The Impact of Capital Structure on Firm Performance of Vietnamese Non-financial Listed Companies Based on Agency Cost Theory

2019 ◽  
Vol 35 (2) ◽  
Author(s):  
Thao Tran Thi Phuong ◽  
Anh Thuy Nguyen
Keyword(s):  
Firm Performance ◽  
Capital Structure ◽  
Corporate Finance ◽  
Financial Economics ◽  
Cost Of Capital ◽  
Agency Cost ◽  
American Economic Review ◽  
Banking And Finance ◽  
The Cost ◽  
The Impact

This paper investigates the impact of capital structure on firm performance using a sample of 3,122 observations of 446 non-financial listed companies on the Vietnam stock market during 2011-2017. Using firm performance measures, namely ROE and Tobin Q, we examined if higher leveraged firms are more efficient or less in their performance. We employed the fixed effect model to prove that there is an inverse U-shaped relationship between leverage and ROE, and then we can find a preferred capital structure for Vietnam non-financial firms. To deal with endogeneity problem of the leverage variable, we employ two stage least squares (2SLS) regression with instrument variable estimators, which helps us strengthen the above results. Keywords Capital structure, firm performance, leverage, efficiency, instrument variable estimator, agency cost theory References [1] J. Abor, The effect of capital structure on profitability: an empirical analysis of listed firms in Ghana, Journal of Risk Finance. 6 (2005) 438-447.[2] M. Baker, J. Wurgler, The Determinants of Capital Structure: Capital Market-Oriented versus Bank-Oriented Institutions, Journal of Financial and Quantitative Analysis. 43 (2002) 59-92.[3] A.N. Berger, E. Bonaccorsi di Patti, Capital structure and firm performance: A new approach to testing agency theory and an application to the banking industry, Journal of Banking and Finance. 30 (2006) 1065-1102.[4] J. Berk, P. DeMarzo, J. Harford, Fundamentals of Corporate Finance, second edition, Prentice Hall, 2012.[5] A.A. Berle, G.C. Means, The Modern Corporation and Private Property, New York: The Macmillan Company, 1932.[6] V. Dawar, Agency theory, capital structure and firm performance: Some Indian evidence. Managerial Finance. 40(12) (2014) Số trang.[7] T.H.V. Duong, A study of the factors affecting the capital structure of the companies listed on Vietnam stock market, Doctoral thesis - National Economics University, 2014.[8] S.J. Grossman, O.D. Hart, Corporate financial structure and managerial incentives, In M. J.J., The economics of information and uncertainy, University of Chicago Press, 1982.[9] M. Jensen, Agency cost of free cash flow, corporate finance and takeovers, American Economic Review Papers and Proceedings. 76 (1986) 323-329.[10] J.C. Jensen, W.H. Meckling, Theory of the firm: managerial behavior, agency costs and ownership structure. Journal of Financial Economics. 3 (1976) 305-360.[11] A. Kraus, R.H. Litzenberger, A State-Preference Model of Optimal Financial Leverage, Journal of Finance. Tập (1973) 911-922.[12] D. Margaritis, M. Psillaki, Capital structure and firm efficiency, Journal of Business Finance and Accounting. 34 (2007) 1447-1469.[13] D. Margaritis, M. Psillaki, Capital structure, equity ownership and firm performance, Journal of Banking and Finance. 34 (2010) 621-632.[14] F. Modigliani, M. Miller, The cost of capital, corporation finance, and the theory of investment, American Economic Review. 48 (1958) 655-669.[15] F. Modigliani, M. Miller, Corporate income taxes and the cost of capital: A correction, American economic Review. Tập (1963) 433-443.[16] S.C. Myer, Determinants of corporate borrowing, Journal of Financial Economics. Tập (1977) 147-175.[17] S.C. Myers, N.S. Majluf, Corporate Financing and Investment Decisions When firms have information that investors do not have, Journal of financial economics. 13 (1984) 187-221.[18] B. Seetanah, K. Seetah, K. Appadu, K. Padachi, Capital structure and firm performance: evidence from an emerging economy, The Business and Management Review. 4 (2014) 185-196.[19] S. Titman, R. Wessels, The determinants of capital structure choice. Journal of Finance. 43(1) (1988) 1-19.[20] L. Weill, Leverage and Corporate Performance: Does Institutional Environment matter? Small Business Economics. 30 (2008) 251-265.[21] J. Williams, Perquisites, risk and capital structure, Journal of Finance. 42 (1987) 29-49.[22] R. Zeitun, M.M. Haq, Debt maturity, financial crisis and corporate performance in GCC countries: a dynamic-GMM approach, Afro-Asian J. Finance and Accounting. 5 (2015) 231-247.

scholarly journals Board of directors, capital structure, investment decisions and firm-performance: An empirical study of Nordic firms

