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Research in International Business and Finance 40 (2017) 105–113

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Research in International Business


and Finance
journal homepage: www.elsevier.com/locate/ribaf

Determinants of capital structure in emerging markets:


Evidence from Vietnam
Xuan Vinh Vo ∗
School of Banking – University of Economics Ho Chi Minh City 279 Nguyen Tri Phuong Street, District 10, Ho Chi Minh City and CFVG Ho
Chi Minh City 91 Ba Thang Hai Street, District 10, Ho Chi Minh City, Vietnam

a r t i c l e i n f o a b s t r a c t

Article history: Capital structure decision is an important corporate behavior which draws strong interest
Received 11 September 2016 from different stakeholders. It is more important in emerging markets due to their unique
Received in revised form legal, cultural and institutional characteristics. This paper sheds further light on the ques-
18 September 2016
tion of whether capital structure determinants are different in emerging markets. We utilize
Accepted 13 December 2016
a new and unique data set containing firm specific attributes over the period from 2006 to
Available online 19 December 2016
2015. Employing GMM estimator to control for endogeneity, the results indicate that the
determinants of capital structure are different for long-term and short-term indicators.
GEL Classifications:
© 2016 Elsevier B.V. All rights reserved.
G10
G30
G32
K22

Keywords:
Capital structure
Leverage
Firm size
Growth
Emerging markets

1. Introduction

Capital structure decision is an important corporate policy which deals with firm’s activities, with debts and equity
(Brounen et al., 2006). Following the famous work of Modigliani and Miller (1958), there is a growing literature concerning
capital structure. Even though capital structure has been the central topic of financial economists for decades, there is no
single theory explaining the choice of capital structure. Recent paper by Ardalan (forthcoming) even shows that capital
structure becomes irrelevant if more appropriate assumptions are made. Many empirical papers providing inconclusive
results highlight the importance for further investigation to shed further light into this issue. However, there is little work
done on examining capital structure in these emerging countries (Faris 2011) and Vietnam is not a specific case.
This paper explores whether capital structure determinants are different in emerging markets. We use a comprehensive
data set of firm specific attributes from firms listed on the Ho Chi Minh City stock exchange covering a period from 2006
through 2015. We also employ the GMM estimation techniques to alleviate biases and provide further robustness for the
results. In order to enable easy comparisons, potential determinants of capital structure decision among Vietnamese firms

∗ Tel.: +84 8 38 551 776; fax: +84 8 38 551 776.


E-mail address: vinhvx@ueh.edu.vn

http://dx.doi.org/10.1016/j.ribaf.2016.12.001
0275-5319/© 2016 Elsevier B.V. All rights reserved.
106 X.V. Vo / Research in International Business and Finance 40 (2017) 105–113

