(Luận văn thạc sĩ) determinants of capital structure of listed firms in the pharmaceutical sector in vietnam

VIETNAM NATIONAL UNIVERSITY, HANOI
VIETNAM JAPAN UNIVERSITY
------------------------

BUI THI MINH HUYEN

DETERMINANTS OF CAPITAL
STRUCTURE OF LISTED FIRMS IN THE
PHARMACEUTICAL SECTOR IN
VIETNAM

MAJOR: BUSINESS ADMINISTRATION
CODE: 8340101.01

RESEARCH SUPERVISORS:
Prof. Dr. HIROSHI MORITA
Assoc.Prof. Dr. NGUYEN VAN DINH

Hanoi, 2020


TABLE OF CONTENTS
ACKNOWLEDGEMENT ...................................................................................... iii
STATUTORY DECLARATION ............................................................................ iv
LIST OF TABLES .................................................................................................... v
LIST OF FIGURES ................................................................................................. vi
LIST OF ABBREVIATIONS.................................................................................vii
EXECUTIVE SUMMARY ................................................................................... viii
CHAPTER 1: INTRODUCTION ............................................................................ 1
1.1 Research Motivations ............................................................................................1
1.2 Research Objectives ..............................................................................................3

1.3 Research Objects and Scope .................................................................................3
1.4 Research Questions ...............................................................................................4
1.5 Research Structure ................................................................................................5
CHAPTER 2. THEORETICAL FRAMEWORK.................................................. 6
2.1 Definition relating to capital structure ..................................................................6
2.2 The theories about capital structure ......................................................................8
2.3 The determinants affecting capital structure .......................................................11
2.4 Literature review .................................................................................................16
2.5 Research gaps .....................................................................................................21
CHAPTER 3: METHODOLOGY ......................................................................... 23
3.1 Research methodology ........................................................................................23
3.2 Research Data......................................................................................................23
3.3 Research Model ..................................................................................................24
3.4 Variables measurement .......................................................................................25
3.5 Hypothesis ...........................................................................................................26
CHAPTER 4: DATA ANALYSIS AND FINDINGS ........................................... 31
4.1 Analyzing the pharmaceutical sector in Vietnam during the 10-year period .....31
4.1.1 The characteristics of pharmaceutical sector in Vietnam ...............................31
4.1.2 Current status of capital and capital structure of pharmaceutical listed firms
...................................................................................................................................32
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4.2 Descriptive statistics...........................................................................................35
4.2.1. Descriptive statistics of dependent variable ...................................................35
4.2.2. Descriptive statistics of independent variables ...............................................36
4.3 Testing the model ................................................................................................37
4.3.1 Original regression model ...............................................................................37
4.3.2. Correlation matrix and multicollinearity testing ............................................38
4.3.3 Heteroskedasticity testing ................................................................................40

4.3.4 Autocorrelation testing.....................................................................................41
4.3.5 Overcoming the Heteroskedasticity of the model ............................................42
4.4 Result of the research and discussing them ........................................................43
4.5 Comparing factors affect to capital structure between companies listed on
Hanoi Stock Exchange (HNX) and ones listed on Ho Chi Minh City Stock
Exchange (HOSE) ................................................................................................... 46
CHAPTER 5: RESEARCH IMPLICATIONS AND RECOMMENDATIONS
................................................................................................................................... 51
5.1 Research implications .........................................................................................51
5.2 Recommendations ...............................................................................................51
5.2.1 Recommendations for the pharmaceutical listed companies in Vietnam ........51
5.2.2 Recommendations for related parties ..............................................................52
5.3 Limitation and the following research directions ..............................................53
CONCLUSION ........................................................................................................ 55
REFERENCES ........................................................................................................ 57
APPENDIX .............................................................................................................. 63