2020 ◽  
Vol 17 (4, Special Issue) ◽  
pp. 377-390
Author(s):  
Shab Hundal ◽  
Anne Eskola
Keyword(s):  
Principal Component Analysis ◽  
Corporate Governance ◽  
Firm Performance ◽  
Capital Structure ◽  
Corporate Finance ◽  
Board Of Directors ◽  
Boards Of Directors ◽  
Investment Decisions ◽  
Principal Component ◽  
The Impact

Firms’ financing, boards of directors’ characteristics, investments, and firm-performance (financial and non-financial) occupy a pivotal place in corporate finance and corporate governance literature. The current study explores if causalities between the abovementioned four distinct albeit inter-related phenomena follow any pattern. The data comprising of 1240 firm-years belonging to Finland, Norway, Sweden, and Denmark for the period of 2003 to 2018 have been analyzed by applying multivariate linear regression and principal component analysis. The findings show that the impact of boards of directors’ characteristics is stronger on capital structure, however, weaker on investments and financial performance. The major contribution of the article is creating a set orderly and sequential causalities between financing, boards of directors’ characteristics, investments, and firm-performance.

scholarly journals Capital Structure and Performance of Deposit Money Banks in Nigeria

2021 ◽  
Vol 17 (4) ◽  
pp. 130
Author(s):  
Osareme Erhomosele
Keyword(s):  
Regression Analysis ◽  
Theoretical Model ◽  
Firm Performance ◽  
Capital Structure ◽  
Agency Cost ◽  
Return On Equity ◽  
Legal Control ◽  
And Performance ◽  
The Impact ◽  
The Relationship

Investigations into the relationship between capital structure and firm performance over the years have consistently produced mixed results in the light of prevailing theories relevant to the concept of capital structure. The study examined the nature of the relationship between the capital structure of Deposit Money Banks (DMBs) in Nigeria and the trend of performance recorded in the industry. Leverage was adopted as a surrogate for capital structure, while firm performance was proxied by profit efficiency and return on equity. A regression analysis test was applied to a balanced panel data, pooled from a sample of 11 DMBs to determine the impact of capital structure on performance. The study found evidence that supports a non-monotonic relationship between capital structure and performance of DMBs, as predicted by the agency cost theoretical model. A major recommendation elicited from the findings of the study advocates for legal control on the proportion of debt DMBs can include in their capital structure if they are to operate as efficiently as expected.

Corporate Finance and the Legacy of Miller and Modigliani

1988 ◽  
Vol 2 (4) ◽  
pp. 135-147 ◽  
Author(s):  
Sudipto Bhattacharya
Keyword(s):  
Capital Structure ◽  
Corporate Finance ◽  
Financial Economics ◽  
Dividend Policy ◽  
Research Progress ◽  
Debt Contracts ◽  
Policy Choices ◽  
Almost All ◽  
The Impact

[This is a comment on “The Modigliani-Miller Propositions after Thirty Years” by Merton H. Miller in this same issue.] The influence of the Modigliani-Miller (1958) propositions on capital structure and the Miller-Modigliani (1961) theses on dividend policy permeates almost all aspects of financial economics to this day. In this commentary, I shall focus on the influence of Miller's and Modigliani's contributions on a couple of key areas in corporation finance, and review research progress by later contributors. Broadly speaking, these two themes can be summarized as: (A) integrated tax- and information-related considerations in capital structure and dividend policy choices; and (B) the impact of inflation and nominally denominated debt contracts on the valuation of corporate equity.

scholarly journals Levered-Beta and Cost of Capital Sensitivities: An Experimental Investigation in Capital Structure

2021 ◽  
Vol 14 (4) ◽  
pp. 152
Author(s):  
Kudret Topyan
Keyword(s):  
Capital Structure ◽  
Cost Of Capital ◽  
Weighted Average ◽  
Debt Ratio ◽  
Bond Ratings ◽  
Optimal Capital Structure ◽  
Rating Method ◽  
Optimal Capital ◽  
The Cost ◽  
The Impact

Using US firms with over $5b market cap, this paper tests the impact of levered beta on the firm’s market value and optimal capital structure. Using the synthetic rating method in a recursive model, the paper shows the current and optimal weighted average cost of capital sensitivities as the firm’s market risk measured by beta changes. The paper shows that the change in the value of beta due to alternative leverage levels or other risk factors will alter the cost of capital insignificantly and has no impact on the optimal capital structure due to those firms’ extra-strong bond ratings. As a side-benefit of the synthetic rating method, one may also observe the market-level variables’ impacts on the cost of capital computations and the optimal debt ratio. The paper uses Disney Corporation to show how the synthetic rating methodology helps to disclose the sensitivities of hypothetical alternative leverages.

scholarly journals Multinationality, Capital Structure, and Cost of Capital of Non-Financial Firm Listed on Indonesia Stock Exchange