are firm specific factors which are commonly and consistently considered in the literature including asset growth, tangible
assets ratio, firm profitability, firm size and liquidity.
Our paper is motivated by a number of perspectives. Firstly, our paper is built on a growing literature examining capital
decision. It is well established that capital structure determinants are different in different countries. Particularly, Črnigoj
and Mramor (2009) state that although previous work proves that some capital structure differences can be explained by
modern capital structure theory in mature market economies, the forces behind capital structure decision in emerging
markets are still an open question for investigation. This difference might be explained by the similarities of the institutional
and cultural structure amongst developed countries (Wald 1999) while legal and institutional structure is significantly
different in emerging markets.
Secondly, we consider the capital structure decision in the context of an emerging market. Specially, Vietnam is a small
and partially open economy where the financial markets and institutional developments are still far behind the developed
countries. Since the introduction of the comprehensive economic reform in the mid 1980s, Vietnam is gradually transforming
its economy from a command to market oriented approach. This reform creates a more competitive business environment
toward equal opportunity for private, foreign owned, state-owned and privatized firms in getting fund in financial markets.
In the last two decades, the Vietnamese government sets prioritizes in promoting financial liberalization and facilitating
constant institutional reforms (Batten and Vo 2014, 2015).
These constant economic reforms result in some recent developments in equity and bond market in Vietnam. The devel-
opment of stock market give firms more options to raise finance for their investments, however, most domestic firms are
still relying on bank credit as a major or even the sole source of external funding. One possible explanation for this fact is
that the stock market in Vietnam is still at the infant stage of development. Similar to most emerging markets, the problems
of information asymmetries, higher volatility and higher transaction costs are evidenced in stock market. These problems
clearly hinder firms to get access to finance through stock market. Capital structure decision of firms is clearly affected by
these problems in emerging Vietnam financial market.
The first stock exchange in Ho Chi Minh City is established in 2000 with 4 listed firms. However, a strong development
is witnessed in Vietnam stock markets including a significant increase in both numbers of listed firms and total trading
volume. There are currently more than 300 firms listed on the Ho Chi Minh City stock exchange, the largest stock exchange
in Vietnam.1 Even though the number of listed firms is only a small proportion in comparisons with the total number of
firms in the economy, these listed firms are considered the best Vietnamese firms in terms of corporate governance. Hence,
financial and investment decisions of these firms are assumed to follow global practice.
Our paper contributes to the current literature on a number of fronts. Firstly, the paper makes an important contribution
in the sense that we provide further understanding of the capital structure decision in emerging markets. This is achieved by
assessing the relationship between firm attributes and the capital structure choice of Vietnamese firms employing a unique
and updated data set. Even though a huge volume of research investigating capital structure determinants are existed, papers
utilizing Vietnam data set are still limited. In light of emerging market perspectives, a study investigating capital structure
decision in the Vietnamese context is clearly important. Secondly, since endogeneity is a serious problem in corporate finance
studies, we utilize the GMM estimator to address the potential endogeneity problem in our analysis. Specially, this estimator
technique controls for omitted invariant variables and corrects for endogeneity by using internal instruments. Thirdly, we
use a number of explanatory variables in the context of Vietnam to control for the omitted variable problem. Moreover, the
use of a comprehensive and updated dataset is important to allow us to achieve this task.
The remainder of the paper proceeds as follows. In the following section, we briefly review the extant literature on the
determinants of capital structure. Section 3 introduce the model of capital structure decision. Description of data is presented
in section 4. Section 5 outlines the results and discussions of results. The final section provides some concluding remarks to
the paper.

2. Literature review

A number of pioneering work set the framework for explaining drivers of capital structure (Modigliani and Miller, 1958;
Modigliani and Miller, 1963; Jensen and Meckling, 1976; Myers, 1977, 1984; Myers and Majluf, 1984; Myers, 2001; Fama and
French, 2002). These viewpoints can be categorized into three main theoretical approaches explaining firm level determinant
of capital structure: the trade off, the agency and the pecking order hypotheses. However, all of these theories have failed
to yield conclusive evidence and commonly accepted agreement (Graham, 2000; Leary and Roberts, 2010). Hence, further
investigation is necessary to shed further light on the issue.
These theoretical developments pave the way for the vast empirical research papers testing for validity of these theories
from different perspectives. However, most of the papers employ advanced country data, partly due to the availability of
data. More importantly, the results are mixed in the literature even though there is a large volume of research empirically
investigating the firm specific determinants of capital structure. In addition, the mixed theoretical and empirical results are
also difficult to interpret.

