Nguyen, D. T., Diaz-Rainey, I., & Gregoriou, A. (2012). Financial Development and the Determinants of
Capital Structure in Vietnam. SSRN eLibrary. doi: 10.2139/ssrn.2014834
Nguyen, T. D. K., & Ramachandran, N. (2006). Capital structure in small and medium-sized enterprises:
the case of Vietnam. ASEAN Economic Bulletin, 23(2), 192+.
Okuda, H., & Nhung, L. T. P. (2010). The Determinants of the Fundraising Structure of Listed Companies
in Vietnam: Estimation of the Effects of Government Ownership. Retrieved Feb 25, 2012, from
<http://www.ideas.repec.org>
Pandey, I. M. (2001). Capital Structure and the Firm Characteristics: Evidence from an Emerging Market:
Indian Institute of Management Ahmedabad, Research and Publication Department.

30
Roodman, D. (2006). Howto Do xtabond2: An Introduction to “Difference”and “System” GMM in Stata.
Center for Global Development, Number 103(Working paper).
Ross, S. (1977). The determinantion of financial structure: The intensive signaling approach. Bell Journal
Of Economic, 8, 23-40.
Ruan, W., Tian, G., & Ma, S. (2011). Managerial Ownership, Capital Structure and Firm Value: Evidence
from China's Civilian-run Firms. Australasian Accounting Business & Finance Journal, 5(3), 73-
92.
Seelanatha, S. L. (2010). Determinants of capital structure : further evidence from China. Economics,
Management and Financial Markets, 5(4), 106-126.
Stulz, R. (1990). Managerial discretion and optimal financing policies. Journal of Financial Economics,
26(1), 3-27. doi: 10.1016/0304-405x(90)90011-n
Tian, G. G., & Zeitun, R. (2007). Capital Structure and Corporate Performance: Evidence from Jordan.
Australasian Accounting Business & Finance Journal, 1(4), 16-23,25,28-30,32,34-37.
Titman, S., & Wessels, R. (1988). The Determinants of Capital Structure Choice. The Journal of Finance,
43(1), 1-19.
Viet Capital Securities. (2011). Vietnam 2012 Outlook Viet Capital Securities.
VPBank. (2014). Vietnam banking industry. Retrieved Feb 2014, from
https://www.vpbs.com.vn/ViewReports.aspx
Wintoki, M. B., Linck, J. S., & Netter, J. M. (2012). Endogeneity and the dynamics of internal corporate
governance. Journal of Financial Economics, 105(3), 581-606.
World Bank. (2011). Vietnam development report 2012 : market economy for a middle-income Vietnam.
Retrieved Feb 20, 2012, from
http://documents.worldbank.org/curated/en/2011/12/15546780/vietnam-development-report-
2012-market-economy-middle-income-vietnam
World Bank. (2014). Taking stock : an update on Vietnam's recent economic development. Retrieved 10
Nov, 2014, from http://documents.worldbank.org/curated/en/2014/07/19791861/taking-stock-
update-vietnams-recent-economic-development

31
Table 1: Control variables used in this study
Variables Measure
Growth (GRO) The percentage change in sales over the year
Tangibility (TAN) The ratio between fixed assets and total assets
The effective tax rate, which is calculated by dividing total taxes by the
Tax (TAX)
pre-tax income
The standard deviation of the ratio of operating income before interest,
Risk (RISK) taxes, and depreciation to total assets—this research used the previous
three years when calculating standard deviation
Investment (INV) The ratio of capital expenditure to total assets
Cash flow (CF) The ratio of earnings after taxes plus annual depreciation to total assets
Profitability (PRO) The ratio of earnings before interest and taxes to total sales
Liquidity (LIQ) The ratio of cash and cash equivalent to total assets
Dividend (DIV) Dividend per share over share’s market price

Table 2: Tests and models used in this study

F-test Breusch-Pagan test Hausman test The model is chosen
Ho is not rejected Ho is not rejected Pool OLS
(not FE model) (not RE model)