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ACKNOWLEDGEMENT
I would like to express my sincere thanks to the Board of Management, professors,
and teachers of Vietnam Japan University and Yokohama National University for
facilitating and imparting knowledge to me to complete this graduation thesis as well
as help me to have a solid portfolio for the future career.
And in particular, I would like to send my deepest gratitude to my supervisors Prof.
Hiroshi Morita and Assoc. Prof. Nguyen Van Dinh, who mentored, instructed, and
imparted useful knowledge and ideas during the implementation and completion of
this thesis.
Sincerely thanks to my family and friends for their support, convenience, and

motivation in the past time.
Although many attempts have been made to implement the research in the most
complete way, the limitations of knowledge and experience will inevitably lead to
certain shortcomings.
I hope to receive more guidance and valuable comments from teachers to complete
my thesis.
Sincerely,
Bui Thi Minh Huyen

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STATUTORY DECLARATION
I pledge that the thesis “Determinants of capital structure of listed firms in the
pharmaceutical sector in Vietnam” is the work of the author. The content is drawn
from the learning process and the results of empirical research. The data used in the
study period are true and have a clear origin. Research results have not been published
in any previous scientific research. The thesis is conducted under the guidance of Prof.
Hiroshi Morita and Assoc. Prof. Nguyen Van Dinh.
Sincerely,
Bui Thi Minh Huyen

iv


LIST OF TABLES

Table 3.1: Variables measurement ............................................................................ 25
Table 4.1: Overview of asset structure of pharmaceutical firms .............................. 33
Table 4.2: Overview of capital structure of pharmaceutical firms............................ 34

Table 4.3: Descriptive statistics of dependent variable ............................................. 35
Table 4.4: Descriptive statistics of independent variables ........................................ 36
Table 4.5:Requirements for companies listed on the HOSE and HNX stock exchanges.
................................................................................................................................... 47

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LIST OF FIGURES

Figure 1.1: Revenue of Vietnamese pharmaceutical sector (billion USD) ................ 2
Figure 4.1: Original regression model ...................................................................... 37
Figure 4.2: Correlation matrix of research variables ................................................ 38
Figure 4.3: Regression model without “SIZE” or “TANG” variable ....................... 39
Figure 4.4: Multicollinearity testing.......................................................................... 40
Figure 4.5: Heteroskedasticity testing ....................................................................... 41
Figure 4.6: Autocorrelation testing ........................................................................... 42
Figure 4.7: Overcoming the Heteroskedasticity of the model .................................. 43
Figure 4.8: Regression model of firms listed on HNX and HOSE stock exchanges 48

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LIST OF ABBREVIATIONS

Abbreviations

Meaning

AGE

Firm age

API

Active Pharma Ingredient

CA

Current Assets

CEO

Chief Executive Officer

CL

Current Liabilities

EBIT

Earnings before interests and taxes

GROW

Growth opportunity

HNX

Hanoi Stock Exchange

HOSE

Ho Chi Minh City Stock Exchange

LA

Long-term Assets

LD

Long-term Debts

LIQ

Liquidity

M&A

Mergers and Acquisitions

OLS

Ordinary Least Square

PLU

Pluralist Executive

PROF

Profitability

SIZE

Firm size

SMEs

Small and Medium-sized enterprises

TA

Total Assets

TANG

Tangible Assets

TC

Total Capital

TD

Total Debt

TE

Total Equity

USD

United States Dollar

VIF
VND

Variance – Inflation Factor
Vietnam Dong

vii


EXECUTIVE SUMMARY
This research aims to study the factors influencing the capital structure of
pharmaceutical companies listed on stock exchanges in Vietnam. This study uses data
from financial statements, annual reports, management reports of listed companies
that publish data on the stock market during the period 2010-2019. The study used
the Ordinary Least Square method to estimate the parameters of the model. The study
used different independent variables including company characteristics (profitability,
growth opportunity, tangible assets, liquidity, firm size, firm age) and corporate
governance (pluralist executives). Research results show that profitability, tangible
assets, and liquidity have a negative correlation with capital structure. However,
research also illustrates firm size, firm age and pluralist executives have a negative
correlation with capital structure but they do not have statistical significance. In
contrast, growth opportunities have a positive relationship with capital structure.
Generally, the results are most consistent with previous studies on capital structure.
In addition, the study also shows the direction and the level of the influence of the
above independent variables on the capital structure of pharmaceutical companies

listed on the Hanoi Stock Exchange and Ho Chi Minh City Stock Exchange are
different. Also, the study proposed some recommendations for pharmaceutical listed
firms to get a reasonable capital structure as well as investors and related parties when
they would like to invest in pharmaceutical listed firms in Vietnam.