1
A number of papers provide an overview of Vietnam stock market development (Batten and Vo 2014, 2015; Vo 2015, 2016b, 2016a; Vo and Bui 2016;
Vo forthcoming).
X.V. Vo / Research in International Business and Finance 40 (2017) 105–113 107

One thing seems to be in common is that most studies on this topic focus on certain firm specific factor including
profitability, tangibility and size (Andres et al., 2014). In this paper, we follow the common and well recognized view that
the choice between debt and equity of capital decision depends on firm-specific characteristics, or country and industry
effects.
Deesomsak et al. (2004) investigate the determinants of capital structure in Asia Pacific region using data of Thailand,
Malaysia, Singapore and Australia. With regards to firm specific determinants, this research reports that firm size is posi-
tively related to leverage while growth and liquidity are negatively related to firm leverage. de Jong et al. (2008) analyze
the importance of firm-specific and country-specific factors in the leverage choice of firms from 42 countries around the
world. Results from this study indicate that firm-specific determinants of leverage differ across countries, while the current
literature implicitly assumes equal impact of these determinants.
Psillaki and Daskalakis (2009) report that firm size is positively correlated with leverage while asset structure, prof-
itability and risk is negatively explained capital structure. Meanwhile, growth is not a statistically significant determinant
of leverage for any of the four countries. The main conclusion of this study is that firm-specific rather than country facts
explain differences in capital structure choices of SMEs. Sbeti and Moosa (2012) employ extreme bound analysis to inves-
tigate capital structure determinants using Kuwaiti data and report that the results are more supportive of pecking order
theory than the trade-off theory. They evidence the importance of growth opportunities and profitability. Recent work also
provides evidence on the relationship between costs associated with discharging workers and capital structure decisions
(Serfling 2016).
Using the cash flow as an explanatory variables, Mateev et al. (2013) test some of the predictions of the pecking order
theory. According to this theory, firms with more available internal funds should use less external funding. This study finds
strong evidence to support the pecking order theory. Particularly, this paper reports a negative and significant correlation
between profitability and leverage.
Grounded in agency theory, Santos et al. (2013) seeks to examine how capital structure is affected by ownership con-
centration in the hands of the main shareholder, whether family firms differ in terms of the choice of funding sources and
highlighting the role of multiple large shareholders in this stream of research. There are a number of recent papers providing
single country study of capital structure (Chang et al., 2014a,b; Ebrahim et al., 2014; Handoo and Sharma, 2014) and specific
factors explaining capital structure (Antonczyk and Salzmann, 2014; Chang et al., 2014a,b; Dang et al., 2014; Danis et al.,
2014; Hugonnier et al., 2015).
There are an increasing number of papers focusing on the capital structure decision in China (Chen 2004; Chen and Strange,
2005; Huang and Song, 2006; Li et al., 2009; Qian et al., 2009; Wu and Yue, 2009). It is commonly agreed that Vietnam shares
strong cultural and institutional similarities with China. Some recent studies enrich the literature by considering the impact
of foreign presence on the capital structure of domestic firms (Anwar and Sun 2015).

2.1. Growth and capital structure

The relationship between growth and capital structure has been confirmed in the current literature (Faris 2011). However,
the direction of this link is not the same according to different theories. Moreover, this relationship tends to differ between
different proxies for capital structure. For example, the agency theory grounds on the argument that firms with high growth
opportunities tend to retain financial flexibility in order to be able to borrow more in subsequent years predicting a negative
relationship between growth and leverage (Myers 1977; La Rocca et al., 2009).
Several other explanations are also provided for the relationship between growth opportunities and capital structure in
the literature. Firstly, a firm with good opportunities for growth would be unlikely to issue debt to finance projects, due to
the high financial distress costs this implies, and the fact that intangible assets would be valueless in the case of bankruptcy
(Harris and Raviv 1991). Second, firms with a higher growth opportunities are likely to show lower agency costs of free
cash flow (Jensen 1986). Third, the asset substitution problem is particularly more relevant in firms with greater growth
opportunities. This will in turn lead lenders to impose higher costs of financing, which means that firms whose opportunities
for growth are high will have less debts.
Nevertheless, growth opportunities can also positively correlate with leverage, according to the pecking order theory.
According to Myers (1984), the preferred means of reducing the costs of asymmetric information is by funding resources.
Particularly, firms would prefer using retained earnings in first place, then low-risk debt, high-risk debt and, as the last
resource, new equity. It follows, then, that when a company is presented with good investment opportunities, but lacks
internal cash flow, debt is a first option for funding projects, and high leverage is the result in such companies. Finally, as
companies with higher growth opportunities present greater information asymmetries, they find that high-debts are a form
of signaling the quality of their investments.