Ho is not rejected Ho is rejected Random effect model

(not FE model) (RE model)
Ho is rejected Ho is not rejected Fixed effect model
(FE model) (not RE model)
Ho is rejected Ho is rejected Ho is rejected Fixed effect model
(FE model) (RE model) (FE model)
Ho is rejected Ho is rejected Ho is not rejected Random effect model
(FE model) (RE model) (RE model)

32
Table 3: Descriptive Statistics of capital structure (CS), firm performance (FP)

Variables Observation Mean Std Dev Min Max

Capital structure
TLEV 2797 0.5192 0.2212 0.0026 0.9779
LLEV 2797 0.1083 0.1466 0.0000 0.8007
SLEV 2797 0.4109 0.2057 0.0026 0.9779
MTLEV 2797 0.5352 0.2594 0.0026 0.9812
MLLEV 2797 0.1102 0.1536 0.0000 0.8561
MSLEV 2797 0.4250 0.2378 0.0026 0.9793
Firm performance
ROA 2797 0.0632 0.0843 –0.8302 0.5875
ROE 2797 0.1030 0.4714 –15.282 0.9541
Tobin Q 2797 1.1518 0.7949 0.2610 20.933
Control variables
PRO 2791 0.0726 0.5617 –22.384 2.2978
INV 2788 0.0703 0.4452 –13.923 9.2205
LIQ 2797 0.0934 0.1060 0.0001 0.9436
CF 2794 0.0915 0.0988 –0.8101 1.6677
GRO 2778 0.2454 0.9128 –1.0000 23.139
DIV 2781 0.0716 0.0755 0.0000 1.2692
RISK 2649 0.0404 0.0425 0.0000 0.4910
Note: TLEV: the ratio of total debt to book value of total assets; LLEV: the ratio of long-term debt to book
value of total assets; SLEV: the ratio of short-term debt to book value of total assets; MTLEV: the ratio of
total debt to market value of total assets; MLLEV: the ratio of long-term debt to market value of total
assets; MSLEV: the ratio of short-term debt to market value of total assets; ROA: the ratio of earnings
after interest and tax to book value of total assets; ROE: the ratio of earning after interest and tax to book
value of total equity; Tobin Q: the ratio of the firm’s market value to firm’s book value; MO: the
percentage of ordinary shares held by all directors; SO: the percentage of shares held by the state; FO:
the percentage of shares held by foreign investors; LO: the percentage of shares held by large investors;
SIZE: firm size; GRO: firm growth; TAN: tangibility; tax; risk; INV: investment; CF: cash flow; PRO:
profitability; DIV: dividends

33
Table 4: Correlation coefficients between measures of capital structure and firm performance
ROA ROE Tobin Q TLEV MLEV GRO INV CF RISK LIQ DIV
ROA 1.00
ROE 0.4885* 1.00
Tobin Q 0.3450* 0.0912* 1.00
TLEV –0.4305* –0.1294* –0.1679* 1.00
MTLEV –0.5730* –0.1805* –0.4398* 0.8264* 1.00
GRO 0.1422* 0.0963* 0.1085* –0.0011 –0.0964* 1.00
INV 0.0371 0.0366 0.0358 0.0479* 0.0101 0.0910* 1.00
CF 0.6092* 0.2920* 0.2098* –0.1677* –0.2799* 0.0877* 0.1568* 1.00
RISK –0.0184 –0.1997* 0.1189* –0.1940* –0.2017* 0.0148 –0.0597* –0.0169 1.00
LIQ 0.3998* 0.1317* 0.1430* –0.3231* –0.3597* 0.0070 –0.0326 0.1595* 0.0443* 1.00
DIV 0.2584* 0.1516* –0.1616* 0.0096 0.1076* 0.0151 –0.0124 0.2091* –0.1366* 0.1284* 1.00
Note: ROA: the ratio of earnings after interest and tax to book value of total assets; ROE: the ratio of earnings after interest and tax to book value of total equity;
Tobin Q: the ratio of the firm’s market value to firm’s book value; TLEV: the ratio of total debt to book value of total assets; MTLEV: the ratio of total debt to
market value of total assets; GRO: growth rate measured by the percentage change in sales over the year; TAX: the effective tax rate, which is calculated by
dividing total taxes by the pre-tax income; Risk; INV: investment; CF: cash flow; LIQ: liquidity ratio; DIV: dividend yield.