viii


CHAPTER 1: INTRODUCTION
1.1 Research Motivations
Enterprises need capital to operate which may be retained earnings, debt, and equity.
The source of funds from debt can increase the value of the firm but using too much
debt to finance investments, the company may have financial risks which can
consequently lead the enterprise into bankruptcy. Moreover, an ideal combination of
capital structure including debt and equity can also minimize the cost of capital and
maximize the firm’s value. Therefore, “capital structure decision is an important
corporate policy that deals with the firm’s activities, with debts and equity” (Brounen
et al., 2006).
In fact, the capital structure will change depending on the characteristics of the
situation of each enterprise, the area in which it operates, as well as the effects of
macroeconomic fluctuations of the economy, culture, and religion. Rather than
finding the optimal ratio of debt to equity, finance researchers are often interested in
finding out the factors that influence the use of the financial leverage of the business.
From the relationship between these factors and the capital structure that we can
assess whether the decision to use the loan or the equity of the business is reasonable
or not, then propose solutions to improve the efficiency of using financial leverage,
maximizing asset value for businesses.
In recent years, the theory of modern capital structure has only been studied in
developed countries but has not been paid much attention in developing countries.
Mouamer (2011) also confirmed that “There is little work done on examining capital

structure in emerging countries”. In Vietnam, those studies are almost researched at
the general level for businesses, but not research much for specific industries,
especially pharmaceuticals.

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Vietnam's economy has been growing in recent years, people's incomes have
increased, however, Vietnam is facing an aging population as well as health problems
arising from the environment and the process of industrialization. This leads to an
increased willingness to pay for medical services. Therefore, leading to the inevitable
development of Vietnam's pharmaceutical industry.
According to International Medical Statistics Health, in 2018, Vietnam was one of 17
countries ranked among the highest pharmaceutical growth groups (Pharmerging
markets). According to Business Monitor International report “Vietnam
pharmaceutical sector had revenue of USD 5.9 billion in 2018, an 11,7% increase
from the previous year, which makes Vietnam become the second-largest medicine
market in South East Asia”. It once again confirms that the pharmaceutical sector not
only an essential industry but also an emerging and growing industry in Vietnam in
recent years.
7
5.9

6
5.2
4.7

5
4.2
3.7

4
3.13
3
2

1.99

2.28

2.65

1
0
2010

2011

2012

2013

2014

2015

2016

2017

2018

Figure 1.1: Revenue of Vietnamese pharmaceutical sector (billion USD)
(Source: Business Monitor International Report 2018, Vietnam Business Monitor
Report 2018)
Currently, Vietnam's pharmaceutical industry has to import up to 90% of raw material
(according to KIS Vietnam Securities Corporation, Pharmaceutical Industry Report
(09/01/2019)). In order to avoid being dependent on exchange rates, some domestic

2


drug manufacturers in Vietnam are thinking of making Active Pharma Ingredient
(API) by themselves, but API production infrastructure in Vietnam is not yet well
developed, so it will require huge capital and technology investments. From the need
for capital and technology of the pharmaceutical industry, in recent years, many
domestic and foreign investors have invested in Vietnam's pharmaceutical industry.
The appearance of new investors will affect the capital structure of the business and
its operations, so Vietnamese pharmaceutical enterprises need to make wise decisions
on the capital structure for sustainable development in the current competitive
economic environment.
According to Vo (2017) “Vietnamese enterprises are in the process of financial
liberalization, there are new policies that can affect the bond and equity markets in
Vietnam, which can affect the capital structure of Vietnamese enterprises”. In recent
years, there has been very little researches on the capital structure of Vietnamese
pharmaceutical enterprises, so this research is very necessary.
Therefore, based on the situations mentioned above, I chose the topic “Determinants
of capital structure of listed firms in the pharmaceutical sector in Vietnam” to
examine which factors and their levels affect to the capital structure of pharmaceutical
listed firms in the Vietnam stock market helping financial planners, as well as

