The Impact of Capital Structure On Firm Performance - Empirical Evidence From Listed Food and Beverage Companies in Vietnam

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International Journal of Economics, Commerce and Management

United Kingdom Vol. VII, Issue 2, February 2019


http://ijecm.co.uk/ ISSN 2348 0386

THE IMPACT OF CAPITAL STRUCTURE ON FIRM


PERFORMANCE – EMPIRICAL EVIDENCE FROM LISTED
FOOD AND BEVERAGE COMPANIES IN VIETNAM

Yen Thi Hai Dang


Department of Finance, Faculty of Accounting and Business Management,
Vietnam National University of Agriculture, Hanoi, Vietnam
haiyendang88@gmail.com

Nhung Thi Hong Bui


Department of Finance, Faculty of Accounting and Business Management,
Vietnam National University of Agriculture, Hanoi, Vietnam

Anh Thi Hoang Dao


Department of Finance, Faculty of Accounting and Business Management,
Vietnam National University of Agriculture, Hanoi, Vietnam

Huong Thi Nguyen


Department of Finance, Faculty of Accounting and Business Management,
Vietnam National University of Agriculture, Hanoi, Vietnam

Abstract
The study investigates relationship between capital structure and firm performance focusing on
the group of Food and Beverage Companies in Vietnam. The dependent variables defined as
ROA (return on asset), ROE (return on equity) and EPS (earning per share), which refer to firm
performance. Whereas, independent variables are DA (debt ratio), STA (short term debt ratio),
and LTA (long term debt ratio), and they stand for capital structure of a firm. By using the
unbalanced panel data of 605-observationfrom 61 listed companies in this industry, some
relevant analyses have been showed. Following that, financial leverage has a strong impact on
firm performance, to be more details, debt ratios can significantly and positively affect ROE,

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EPS but negatively affect ROA. The research uses different approaches such as pooled OLS,
FEM and REM to explore this relationship.

Keywords: Capital structure; firm performance; food and beverage industry; Vietnam

INTRODUCTION
An optimal capital structure is a crucial financing choice of firm managers due to their aims to
maximize the value of the firm. Capital structure is a mixture of a firm’s debt and equity
(Brounen et al. 2006). Using debt or financial leverage is a common tool for most business to
increase profit on equity and asset. According to (Jensen, 1976), a firm can benefit from debt
because of the tax shield and the separation of agency cost. However, it has been argued that
the more debt used, the higher cost of capital and bankruptcy cost the firm bears (Harris, M.,
1991). Another reference of capital structure is a relation of financial funds of a firm for is
operation. Furthermore, structure of capital is one of the key element for the firm’s growth
because stockholders is exact the real and important stakeholders in the firm as they can
possess an enormous influences the firm in making decision process (Pirzada, 2015).
Leverage, which refers to the proportion of a firm capital level, can come from either loans of
banks or bonds (Ghosh, 2017).The two first authors who looked at this field are Modigliani and
Miller, and they initially showed a no-relation between the structure of money funds in a firm with
its profitability based on assumption of some perfect elements occurring (Nimalthasan, 2013).
After that, a number of researches are related to examine how capital structure affects financial
firm performance. As a consequence, the results include negative, positive and non-effects of
financing structure and firm performance. This study is conducted to explore how the mixture of
debt and equity affects the firm performance in listed Food and beverage companies in
Vietnam.

Research objectives
(1) To consider the theories and current empirical studies of capital structure
(2) To analyze the impact of capital structure on corporate performance of listed food and
beverage companies in Vietnam
(3) To make recommendations for firm in finding an optimal capital structure