34
Table 5: The effect of capital structure on firm performance—Pooled OLS regression
, = + , + , + , (14)
This table reports the results of examining the relationships between capital structure (CS) and firm performance,
which were estimated by pooled OLS estimators. Statistics are based on annual data for the years 2007–2012.
Columns 1 and 2 examined the effects respectively of total debt to book value of total assets (TLEV) and total debt
to market value of total assets (MTLEV) on return on assets (ROA). Columns 3 and 4 examined the effects
respectively of total debt to book value of total assets (TLEV) and total debt to market value of total assets
(MTLEV) on return on equity (ROE). Columns 5 and 6 examined the effects respectively of total debt to book value
of total assets (TLEV) and total debt to market value of total assets (MTLEV) on Tobin Q. There are six control
variables: firm growth (GRO), investment (INV), liquidity (LIQ), risk (RISK), dividend (DIV) and cash flow (CF).
Dependent variable: Dependent variable: Dependent variable: Tobin
ROA ROE Q
(1) (2) (3) (4) (5) (6)
TLEV –0.105*** –0.2047*** –0.254***
(0.005) (0.039) (0.075)
MTLEV –0.132*** –0.242*** –1.101***
(0.004) (0.036) (0.065)
GRO 0.0082*** 0.0053*** 0.0362*** 0.0309*** 0.0783*** 0.0555***
(0.001) (0.001) (0.008) (0.008) (0.016) (0.015)
INV –0.0061** –0.0057** –0.0148 –0.0144 –0.0108 0.0089
(0.002) (0.002) (0.018) (0.018) (0.035) (0.033)
CF 0.490*** 0.424*** 1.2883*** 1.171*** 2.252*** 1.460***
(0.012) (0.011) (0.093) (0.096) (0.176) (0.173)
RISK –0.120*** –0.157*** –2.2907*** –2.348*** 1.522*** 0.667*
(0.025) (0.024) (0.196) (0.195) (0.371) (0.345)
LIQ 0.170*** 0.130*** 0.2393*** 0.174** 0.774*** 0.0639
(0.010) (0.010) (0.082) (0.083) (0.156) (0.151)
DIV 0.119*** 0.182*** 0.3566*** 0.469*** –2.260*** –1.627***
(0.014) (0.013) (0.110) (0.112) (0.209) (0.202)
Constant 0.0519*** 0.0762*** 0.129*** 0.166*** 1.156*** 1.749***
(0.003) (0.003) (0.029) (0.029) (0.056) (0.053)
Observations 2625 2625 2625 2625 2625 2625
Adj R–squared 0.5930 0.6484 0.1615 0.1695 0.1327 0.2137
F-test 544.61 692.19 73.19 76.29 57.2 101.6

35
Prob > F 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Standard error in parentheses: * significant at the 10% level; ** significant at the 5% level; *** significant at the 1%
level

36
Table 6: The effect of capital structure on firm performance—RE and FE regressions
, = + , + , + +
This table reports the results of examining the relationships between capital structure (CS) and firm performance measured by return on assets (ROA), return on
equity (ROE) and Tobin Q, which were estimated by random effect and fix effect estimators. Statistics are based on annual data for the years 2007–2012. There
are six control variables: firm growth (GRO), investment (INV), liquidity (LIQ), risk (RISK), dividend (DIV) and cash flow (CF).