enterprises, have a suitable view on opting for the optimal capital structure.
1.2 Research Objectives
This study aims to study the theory of capital structure, evaluate the status of the
capital structure, and identify factors affecting the capital structure of pharmaceutical
firms listed on the stock exchange in Vietnam. Then propose some recommendations
for business managers, investors, and policymakers.
1.3 Research Objects and Scope
Research Objects: Capital structure and factors affect the capital structure of
pharmaceutical listed firms in Vietnam's stock market.

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Research Scope: This research collects data and information of listed pharmaceutical
firms in Vietnam in the period from 2010 to 2019.
1.4 Research Questions
Question 1: Do firm-specific factors affect the capital structure in listed
pharmaceutical firms in Vietnam?
Question 2: Is there significant difference in the impact weights among factors that
influent the capital structure of Vietnam pharmaceutical listed firms?
Question 3: Is there any difference in the factors affecting the capital structure of
companies listed on the Hanoi Stock Exchange and ones listed on the Ho Chi Minh
City Stock Exchange?
Motivations lead to research question 3: In Vietnam, listing conditions are different
between HNX and HOSE. Specifically, a company listed on HOSE must have a
charter capital of VND 120 billion or more, while this capital on HNX is only from
VND 30 billion. HOSE requires listed companies to have at least 2 consecutive years
of profitability, while HNX does not require that. HOSE requires listed companies to
publish debts to members of the board of directors, the board of managers, major
shareholders, and related persons, meanwhile, HNX does not require.

Therefore, whether there is any difference in the capital structure between companies
listed on the two stock exchanges HNX and HOSE or not, in order to give hints to
stakeholders. Managers should choose which stock exchange to list on, and "should
or should not" transfer between two stock exchanges. Whether the stock exchange
that the company listed in should be considered by investors before making
investment decisions or not? Should policymakers merge the two stock exchanges or
not, and which listing conditions should be provided to suit the development of
companies.

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1.5 Research Structure
In addition to the introduction, conclusion, table of contents, references, appendices,
the content of this study consists of 5 chapters:
Chapter 1: Introduction
Chapter 2: Theoretical framework
Chapter 3: Methodology
Chapter 4: Data analysis and Findings
Chapter 5: Research implications and Recommendations

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CHAPTER 2. THEORETICAL FRAMEWORK
2.1 Definition relating to capital structure
2.1.1 Capital structure
The definition of capital structure is presented not only in famous books on economics
and finance but also in scientific papers of authors in the world. “The firm’s mix of
debt and equity financing is called its capital structure” (Brealey, Myers, & Allen,

2010). While Ross, Westerfield and Jordan (2013) claimed that “A firm’s capital
structure (or financial structure) is the specific mixture of long-term debt and equity
the firm uses to finance its operations”. From these two definitions, it can be said that
capital strucutre is a financial term to describe the source and method to develop
capital in enterprises which usually emphasizes the relationship between the
proportion of debt and equity.
In addition, Kaur and Narang (2010) found that “Capital structure is defined as the
ability of a firm in financing by using the combination of equity and debt to optimize
the value of the firm. It has been a puzzle for the managers to choose the right
combination of equity and debt to attract investors and creditors. A right capital
structure (equity-debt mix) can reduce the cost of capital and firms aim to reduce the
cost of capital to create the shareholder value”. Therefore, a suitable capital structure
has to ensure the harmony between the equity and debt, low cost and acceptable risk
which is suitable for the condition of the firms. It is really important to every company
due to the fact that it is related to the cost of capital, the benefit of the enterprises
which affect the business capacity of the companies in the competitive environment.
2.1.2 Components in capital structure of enterprises
The basic components in the capital structure include two main parts like debt and
equity.