2.2. Tangibility and capital structure

Both the agency theory and trade-off theory suggest that tangible assets are important and positively determining capital
structure. On the one hand, because tangible assets can be used as collaterals (thus lowering the creditor’s risk of suffering
such agency costs of debt), a high fraction of tangible assets allows firms obtain external finance easily resulting in a high
108 X.V. Vo / Research in International Business and Finance 40 (2017) 105–113

leverage (Titman and Wessels, 1988; Sbeti and Moosa, 2012). Moreover, the tangibility of the firm’s assets is closely associated
with agency costs of debt and the costs of financial funds (Myers 1977; Booth et al., 2001).
In the same line of arguments, Jensen and Meckling (1976) affirm that if firms do not have collaterals for their debt, moral
hazard and hence agency costs of debt increase (La Rocca et al., 2009). In other words, firms unable to provide collaterals
may have more opportunities to expropriate bondholder interest by substituting safer projects for riskier projects (Booth
et al., 2001). In addition, firms unable to provide collaterals will have to pay higher interest, or will be forced to issue
equity instead of debt (Scott 1977). Tangible assets are more valuable on the market than intangible assets in the case of
bankruptcy, and so bondholders will demand lower risk premiums. Tangible assets can also mitigate concerns over insider
resource expropriation. Moreover, the use of collateral plays a more important role in countries where creditor protection
is relatively weak (La Porta et al., 1998) and it is commonly accepted that emerging countries are in this weak creditor
protection group.
In summary, a positive relationship between tangibility of assets and leverage is anticipated.

2.3. Profitability and capital structure

The relationship between the capital structure and profitability is both theoretically and empirically controversial (Friend
and Lang, 1988; Harris and Raviv, 1991; Rajan and Zingales, 1995; Booth et al., 2001; Sbeti and Moosa, 2012). Specially,
Modigliani and Miller (1963) state that a company may opt for debt in order to take advantage of tax shields. Moreover,
there is a positive relationship between profitability and the existence of free cash flow problems and in these circumstances
debt may act as a management tool to ensure that managers do not pursue individual objectives (Jensen 1986).
According the pecking order theory, a more profitable firm is more likely to substitute debt for internal funds. Therefore,
by holding the investment level fixed, a negative relationship between debt levels and profitability is expected. However,
when there is asymmetric information about the quality of a firm, the more profitable companies may use a higher debt to
signal their quality to the market. On the other hand, profitable firms prefer not to raise external equity in order to avoid
potential dilution of ownership.
The trade-off hypothesis, in turn, suggests a positive relationship because more profitable firms have a lower probability
of bankruptcy (Fama and French, 2002). In addition, La Rocca et al. (2009) argue that more profitable firms are more likely
to borrow more in order to benefit from the tax shield (Frank and Goyal, 2003; Frank and Goyal, 2009). In addition, Rajan
and Zingales (1995) argue that creditors prefer to give loans to firms with high current cash flow.
In summary, agency costs and bankruptcy costs imply that more profitable firms are associated with higher leverage,
and therefore a positive relationship between leverage and profit is expected.

2.4. Firm size and capital structure

The size of a firm has been reported to be an important determinant of capital structure in many different perspectives
(Harris and Raviv, 1991; Rajan and Zingales, 1995; Hall et al., 2000; Bevan and Danbolt, 2002). From a financial distress
perspective, many authors state that larger firms tend to be more diversified and have a smaller probability to fail, so size
can be an inverse proxy for the probability of bankruptcy (Warner, 1977; Ang et al., 1982; Pettit and Singer, 1985).
On the other hand, it is commonly established that small companies usually have bigger bankruptcy costs in relative
terms (Ang et al., 1982) while larger companies are more likely to use debt than smaller ones, according to the tradeoff
theory (Titman and Wessels, 1988). Moreover, Diamond (1989) suggests that large firms can assume more debt at lower
costs because their better reputations in the debt market (La Rocca et al., 2009). Likewise, Rajan and Zingales (1995) assert
that larger firms benefit from lower debt cost because there are more transparent.