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LITERATURE REVIEW
Capital structure
In general, capital structure refers to two kinds of capitals containing equity capital and debt
capital. Each of them has both advantages and disadvantage for a company. Equity is
considered as an amount of money invested for the firm by shareholders or owners. Regarding
equity capital, the equity component is contributed capital and retained earnings. While the
contributed capital is the initial investment of owners for the firms, the retained earnings are
profits or growth fund. Turing to debt capital, it is amount of money borrowed by a firm, debt can
be short – term period or long term period (Mr. Philip R. Lane, 2000). A number of scholars
have studied about capital structure with the purpose of seeking an optimal capital structure.
They believe that there is at least a point where debt – equity ratio can bring firm a greatest
value. In other words, it is the level of debt leading to maximize profits and minimize cost of
capital (Nimalthasan, 2013). Following Jensen and Meckling (1976), the authors published that
companies which have less amount of liabilities tend to face with less risks than others. As a
result, the higher debt may lead a less effective performance for a firm. It was explained by the
conflicts causing from shareholders and lenders. They have differences expectations of risks as
well as return rate. In simple words, owners expect a high profitability and face with high risk,
while creditors aim to gain lower profit but lower risk.

Empirical Evidence
A number of studies have taken to investigate the impact of capital structure on firm
performance. Nevertheless, there is no definite answer of the positive or negative relationship
between financial leverage and the corporate value. As found in, Muhfuzah Salim et al. (2012)
published a paper relating to the field of capital structure and firm performance. They collected
237 company observations to build up a set of data with the time series is from 1995 to 2011.
Profitability is measured by ROA (return on asset), ROE (return on equity), while Capital
structure is debt ratio. They stated that debts could affect negatively to financial performances
considered by ROA (return on assets) and ROE (return on Equity).Thus, when firms tend to
borrow more money, they will have to cope with more problems on decreased financial
performances. In contrast, Rami Reitun et al. (2007)studied about how financial leverage have
effects on firm performance by using a data of 167 firms in Jordan, the financial statements
gathered from 1989 to 2003. As a result, a positive relationship between debts and firm
performance was found in this examination and one interest point from the paper is that agency
appearance may influence positively to level of debt. So that if a firm tries to seek funds outside
the firm by debts, it is likely to achieve a better performance, because cost of debt capital is

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cheaper than cost of equity capital. According to (Rajeswararao Chaganti, Fariborz Damanpour,
1991), the data was formed by collected statistics of 40 manufacturing companies within 3
years. The findings show that the stockholdings of outside institutional size have a strong impact
on capital structure. Another evidence showing results of relationship between capital structure
and firm performance is the paper worked by Nimalthasan et al. (2013), the authors used the
data of 25 companies in Sri Lanca with financial statements from 2008 to 2012 to reveal that
debt equity ratio has significant impacts on ROA (return on asset), ROE (return on equity), and
Net Profit (Nimalthasan, 2013). As found in (Soumadi, 2012), it examines how debts have
impacts on financial performance, the research used the multiple regression with OLS
estimation to show that when the firm increases debt, it leads a reduction of firm performance
with employing data of 76 companies from 2001 to 2006.

METHODOLOGY
Sample
The research sampled all food and beverage corporations that have been listed on Vietnam
stock exchanges over a period from 2000 to 2017. Due to a young stock market, the number of
listed companies is limited at 61 companies. The classification of food and beverage industry
used in this study is based on North American Industry Classification System (NAICS). In total,
605 observations were included in the unbalance panel data. The research employed panel
data to gain benefit from a larger number of samples and degree of freedom, through enhance
the estimators’ efficiency.

Variable
There are many indicators to represent the financial performance of a company. As mentioned
by (Al-Matari et al., 2014), firm performance can be evaluated by the accounting criteria such as
ROA, ROE, PM, ROI, EPS, etc. This study assessed the return on equity (ROE), return on
asset (ROA) and earning per share (EPS) as dependent variables, which inline with (Vătavu,
2015) and (Zeitun and Tian, 2007). Measures for capital structure were total debt to total asset
(debt ratio - DA), short-term debt to total asset (STA) and long-term debt to total asset (LTA),
which based on the research of (Abor, 2005; Gill and Biger, 2011; and Zeitun and Tian,
2007).This study used two control variables, including liquidity and cash flow ratio.Liquidity was
considered as an indicator for the company performance because the company is supposed to
have better operation, prompt payment, and take the advantage of investment opportunities
(Cho, 1998; Phuong et al., 2017). In addition, some authors believed that cash flow could affect
the efficiency of business. With high cash flow, the company couldimplement more projects

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without using external capital at high cost (Chang et al., 2007). In contrast, (Chung et al., 2005;
Jensen 1976) argued that the firm easily has mistaken decision in new investment and
increases agency problem with high cash flow.