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Liabilities
Brigham and Houston (2008) said that liabilities mean that the money which the
company owes to each other. According to Ross et al. (2013) “Liabilities are divided
based on time of payment including current liabilities and long-term debt”.
Current liabilities shows the debt which the companies have the responsibility to pay
within one year including short-term bank loan, account payable to suppliers or the
government and employees, short-term bond. For short-term liabilities, the process is

usually easy and simple to implement. However, time to pay is short so the companies
may be difficult to pay the debt if they do not use them effectively.
Long-term debt illustrates the debt which the firms are responsible to pay principle
and cost of capital after a certain period including medium and long-term loans from
external credit institution such as banks, financial leasing companies, the issuance of
bonds or other funds. Long-term debt usually has a higher cost of capital than the
short-term one, however, the firms are under short-term payment pressure.
Equity
“The shareholders are equity investors, who contribute equity financing” (Brealey,
Myers, & Allen, 2010). Besides, Hall and Lieberman (2012); Ross et al. (2013)
claimed that “Equity is the difference between total assets and total liabilities”. With
different types of firms, equity is developed differently and includes three main types:
Chartered capital is the amount of money contributed by the founders when they
open the companies. This is the capital written in the companies’ rules. Especially,
for joint-stock companies, the main capital is the contribution of the shareholders by
buying the stock of the firms. Each shareholder is an owner of the company and is
liable only on the value of shares held by them. This is not a debt so joint-stock
companies have full rights to use their production and business activities without any
restraints about payment. This feature shows that the degree of autonomy in the

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production and business of joint stock companies depends heavily on this source of
capital. The larger the equity contributes, the higher the financial autonomy is.
The capital from retained earnings is the income of the companies which is accepted
by the shareholders to reinvest instead of receiving the dividend. This is an active and
convenient capital for the companies. However, companies must commit to paying a
higher interest rate than the current dividend.
The capital from issuing stock: The enterprises can increase their equity by issuing

new stock. This is really an important capital mobilization in the long-term financing
strategies of enterprises. The joint-stock company can issue additional shares through
the stock market.
Other equity includes funds and specialized funds formed primarily from the
distribution of profits, including investment funds, financial reserve funds, capital
construction investment funds, exchange rate difference and so on.
2.2 The theories about capital structure
2.2.1 Capital structure theory of Modigliani and Miller
The theory of Modigliani and Miller (1958) is the first theory that research the capital
structure of enterprises and this is also the basis for later theories.
According to the Modigliani and Miller, in a perfectly competitive market with no
tax, all the way of combinations of equity and liabilities are the same. According to
Bradley, Jarrell & Kim (1984) “At any financial option, whether using equity or
choosing short-term or long term debt, the value of the business is unchanged”.
In 1963, Modigliani and Miller showed another study with the effect of corporate tax.
Because of benefits from the tax shield, the value of the levered company is higher
than value of the unlevered company.

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2.2.2 Trade-off theory
The trade-off theory explained why companies are often financed partly by debt and
partly by equity. One big reason why enterprises cannot fully finance a loan is that
besides the existence of a debt tax-shield benefit, the use of debt financing also
generates more costs, especially bankruptcy costs including both direct and indirect
costs of bankruptcy caused by debt. The trade-off theory assumes that the target debt
ratio can be different among firms. Companies that have secure tangible assets and
high profitability have higher debt ratios and vice versa.
Thus, this theory shows that the tangible fixed assets and profitability have an impact