Dependent variable: ROA Dependent variable: ROE Dependent variable: Tobin Q

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
RE FE RE FE RE FE RE FE RE FE RE FE
TLEV –0.115*** –0.134*** –0.309*** –0.393*** –0.254*** –0.303
(0.006) (0.012) (0.056) (0.101) (0.075) (0.208)
MTLEV –0.138*** –0.137*** –0.293*** –0.281*** –1.119*** –2.066***
(0.004) (0.007) (0.044) (0.059) (0.066) (0.114)
GRO 0.00831*** 0.00928*** 0.00487*** 0.00506*** 0.0274*** 0.0220** 0.0197** 0.0135 0.0783*** 0.102*** 0.0548*** 0.0358**
(0.001) (0.001) (0.001) (0.001) (0.008) (0.009) (0.008) (0.009) (0.016) (0.019) (0.015) (0.018)
INV –0.00413* –0.00129 –0.00423** –0.00211 –0.00269 0.00906 –0.00422 0.00586 –0.0108 –0.00160 0.00884 0.00780
(0.002) (0.002) (0.002) (0.002) (0.017) (0.018) (0.017) (0.018) (0.035) (0.038) (0.033) (0.035)
CF 0.440*** 0.348*** 0.383*** 0.309*** 1.257*** 1.147*** 1.158*** 1.092*** 2.252*** 1.416*** 1.412*** 0.498**
(0.012) (0.015) (0.012) (0.014) (0.102) (0.119) (0.104) (0.121) (0.176) (0.246) (0.174) (0.231)
RISK –0.210*** –0.402*** –0.224*** –0.390*** –2.968*** –3.486*** –2.957*** –3.462*** 1.522*** –0.243 0.608* –0.0576
(0.027) (0.035) (0.025) (0.033) (0.229) (0.281) (0.228) (0.281) (0.371) (0.580) (0.357) (0.537)
LIQ 0.156*** 0.118*** 0.121*** 0.0920*** 0.215** 0.184 0.165* 0.145 0.774*** 0.120 0.0372 –0.451**
(0.011) (0.014) (0.010) (0.013) (0.094) (0.115) (0.095) (0.115) (0.156) (0.237) (0.152) (0.221)
DIV 0.102*** 0.0624*** 0.171*** 0.139*** 0.222** 0.0978 0.368*** 0.257** –2.260*** –2.185*** –1.601*** –1.084***
(0.014) (0.015) (0.013) (0.015) (0.111) (0.124) (0.113) (0.128) (0.209) (0.256) (0.202) (0.244)
Constant 0.0668*** 0.0992*** 0.0875*** 0.105*** 0.221*** 0.313*** 0.225*** 0.260*** 1.156*** 1.378*** 1.765*** 2.400***
(0.004) (0.007) (0.004) (0.004) (0.040) (0.059) (0.036) (0.040) (0.056) (0.122) (0.054) (0.078)
 Dependent variable: ROA Dependent variable: ROE Dependent variable: Tobin Q
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
RE FE RE FE RE FE RE FE RE FE RE FE
Observations 2625 2625 2625 2625 2625 2625 2625 2625 2625 2625 2625 2625
R-square 0.7074 0.6287 0.7570 0.7141 0.1519 0.1544 0.1617 0.1573 0.2263 0.1464 0.2662 0.2184
(within)
F-test (overall) 189.50 248.14 51.09 52.23 20.62 70.10
Prob > F 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Wald test 2823.23 3704.48 473.78 489.43 400.37 696.73
Prob > Chi2 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
F-test that all u_i = 0 2.82 2.64 2.33 2.31 1.50 1.76
Prob > F 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000