2.5. Liquidity and capital structure

It is commonly stated that liquidity ratios may have a mixed impact on the capital structure decision. On the one hand,
a negative relation between leverage and liquidity is expected because if firms are having more debt, the associated higher
liabilities and lower remaining current assets (Ozkan 2001). Moreover, the agency theory suggests that when the agency
costs of liquidity are high, outside creditors tend to reduce the debt financing limit available to firms (Myers and Rajan,
1998). If firms follow the financing hierarchy of the pecking order theory for their capital structure decision, it results in a
negative link between liquidity and financial leverage (Sbeti and Moosa, 2012).
On the other hand, as firms with higher liquidity ratios might use a relatively higher debt ratio due to greater ability to
meet short term obligations when they fall due. This implies a positive relationship between a firm’s liquidity position and
debt ratios.
X.V. Vo / Research in International Business and Finance 40 (2017) 105–113 109

3. Model and variables

In this section, we start by providing a discussion on the dependent variables which represents firm leverage. We then
introduce explanatory variables and outline their relations with leverage. We also provide the discussion of relationships
between determinate variables and firm leverage through different theoretical lens.

3.1. Model

This section focuses on formulating the model that will be used to examine the determinants of the capital structure
decision of Vietnamese firms. The model is set up from the capital structure theories to enable us to shed light on the
question of whether the capital structure decision in emerging economies is different from the developed ones. Factors that
may affect the firms’ capital structure are based on the capital structure theories and the preponderance of existing capital
structure studies in the current literature. Specially, firm specific variables explaining capital structure are selected including
growth, tangibility, profitability, firm size and liquidity.
In order to avoid the endogeneity problem in corporate finance, our model is a dynamic model which is specified as
follows:
CapStructurei,t

= ˛ ∗ CapStructurei,t−1 + ˇ1 GROWTHi,t + ˇ2 TANGi,t + ˇ3 PROFITi,t


+ˇ3 SIZEi,t + ˇ1 LIQDi,t + εi,t

where CapStructure is the measure of capital structure, proxied by long-term and short-term leverage ratio. In this study,
we first investigate two other disaggregated measures of leverage which include the long term debt ratio and the short term
debt ratio. This separation allows us to distinguish between short and long term debt determinants. The short term leverage
ratio (STDTA) is defined as the ratio of short-term debts to total assets and the long term leverage ratio (LTDTA) is calculated
as the ratio of long term liabilities to total assets. Moreover, we also include the ratio of long-term debt to short-term debt
to model the preference for long-term debt over short-term debt in capital structure decision.2

3.2. Control variables

GROWTHi,t is the growth variable. In this study, following Rajan and Zingales (1995) and Huang and Song (2006), we use
Tobin Q (the ratio of market value of total assets to book value of total assets) as a variable to proxy for the firm’s future
growth opportunity. Tobin Q is considered in the current literature to be a better indicator for future growth as it reflects
the market value and investor’s valuation of the firm. More specially, Tobin Q is calculated as the ratio of market value of
equities plus book value of debts to the total assets.
TANGi,t is a proxy for tangibility. This study uses the ratio of net plant, property and inventory to total assets as a measure
for firm tangibility.
PROFITi,t is the profitability measure. Following most of the existing capital structure studies (Rajan and Zingales, 1995;
Wald, 1999; Booth et al., 2001; Delcoure, 2007), we employ return on assets as a measure of profitability.
SIZEi,t is a proxy for firm size. In this paper, firm size is calculated as the natural logarithm of total assets (ln(total assets))
at year end.
LIQDi,t is the liquidity measure. In this study, firm liquidity is calculated as the ratio of current assets to current liabilities
at year end.
The above equation is estimated using the dynamic GMM estimation of Arellano and Bond (1991) and Holtz-Eakin et al.
(1988). This estimator technique is commonly employed in dynamic model which is controlling for omitted variable problem
and potential endogeneity issue. More importantly, this analysis approach is appropriate for our unique dataset which has
the characteristics of large cross-section and short time series.