Data analysis
There are different ways to explore the relationship between capital structure and corporate
performance in a panel data. The pool OLS, fixed effect (FE) and random effect (RE) estimation
are regular methods applied in this case.
The liner model is: yit = α + xi,t*β + µit where yit is the dependent variable of company i at
time t; xi,t is the explanatory variables, β is the parameter associated with xi,t; µit is disturbance term.
The pooled OLS is unbiased and consistent if the error term is independent with the
explanatory variables xi,t and unobserved heterogeneity is absent. However, if the company
specific effects exist, the regression with fixed effect (FE) and random effect (RE) are better.

Model Specification
To test the impact of capital structure on firm performance, this study used the model as follow:
Firm performance = α + β1 * Capital Structure + β2 *Liquidity + β3 * Cash flow + µit
The specific models are:
 Performance 1: (1) ROE = α + β1 *DA + β2 *LIQC + β3 * CFA + µit
(2) ROE = α + β1 *STA + β2*LTA + β3 *LIQC + β4 * CFA + µit
 Performance 2: (1) ROA = α + β1 *DA + β2 *LIQC + β3 * CFA + µit
(2) ROA = α + β1 *STA + β2 *LTA + β3 *LIQC + β4 * CFA + µit
 Performance 3: (1) EPS = α + β1 *DA + β2 *LIQC + β3 * CFA + µit
(2) EPS = α + β1 *STA + β2 *LTA + β3 *LIQC + β4 * CFA + µit

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ANALYSIS AND FINDINGS


Data descriptive statistics
Table 2 presents the descriptive statistics of dependent and independent variables. In general,
total debt ratio (DA) accounts for 45.6%, followed by the short-term debt ratio (STA) with 39.9%,
meaning companies in food and beverage industry use high level of debt. However, the financial
leverage is lower in compare with the average of all industries in Vietnam Stock Exchange,
which account for 51.92% and 41.09%, respectively (Phuong et al., 2017). The ratio of long-
term debt (DTA) is on average of 8.7%, which shows that the capital structure of Viet Nam food
and beverage firms is mainly based on short-term debt.
The organization performance indicators are indicated in ROA, ROE with the average of
8.6% and 14.5% return on asset and equity, respectively. These ratios are also higher than that
of all industries in Vietnam, which is 6.3% and 10.3%, respectively (Phuong et al.,2017). It
supports that the food and beverage industry in Vietnam is expected to be one of the most
potential and profitable industries in compare with others. The EPS is around 4300 VND but
widely disperses.

Correlation matrix

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Table 3 shows the correlated relationship between all the variables. It can be seen that there is
a significant and negative relationship between most of capital structure and firm performance
indicators, include DA, STA and ROA, ROE. LTA and EPS havea significant correlation but no
significant relationship with other variables. Variable DA and STA have high correlation (around
0.91), however in the regression, these variables are separately performed to avoid
multicollinearity issue. Moreover, the correlation of control variables with dependent variables
are high, and the correlation between other explanatory variables are lower than 0.4, suggested
that these variables are suitable in the model.

Pool OLS results

Table 4 presents the regression results of capital structure and firm performance variables. As
shown in the table, capital structure positively affects company return on equity (ROE). In
details, the coefficients of DA, STA, and LTA have positive and significant at 5% and 1% with β
= 0.097, 0.084, and 0.1879, respectively. In other words, an increase of 1% in capital structure
will lead to an increase of approximately 9.7%, 8.4% and 18.9% in ROE.

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Table 4 also displays that capital structure influence negatively return on asset (ROA) and
significant at confident level of 99% and 95%. It can be concluded that a 1% increase in DA,
STA, LTA will cause around 6.4% decrease in ROA.
Additionally, DA and STA variables positively and significantly affect EPS of the
company, which presented outcome β = 3579.76; sig = 0.07 and β = 4462.14; sig = 0.31,
respectively.
The two control variables LIQC and CFA also have positive and significant impacts on
the firm performance at all indicators.
Last but not least, F test of all regressions are significant at 1%; and adjusted R 2are
around 0.31, 0.63 and 0.075 at ROE, ROA and EPS regression, suggesting the models’ fitness
and explanation of 31%, 63% and 7.5% the change in firm performance in term of ROE, ROA
and EPS respectively.