B &Pagan test 301.09 282.59 7.55 6.8 0.00 247.41

Prob > Chi2 0.0030 0.0045 0.0030 0.0045 1.0000 0.0000
Hausman test 195.85 150.69 21.30 18.05 47.29 134.61
Prob > Chi2 0.0000 0.0000 0.0033 0.0118 0.0000 0.0000
Wald test for 2.2e+36 1.7e+35 7.6e+37 2.0e+35 4.4e + 35 2.0e + 35
heteroskedasticity 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Prob > Chi2
Wooldridge 16.243 7.273 57.161 48.199 147.378 118.474
test 0.0000 0.0001 0.0000 0.0000 0.0000 0.0000
Standard error in parentheses: * significant at the 10% level; ** significant at the 5% level; *** significant at the 1% level.
Table 7: The effect of capital structure on firm performance—Fixed effect estimator with
robust standard error
, = + , + , + +
This table reports the results of examining the relationships between capital structure (CS) measured by
total debt to book value of total assets (TLEV) and total debt to market value of total assets (MTLEV),
and firm performance measured by ROA, ROE and Tobin Q, which were estimated by fixed effect
estimator adjusted standard error. Statistics are based on annual data for the years 2007–2012. Columns 1
and 2 examined the effects respectively of TLEV and MTLEV on return on assets (ROA). Columns 3 and
4 examined the effects respectively of TLEV and MTLEV on return on equity (ROE). Columns 5 and 6
examined the effects respectively of TLEV and MTLEV on Tobin Q. There are six control variables: firm
growth (GRO), investment (INV), liquidity (LIQ), risk (RISK), dividend (DIV) and cash flow (CF).
Dependent variable: ROA Dependent variable: ROE Dependent variable: Tobin
Q
(1) (2) (3) (4) (5) (6)
TLEV –0.134*** –0.393*** –0.303
(0.017) (0.133) (0.262)
MTLEV –0.137*** –0.281*** –2.066***
(0.010) (0.062) (0.111)
GRO 0.0093*** 0.005** 0.022* 0.0135 0.102*** 0.0358**
(0.002) (0.002) (0.011) (0.009) (0.026) (0.016)
INV –0.0013 –0.0021 0.009 0.006 –0.0016 0.0078
(0.005) (0.005) (0.018) (0.017) (0.024) (0.018)
CF 0.348*** 0.309*** 1.147** 1.092** 1.416*** 0.498
(0.078) (0.074) (0.427) (0.457) (0.401) (0.316)
RISK –0.402*** –0.390*** –3.486*** –3.462*** –0.243 –0.0576
(0.098) (0.101) (1.02) (1.04) (0.675) (0.621)
LIQ 0.118*** 0.0920*** 0.184*** 0.145*** 0.120 –0.451
(0.017) (0.016) (0.055) (0.049) (0.557) (0.553)
DIV 0.0624*** 0.139*** 0.0978 0.257** –2.185*** –1.084***
(0.016) (0.022) (0.078) (0.102) (0.469) (0.411)
Constant 0.0992*** 0.105*** 0.313*** 0.260*** 1.378*** 2.400***
(0.014) (0.012) (0.094) (0.049) (0.148) (0.082)
Observations 2625 2625 2625 2625 2625 2625
R-square 0.6287 0.7141 0.1401 0.1460 0.1467 0.2184
F-test 33.62 82.16 14.19 26.48 8.36 63.53
Prob > F 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Standard error in parentheses: * significant at the 10% level; ** significant at the 5% level; *** significant
at the 1% level.
Table 8: The effect of capital structure on firm performance—System two-step GMM
estimator with robust standard error
, = + , + , + +
This table reports the results of examining the relationships between capital structure (CS) measured by
total debt to book value of total assets (TLEV) and total debt to market value of total assets (MTLEV),
and firm performance measured by ROA, ROE and Tobin Q, which were estimated by the system GMM
estimator. Statistics were based on annual data for the years 2007–2012. Columns 1 and 2 examined the
effects respectively of TLEV and MTLEV on return on assets (ROA). Columns 3 and 4 examined the
effects respectively of TLEV and MTLEV on return on equity (ROE). Columns 5 and 6 examined the
effects respectively of TLEV and MTLEV on Tobin Q. There are six control variables: firm growth
(GRO), investment (INV), liquidity (LIQ), risk (RISK), dividend (DIV) and cash flow (CF).
Dependent variable: Dependent variable: ROE Dependent variable: Tobin
ROA Q
(1) (2) (3) (4) (5) (6)