on capital structure. Enterprises with large tangible fixed assets will be able to pay
better; firms will use more debt to take advantage of the tax shield. The higher the
profitability is, the fewer bankruptcy costs are, therefore; companies will tend to use
more debt to take advantage of the tax shield.
2.2.3 Pecking-order theory
The pecking order theory indicated that there is a priority in the use of funding sources.
Accordingly, the investment will be financed first by internal capital (mainly retained
earnings), followed by new debt financing and finally new equity issuance. The order
of using funding sources indicates the negative relationship between profit and debt.
This theory shows that growth rates and profitability have an impact on capital
structure:
A company with a high growth opportunity means that there is a high demand to
borrow when the retained earnings are not enough to meet the firm's demand, it will
give priority to choosing a loan to increase the debt ratio. The growth opportunity is
positively correlated with capital structure.
High profitability will allow enterprises to have more conditions to retain more
profit, so they will use less debt, therefore; profitability is negatively associated with
capital structure.

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2.2.4 Agency theory
The agency theory was completed by Jensen and Meckling (1976) and it explains the
relationship between principal and agent.
This theory shows the growth rate is negatively correlated with debt because
shareholders often do not want to share benefits with creditors when the firm grows well.
Agency theory points out that due to the conflict between shareholders and managers,
larger companies choose to borrow more because the terms in the loan agreement will
control the behavior of the manager. Hence, firm size has a positive impact on the

debt.
Besides, agency theory also confirmed the conflict of interest between ownership and
manager in the corporation. According to Nazir, Aslam & Nawaz (2012) “The
Corporate Governance and capital structure of the firms are linked together through
the agency cost especially in case of developing economies”. The relationship
between corporate governance and capital structure has been identified in many
studies, for example, Berger et al. (1997); Friend and Lang (1988); Wen et al. (2002).
One of the most important issues of corporate governance is pluralist executives
(CEO duality). When the CEO is the chairman of the board, he will increase the
power of the CEO to help make decisions quickly and ensure decisions are
implemented. But the fact that the CEO is also the chairman of the board of directors
is also losing the important function of the chairman of the board of directors. Hence,
the CEO will act according to his goals, not the shareholders'. Besides, according to
agency theory, because of agency conflicts, managers of the firms may not always
accept leverage choices that are maximizing value for shareholders. Instead,
managers may tend to select the leverage degree that maximizes their own benefits.
Therefore, we can conclude that there is a relationship between pluralist executives
and capital structure through explanation about agency conflict of agency theory.

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2.3 The determinants affecting capital structure
Based on theories of capital structure as well as a variety of research results from
previous researchers, there are many factors having impacts on the capital structure
of the enterprises.
These determinants are as follow:
Profitability
Titman and Wessels (1988) suggested that “Profitability is an essential determinant
of capital structure because it shows how much earning the company retains to keep

it going”. The pecking order theory showed that enterprises with high profit prefer
internal funding to external debt. In more detail, internal funding from retained
earnings will be used first which is followed by borrowed debt and issued stock. This
shows that there is a negative relationship between profit and capital structure. This
opinion was supported by previous studies include Ahmed Sheikh and Wang (2011);
Saeed et al. (2014); Titman and Wessels (1988); Wald (1999); Booth et al. (2001);
Viviani (2008); De Jong et al. (2008); Serrasqueiro and Roga˜o (2009). Besides, the
studies of Chen (2004); Tong and Green (2005); Huang and Song (2006) also point
to the negative relationship between profitability and capital structure when
researchers conduct research related to capital structure in Chinese companies.
However, trade-off theory shows the positive relationship between profitability and
leverage ratio, it means that “Companies with high profitability should use more debt
because of the tax depreciation and lower expected bankruptcy costs” (Frank and
Goyal, 2003; Fama & French, 2002)
The growth opportunity
According to Mouamer (2011) “There is a relationship between growth opportunity
and capital structure and this relationship was confirmed in current literature”.
Depending on the different theories and researches, the relationship direction is
different.
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Based on the pecking order theory, there is a positive relationship between growth
opportunity and capital structure. The companies with good growth opportunities
mean that they have more demands for borrowing capital, especially when retained
earnings are not enough for operating, they will have the priority to choose borrowed
capital to increase the debt ratio because the cost of flotation in selling stock is more
than the cost of issuing debt.
However, according to Myers (1984) “High growth means higher bankruptcy costs”.
Besides, Deesomsak, Paudyal and Pescetto (2004) found that growth firms have