4. Data

The data set used in this research is a collection of market data and accounting data of public firms listed on the Ho Chi
Minh City stock exchange for the period from 2006 to 2015. We do not include banks and financial companies in our data
sample due to the special financial behaviors and nature of these businesses (King and Santor, 2008). The accounting data
are taken from balance sheets and income statements. These data are then used to calculate variables measuring growth
opportunity, tangibility, profitability, size and liquidity of a firm.
Table 1 describes the summary statistics of the data for our sample over the period of research. It is interesting to observe
that on average, Vietnamese firms tend to use much more short-term debts than long-term debts. One possible explanation
for this fact is the low level of development of bond market in Vietnam that makes firms harder to access long-term finance.

2
We thank an anonymous referee for suggesting this ratio as a measure of capital structure.
110 X.V. Vo / Research in International Business and Finance 40 (2017) 105–113

Table 1
Data description of variables.

TDTA LTDTA STDTA GROWTH TANG PROFIT SIZE LIQD

Mean 0.4781 0.1169 0.3613 1.2240 0.2778 0.0699 11.9565 2.5211


Median 0.4990 0.0492 0.3296 0.9163 0.2316 0.0560 11.9068 1.6131
Maximum 0.9925 0.6930 0.9876 20.9330 0.9698 0.7837 14.1629 229.7793
Minimum 0.0020 0.0000 0.0020 0.0481 0.0000 −0.6455 9.9576 0.0895
Std. Dev. 0.2121 0.1508 0.2005 1.0554 0.2158 0.0854 0.5369 6.6328
Observations 1997 1997 1997 1997 1997 1997 1997 1997

Notes: This table presents the descriptive statistics for the variables employed in the analysis. TDTA is the total leverage ratio, calculated as the ratio of
total debts to total assets; STDTA is the short term leverage ratio, calculated as the ratio of short-term debts to total assets; LTDTA is the long-term leverage
ratio, calculated as the ratio of long-term liabilities to total assets; GROWTH is calculated as the ratio of market value of equities plus book value of debts
to the total assets; TANG is the ratio of net plant, property and inventory to total assets; PROFIT is the return on assets; SIZE is the logarithm of total assets;
LIQD is the ratio of current assets to current liabilities.

Table 2
Correlations between variables.

LTDTA STDTA GROWTH TANG PROFIT SIZE LIQD

LTDTA 1
STDTA −0.2971 1
GROWTH −0.0740 −0.0353 1
TANG 0.3944 −0.3382 −0.0155 1
PROFIT −0.2488 −0.2919 0.2145 −0.0290 1
SIZE 0.3833 0.0025 −0.1651 0.0112 −0.0883 1
LIQD −0.0292 −0.2431 0.0143 −0.0539 0.0703 −0.0737 1

Notes: This table presents the correlations amongst variables employed in the analysis. STDTA is the short term leverage ratio, calculated as the ratio of
short-term debts to total assets; LTDTA is the long-term leverage ratio, calculated as the ratio of long-term liabilities to total assets; GROWTH is calculated
as the ratio of market value of equities plus book value of debts to the total assets; TANG is the ratio of net plant, property and inventory to total assets;
PROFIT is the return on assets; SIZE is the logarithm of total assets; LIQD is the ratio of current assets to current liabilities.