TLEV –0.0907*** –0.377** –0.0961

(0.026) (0.163) (0.205)
MTLEV –0.0691*** –0.122 –0.305**
(0.019) (0.097) (0.150)
GRO 0.0058 0.0002 0.0424 0.0011 0.0607 0.0312
(0.008) (0.008) (0.049) (0.055) (0.051) (0.045)
INV 0.050** 0.0448*** 0.317* 0.336** 0.139 0.158*
(0.019) (0.017) (0.164) (0.161) (0.104) (0.083)
CF 0.845*** 0.780*** 2.266*** 1.484*** 2.633*** 2.294***
(0.085) (0.102) (0.468) (0.446) (0.798) (0.747)
RISK –0.011 0.0713 –1.324* –0.0966 –0.139 –0.223
(0.101) (0.106) (0.683) (0.519) (0.138) (0.490)
LIQ 0.113*** 0.117*** –0.0643 0.226 0.0581 –0.433
(0.033) (0.032) (0.126) (0.166) (0.058) (0.579)
DIV –0.174** –0.0715 –0.609 –0.186 –3.926*** –3.262***
(0.074) (0.068) (0.410) (0.344) (0.645) (0.664)
L.ROA 0.0225 0.0111
 (0.081) (0.078)
L.ROE –0.219 –0.142
(0.143) (0.160)
L.TOBIN Q 0.514*** 0.474***
(0.091) (0.075)
Constant 0.0306 0.0194 0.201 0.0281 0.608*** 0.807***
(0.020) (0.017) (0.122) (0.32) (0.179) (0.139)
Observations 1338 1338 1338 1338 1338 1338
Wald Chi2 423.28 514.09 61.52 94.37 296.18 408.33
Prob > Chi2 0.000 0.000 0.000 0.000 0.000 0.000
AR(1) 0.024 0.023 0.049 0.086 0.001 0.000
AR(2) 0.825 0.614 0.858 0.630 0.222 0.312
Hansen J test 0.134 0.116 0.261 0.384 0.412 0.562
Table 9: Non-linear relationship between capital structure and firm performance

Dependent variable :ROA Dependent variable: ROE Dependent variable: Tobin

Q
(1) (2) (3) (4) (5) (6) (7) (8) (9)
TLEV 0.00367 2.160*** –0.307
(0.047) (0.675) (0.739)
2
TLEV –0.143*** – 0.0043
2.661*** 3
(0.047) (0.818) (0.662)
SLEV –0.0464 1.073* –1.349
(0.041) (0.607) (0.927)
SLEV2 –0.0524 –1.558* 1.469
(0.050) (0.828) (0.952)
LLEV – –0.157 –0.262
0.0797*
*
(0.038) (0.228) (0.622)
2
LLEV 0.0394 –0.178 –0.188
(0.075) (0.514) (0.932)
GRO 0.0093*** 0.0095** 0.0093* 0.0228** 0.0233* 0.0221 0.102* 0.102* 0.102*
* ** * * ** ** **
(0.003) (0.002) (0.003) (0.011) (0.011) (0.011) (0.026) (0.026) (0.026)
INV –0.00127 –0.00238 – 0.00953 0.00534 0.0055 – – –
0.00264 1 0.0016 0.0043 0.0033
0 6 7
(0.005) (0.005) (0.005) (0.017) (0.017) (0.018) (0.024) (0.024) (0.024)
CF 0.343*** 0.362*** 0.370** 1.061*** 1.166** 1.206* 1.416* 1.490* 1.448*
* * ** ** ** **
(0.077) (0.080) (0.080) (0.402) (0.449) (0.428) (0.409) (0.414) (0.406)
RISK –0.391*** – – – – – –0.243 –0.312 –0.258
0.395*** 0.407** 3.276*** 3.394** 3.496*
* * **
(0.098) (0.101) (0.105) (0.895) (1.030) (1.053) (0.697) (0.686) (0.671)
LIQ 0.121*** 0.126*** 0.130** 0.258*** 0.236** 0.219* 0.120 0.118 0.142
* * **
(0.017) (0.018) (0.018) (0.055) (0.054) (0.054) (0.549) (0.539) (0.563)
 Dependent variable :ROA Dependent variable: ROE Dependent variable: Tobin
Q
(1) (2) (3) (4) (5) (6) (7) (8) (9)
DIV 0.0596*** 0.0660** 0.0637* 0.0451 0.0909 0.102 – – –
* ** 2.185* 2.157* 2.187*
** ** **
(0.016) (0.016) (0.017) (0.085) (0.077) (0.081) (0.465) (0.459) (0.464)
Constant 0.0732*** 0.0574** 0.0346* –0.171* –0.0126 0.125* 1.378* 1.459* 1.252*
* ** ** ** ** **
(0.015) (0.011) (0.009) (0.087) (0.075) (0.048) (0.199) (0.173) (0.083)
Observatio 2625 2625 2625 2625 2625 2625 2625 2625 2625
ns
R-square 0.6137 0.5827 0.5626 0.1879 0.1605 0.1493 0.1468 0.1268 0.1273
F-test 30.38 25.86 20.35 12.29 12.04 11.89 7.48 7.19 7.3
Pro > F 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000