value come from intangible growth opportunities, so when firms need the money their
revenue may not have. Based on the trade-off theory, there is a negative relationship
between growth opportunities and capital structure due to the firms with growth
opportunities like holding intangible assets which can not be collaterals, so they tend
to use less debt. Furthermore, based on agency theory, the high growth rate also
means positive business results so the shareholders do not want to share this
advantage with the creditors, and then they will use less debt. Researches from Zou
and Xiao (2006); Eriotis et al. (2007) also confirmed this relationship.
Firm size
Large-sized enterprises usually have advantages in the recent competitive economic
market. The size of firms is considered to be the first sign for external investors to
have information about the companies. According to Titman and Wessels (1988)
“Large companies can access the market more easily and can borrow money with
better terms”. Therefore, most firms have the tendency to expand the size to take this
advantage. When studying companies of G-7 countries, Rajan and Zingales (1995)
found that large companies are more diversified so they were less likely to go
bankrupt, so large firms should use more debt. Ahmed Sheikh and Wang (2011)
claimed that to have external capital, small-sized firms have to bear a higher cost than
the large-sized ones. Based on the trade-off theory, large-sized companies can borrow
more capital than small-sized enterprises to take tax benefits of debt. Besides,

12


accroding to agency theory, due to the conflict between shareholders and managers,
larger companies choose to borrow more because the terms in the loan agreement will
control the behavior of the manager. It means that firm size has a positive relationship
with leverage. This opinion was confirmed by some previous researches including
Deesomsak et al. (2004); Eriotis et al. (2007); Serrasqueiro & Roga˜o (2009).
However, according to pecking-order theory, larger firms are better known will have

fewer problems related to information asymmetric and have enough internal capital,
so they will tend to use equity to finance firm activities. It shows that firm size has a
negative impact on leverage. Research from Chen (2004) pointed out the negative
relationship between firm size and the long-term debt ratio.
Tangible assets
As stated by Myers (1984), there is a link between tangible assets and financial
leverage due to the fact that companies with lots of collaterals will have a low rate in
the matter of asymmetric information. Frank and Goyal (2009) claimed that “ It is
evident that if the company has mortgage loans, the borrower's risk associated with
the cost of the loan will also decrease”. This argument is also supported by empirical
studies such as Huang and Song (2006); Titman and Wessels (1988). Based on tradeoff theory, tangible assets have a positive relationship with capital structure because
enterprises which have the larger number of tangible assets usually receive liabilities
with the quite more convenient condition than the ones with the smaller number of
tangible assets. Tangible assets can have an influence on the decision of a company
to borrow money because tangible assets are more valuable than intangible assets in
case the firm is bankrupt. Besides, the level of risk will decrease when the company
provides tangible assets to mortgage and creditors can require to sell these assets in
case the company can not pay. Therefore, tangible assets are good-mortgaged assets
for the debt.
In contrast, other researchers illustrated that there is a negative relationship between
tangible assets and debt ratio including Ahmed Sheikh and Wang (2011); Booth et al.

13


(2001). Titman and Wessels (1988) showed that firms with fewer collateral assets can
use more debt to prevent managers from the optimal levels of perquisites. It is suitable
for the implication of agency theory. In Vietnam, a study from Tran and
Ramachandran (2006) also found out this negative relationship.
Liquidity