Another possible explanation might be the frequent changes in macroeconomic policy and volatile economic environment
of emerging markets. These issues together result in the banks’ reluctance to give long term credit and short-term firm
borrowing.

5. Results and discussion of results

Table 2 represents the matrix of correlation results amongst variables. There is a negative correlation between long
term and short term leverage. Moreover, there direction of relationship between capital structure and other potential
determinants tends to be mixed for long and short term leverage.
Table 3, represents the GMM regression results of determinants of capital structure where capital structure is proxied by
the long-term, short-term leverage measure and the ratio of long-term to short-term debt measure, respectively.
Overall, the results from our analysis of capital structure of Vietnamese firms offer some interesting results. Of particular
important is the determinants of capital structure are different for different capital structure measures.
The coefficients of growth opportunity measure are positive but not significant in all regressions for both long-term
and short-term leverage. However, this growth parameter is positive and significant in regression explaining the ratio of
long-term to short-term debt. This is because Tobin Q is employed to measure the firm’s growth opportunity, higher market
value firms tend to use more debts to finance their investment. This finding validates the fact that higher growth Vietnamese
firms are unable to take advantage of new equity issue in stock markets. This finding is contrary to the argument of Berens
and Cuny (1995) that growth opportunity implies high equity financing and less leverage.
Further, our finding is inconsistent with the agency theory because high growth Vietnamese firms are likely to finance
new projects with bank loans. This is interesting since if high growth firms need extra finance for an investment while not be
able to issue equity, they may forgo this opportunities because such an investment effectively transfers wealth from stock
holders to creditors (Myers 1977). Our results are inconsistent with many previous studies (Berens and Cuny, 1995; Jung
et al., 1996; Berger et al., 1997) and empirical papers (Kim and Sorensen, 1986; Rajan and Zingales, 1995; Wald, 1999; Booth
et al., 2001) but support the finding of Kester (1985). This might also explained by the fact that even though stock market
gradually develops in the last decades, most of firm financings are bank credit in Vietnam.
The coefficient for tangible assets is positive and significant in regression explaining long-term leverage but negative and
significant in regression explaining short-term leverage. The coefficient for the preference of long-term debt over short-term
debt is also positive and significant. This finding highlights the fact that firms can borrow more long-term debts if they have
more tangible assets for collaterals. Tangible assets are important in determining capital structure because the value of
tangible assets is higher than intangible assets in case of bankruptcy (Williamson, 1988; Harris and Raviv, 1991; Huang and
Song, 2006). This result is consistent with the agency theory of capital structure (Jensen and Meckling, 1976; Jensen, 1986)
as firms may shift to riskier investments and transfer wealth from creditors to shareholders while tangible assets help to
X.V. Vo / Research in International Business and Finance 40 (2017) 105–113 111

Table 3
GMM − regression results.

Variables Long-term Leverage Short-term Leverage Long-term/Short-term

Coefficient Coefficient Coefficient Prob. Coefficient Prob.

Lag of Dep. Var. −0.0470 0.3062 0.3111 0.0000 0.2069 0.0000


GROWTH 0.0019 0.8132 0.0060 0.3925 0.5485** 0.0106
TANG 0.6119*** 0.0000 −0.2076* 0.0857 11.1068*** 0.0000
PROFIT 0.0703 0.5824 −0.6182*** 0.0000 −3.6451 0.2253
SIZE 0.2074** 0.0129 −0.1001* 0.0920 −1.8422*** 0.0000
LIQD 0.0007 0.2353 −0.0027* 0.0857 2.1303*** 0.0000
J-statistic 37.2920 50.6386 31.7887

Notes: The table reports parameter estimates of the model:.