Table 5 illustrates the test for multicollinearity with all the VIF coefficients are lower than 2 and
tolerance coefficients are larger than 0.5.

Fixed effect and Random effect results


The F-test of OLS regression reveals the fitness of model, however pooled OLS is hardly to
control for unobserved firm specific affects, therefore this research adopts the FE and RE
regression beside OLS to control for the influence of unobserved individual. The F-test u_i=0 in
FE and the B &Pagan test in RE help to determine each of them is better than OLS or not. The
Hausman test is conducted to choose between fixed effect and random affect.
According to table 6, the Hausman test in all regressions have P-value >5%, meaning
the results are not statistically significant (H0 difference in coefficients not systematic). In this
case, the random effects regression is more relevant. Furthermore, all the B& Pagan tests are
significant at 1%, showing that RE is better than pooled OLS. Therefore, the random effect
regression was applied to explore the impact of capital structure on firm performance.

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International Journal of Economics, Commerce and Management
United Kingdom Vol. VII, Issue 2, February 2019

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International Journal of Economics, Commerce and Management
United Kingdom Vol. VII, Issue 2, February 2019

RE regression results illustrate positive and significant affects of DA, STA, LTA on ROE, with
coefficients approximately equal 0.099, 0.086, and 0.185. Besides, capital structure has
negative and significant impact on ROA. A 1% increase in DA, STA, LTA will lead to 7.11%,
7.3%, 6.08% decrease in ROA. Both DA and STA can influence positively EPS with β =
3761.24, sig =0.1 and β = 4894.38, sig =0.05.
The results from table 5 and table 6 also reveal that there are no differences in the
positive or negative sign of the coefficients between pool OLS and RE model but there are
slightly different in the amount. While the RE can control for unobserved individual influence, the
Wooldridge test was carried out to check autocorrelation. Table 6 implies that there is no
autocorrelation in the regression of ROE, but there is appearance of autocorrelation in
regression of ROA and EPS. However, this study used the Wooldridge test as additional
reference only because it is commonly believed that autocorrelation problem can be omit in
short panel data (Phuong et al., 2017).

CONCLUSION AND DISCUSSION


The study has presented the significant relationship between capital structure and corporate
performance of food and beverage companies in Vietnam Stock Exchange. It is proposed that
debt ratios can positively affect ROE, EPS but negatively affect ROA. Along with the average of
all industries in Vietnam, listed companies in Food and Beverage industry in Vietnam has used
a high level of debt, especially short-term debt. The results suggested that firms with high level
of total debt; short-term debt and long-term debt are likely to experience better firm performance
measured by ROE, but poorer performance measured by ROA. In addition, corporation with
high total debt ratio and short-term debt ratio are likely to gain more EPS. When a firm finances
more 1% of total debt, its return on equity increases 9.7% while return on asset decreases
6.38%. If the firm employs 1% higher in short term debt structure, ROE will raise 8.4% while
ROA will be 6.37% lower. If the firm elevates 1% of long-term debt, ROE will go up 18.79% but
ROA will go down 6.43%.
To control for unobserved individual effects, the research adopted fixed effect and
random effect estimator. Result illustrated that random effect model is more suitable than the
pool OLS and fixed effect.
Therefore, some recommendations are proposed for these companies. Firstly, each firm
should consider one optimal structure. Take into consideration that with more debt, the firm can
increase return on equity but reduce return on asset, which implies that debt has been used
ineffectively. The best capital structure can fulfill the essential of lowest cost of capital a long

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with decrease the insolvency cost. Secondly, the firm should take advantages of tax shield by
choosing the optimal capital structure, which balance between the firm’s debt and equity. For
further study, it is necessary to enlarge sample data to get better understanding of optimal
capital structure of the food and beverage industry. Therefore, beside Vietnam Stock Exchange,
companies traded on OTC market should be taken into account in the research. Moreover,
future research should consider firm performance measured by market indicators besides
accounting ones.

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