“Liquidity ratio may have mixed effect to leverage of the firm” (Vo, 2017). Based on
the trade-off theory, enterprises with high liquidity usually maintain a higher debt
ratio because they can ensure obligations of a contract on time, which shows a
positive relationship between liquidity and capital structure.
However, as implied in the pecking order theory, enterprises usually have a priority
to use internal funding from retained earnings rather than external funding. Therefore,
businesses that are able to generate retained earnings high enough to finance the
investment will not use debt anymore. This refers to a negative relationship between
liquidity and capital structure. Empirical studies supporting this view include
Deesomsak et al. 2004; Afza et al. (2011); Saeed et al. (2014).
Business risk
According to the theory of trade-off theory, businesses with high-income volatility
often face greater risk in paying their debts. This implies that businesses with highincome volatility will borrow less and prefer internal funds. The enterprises with high
risk usually have to deal with the worry about bankruptcy. Thus, a negative
relationship between business risk and capital structure. Empirical research
supporting this view is Booth et al. (2001). In contrast, according to pecking-order
theory, when a company has high risk, the potential investors will require higher
returns and it makes the company face expensive costs when the company issues
equity, therefore, risky firms will use more debt to finance themselves. There are
several studies that have found a positive relationship between business risk and
capital structure such as Saeed et al. (2014); Tran and Ramachandran (2006).

14


Non-debt tax shield
The non-debt tax shield is also an analysis when discussing factors affecting the
capital structure. While Bradley, Jarrell & Kim (1984) argues that “there is a positive
relationship between the non-debt tax shield and financial leverage”, other authors
have the opposite view. The trade-off theory shows a negative relationship between

non-debt tax shield and capital structure. When this tax shield is high, net cash flow
from operating profit to shareholders is large. As a result, enterprises with high
depreciation in the estimated cash flow will use less debt in the capital structure.
Research results from Wald (1999); De Miguel & Pindado (2001); Deesomsak et al.
(2004) also point out the negative relationship between non-debt tax shield and capital
structure. In addition, Titman and Wessels (1988) found that “there is no relationship
between capital structure and non-debt tax shield”.
Firm age
Oliner and Rudebusch (1992) gave the definition that “firm age as the number of
years from the firm’s initial public offering of common stock until now (the number
of years that company was listed in the stock market)”. According to pecking order
theory when years of listing are high, it means that the company has more time to get
funds and market experiences. Therefore, they are likely to use less debt and a firm
age has a negative impact on capital structure. Research results from Hall et al.
(2000); Kieschnick & Moussawi (2018) supported the pecking order theory.
In contrast, trade-off theory shows a positive relationship between firm age and
capital structure, because younger firms can not have enough with the higher cost of
debt and higher bankruptcy cost, so earnings of younger firms may not afford these
debts. It makes younger firms unable to utilize the tax benefit of debt. Chen and
Strange (2005) also supported this opinion.

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Pluralist executives
According to Boyd (1995) “CEO duality exists when a firm’s chief executive also
serves as Chairman of the board of directors”. The goal of the shareholders is to
maximize the value of their business, that is, maximize the market value of their
equity. Managers are aiming for short-term goals with the ability to increase profits,
can bring quick results, help them increase their salaries, bonuses, and reputation.

Based on the agency theory, when there is independence between owners and
managers, if the owners lose their control, the managers will operate the companies
to make them profitable which may harm the benefit of the owners. Therefore, when
the CEO is also the chairman, managers tend to choose low-risk investment projects
or a project with a low debt ratio to reduce the probability of bankruptcy and avoid
loss of control. Thus there is a relationship between pluralist executives and capital
structure.
According to Fosberg (2004), there is a negative relationship between pluralist
executives and leverage ratio. However, according to Abor (2007), the author found
out that the positive relationship between pluralist executives and the use of debt.
While Jaradat (2015) points out that there is no significant impact of CEO duality on
capital structure.
2.4 Literature review
The issue of structuring capital has been particularly interesting to the managers as
well as the researchers in the world. Since Modigliani and Miller’s research of capital
structure was awarded the Economy Nobel Prize, there have been more and more
empirical researches carried out in order to examine its practice of theory and show
their opinion to diversify the effects of the firm’s capital structure.
2.4.1 International researches
In the research of Chen & Strange (2005), the authors explored the determinants of
the capital structure of firms listed on the Shanghai Stock Exchange and Shenzhen
Stock Exchange in 2003. The author found out that profitability has an negative
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