CapStructurei,t = CapStructure(−1)i,t + ˇ1 GROWTHi,t + ˇ2 TANGi,t + ˇ3 PROFITi,t + ˇ3 SIZEi,t + ˇ1 LIQDi,t + εi,t
where: CapStructure is the capital structure indicator; GROWTH is calculated as the ratio of market value of equity plus book value of debt to the total
assets; TANG is the ratio of net plant, property and inventory to total assets; PROFIT is the return on assets; SIZE is the logarithm of total assets; LIQD is the
ratio of current assets to current liabilities, i and t are firm and time script. We do not report the coefficient estimates for time dummies to conserve space.
*, **, *** denotes the level of significance of 10%; 5% and 1% respectively.

reduce the agency costs of debts. This result is also consistent with many empirical studies suggesting that a high fraction
of tangible assets is associated with high leverage (Marsh, 1982; Long and Malitz, 1985; Friend and Lang, 1988; Rajan and
Zingales, 1995). Our result also indicates that Vietnamese firms tend to be obligated to put forward collaterals for both long
term borrowing. More important, given the stability of the debt structure, firms with higher tangible assets are using less
short-term debts for a more flexible finance structure.
We find that firms with higher profitability tend to borrow less short-term debts in Vietnam as the coefficients for
profitability are negative and significant in regression explaining short-term debt and the ratio of short-term to long-term
leverage. This result is interesting in the sense that profitable firms in Vietnam tend to borrow long-run while reduce short-
run debt. This result is consistent with previous theoretical studies (Jensen, 1986; Williamson, 1988; Chang, 1999) and also
similar to other empirical studies documented in the current literature (Friend and Lang, 1988; Titman and Wessels, 1988;
Wiwattanakantang, 1999).
The finding also represents the fact of high interest rate in Vietnam during the investigation period due to the strict
monetary policy of Vietnamese government to curb inflation. Firms with high level of debts are significantly affected and
their profits reduce significantly due to very high costs of borrowing.
Estimated coefficients of firm size is positive and significant in regression of long term debt, while negative in regression
of short term debt. Further, the analysis also indicates the preference of short-term debt for large firms. This result suggests
that larger firms tend to use long term debt while smaller firms use short term debt to finance their investments. This result
is consistent with agency theory and similar to the finding of previous studies (Marsh, 1982; Rajan and Zingales, 1995;
Wald, 1999; Booth et al., 2001). A possible reason is that larger firms in Vietnam do not take the advantage of having more
bargaining power over creditors or bankers than smaller firms to borrow long term.
We find that liquidity coefficients are negative and significant in short term leverage regression while positive but insignif-
icant in long term leverage regression. Further, the coefficient of liquidity is positive and significant in regression of the ratio
of long-term to short-term leverage. This outcome suggests that liquidity problems limit the firm from borrowing long term
and liquidity management is a critical issue for the success of firms in Vietnam.

6. Conclusion

Given the increasing importance of emerging markets, investigation of financing decision in emerging economies is
always an interesting topic on its own merits. Despite a huge volume of research in the literature concerning capital structure
determinants, there is still a gap in investigating this issue in emerging economies. Even though some capital structure
differences can be explained by modern capital structure theory in mature market economies, the forces behind capital
structure decision in emerging economies are still an open question for investigation. The main purpose of this study is to
shed further light on forces driving capital structure decision in Vietnam, an emerging market economy.
The paper investigates determinants of capital structure in Vietnam. We utilize a comprehensive dataset of firms listed on
the Ho Chi Minh City stock exchange from 2006 to 2015. We formulate a model which leverage is a function of firm attributes
hypothesized from the capital structure theories. We consider a large number of firm attributes variables (asset growth, ratio
of tangible assets, profit, firm size and liquidity) in explaining capital structure. The finding offers some interesting results.
Particularly, the determinants of capital structure are different for long-term and short-term leverage.
112 X.V. Vo / Research in International Business and Finance 40 (2017) 105–113

Acknowledgement

The paper is benefited from constructive comments and helpful suggestions from Jonathan Batten and Peter Szilagyi. We
thank an anonymous referee for critical comments which help to improve the brevity of the paper. Any remaining errors
are our own responsibility.

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