2020 ◽  
Vol 3 (2) ◽  
pp. 146-159
Author(s):  
Rezza Vitriya
Keyword(s):  
Capital Structure ◽  
Multinational Firms ◽  
Cost Of Capital ◽  
Stock Exchange ◽  
Linear Regression Analysis ◽  
Cost Of Debt ◽  
Multinational Firm ◽  
Domestic Firms ◽  
The Cost ◽  
The Impact

Multinational firms are firm that do business internationally, the higher degree of multinationality of a firm, they have more ability to get greater funding because there are more chances to get funding from foreign country. Because of that condition, multinational firms have different cost of capital with domestic firms. The main purpose of this study is to understand the impact of degree of multinationality, capital structure, firm size, profitability and growth opportunity to cost of capital. Panel data is used on this research and multiple linear regression analysis is used as analytical model. The result suggest that Indonesia multinational firms have lower cost of capital, cost of equity, and cost of debt than Indonesia domestic firms. The study found that capital structure is negatively related to cost of capital, this means that Indonesia multinational firm use more debt than Indonesia domestic firms, and so lower the cost of debt after tax and hence the cost of capital.

scholarly journals The relationship between government ownership, firm performances and leverage: An analysis from Malaysian listed firms

2013 ◽  
Vol 10 (4) ◽  
pp. 47-60
Author(s):  
Nazrul Hisyam Ab Razak ◽  
Normaizatul Akma Saidi ◽  
Fauziah Mahat
Keyword(s):  
Firm Performance ◽  
Capital Structure ◽  
Agency Cost ◽  
Government Support ◽  
Inverse Association ◽  
Governance Mechanism ◽  
Government Ownership ◽  
Corporate Managers ◽  
Listed Firms ◽  
The Impact

The purpose of this paper is to examining the impact of government ownership on firm performance and leverage in Malaysia. In this paper, we examine governance mechanism and firm performance and leverage of 200 Malaysian firms over 5 year periods from 2005 - 2009. We use fixed effect panel regression model in predicting capital structure of Malaysian firms. We use two indicators as independent variables which are debt ratio and debt over equity ratios. This paper is to determine whether after controlling firm specific characteristics such as corporate governance, agency cost, growth, risk and profitability, government involvement will influence decision on debt policy of the firm. This study may enable the firms to make better decision on their external financing. The inverse association of leverage and profitability implies that the firms are able to get the required capital easily due to the higher level of profits. The existence of government support and backup also will ensure the level in the firms is at the controllable. Therefore, the findings will be able to add new knowledge to the corporate managers and policy makers especially on decision-making on capital structure.

M&M Pizza

2017 ◽  
pp. 1-3
Author(s):  
Michael J. Schill
Keyword(s):  
Capital Structure ◽  
Corporate Finance ◽  
Cost Of Capital ◽  
Cost Of Debt ◽  
Financial Policy ◽  
First Year ◽  
Cost Of Equity ◽  
The Cost

This case is used in Darden's core first year finance course. The exercise introduces in a fun way the fundamentals of financial policy that are the foundation of corporate finance. It takes the textbook treatment of the Modigliani and Miller (M&M) principles and casts it in a case format. The case is accompanied by a teaching note for instructors and spreadsheets for both instructors and students. Moe Miller, the new managing director of M&M Pizza, is considering changing the company's capital structure to reduce the cost of capital. With the cost of debt at 4% and the cost of equity at 8%, adding a cheaper cost of funds through debt appears to be obvious. The case provides a simple framework for understanding the powerful intuition behind the foundational capital structure irrelevance propositions of Modigliani and Miller (1958). The case is written as an introductory experience in financial policy. Students are required to generate simple estimates of the cost of capital and estimate the value of debt and equity claims under various recapitalization scenarios. As the business is very simple and operates in a quasi-perfect market, the calculations require only that students are comfortable with the estimation of firm cost of capital.

Confirming Anomalies

2021 ◽  
pp. 2150024
Author(s):  
Peter Chinloy ◽  
Matthew Imes
Keyword(s):  
Capital Structure ◽  
Stock Returns ◽  
Cost Of Capital ◽  
Simultaneous Equations ◽  
Second Stage ◽  
Predicted Values ◽  
The Cost ◽  
Over Time ◽  
Identification Strategy

A procedure confirms whether a return-factor correlation is anomalous or results from endogenous simultaneous-equations bias. The identification strategy sorts the cost of capital components for instruments. In the first stage, the initially found factors are regressed on cost instruments. In the second stage, a confirmed anomaly has predicted value significant in returns and exogenous. Taxes, depreciation and capital structure are strong instruments, affecting 1980–2017 quarterly U.S. stock returns. Size, value and profitability decisions are significant in instruments. Returns increase in fitted profits, but not small size. Actual and predicted values have weaker correlation with returns over time.

scholarly journals Influence of Capital Structure on Corporate Performance of Listed Firm in PSX: Role of External Factors

2021 ◽  
Vol 7 (3) ◽  
Author(s):  
Abdul Hameed ◽  
Farheen Zahra Hussain ◽  
Khawar Naheed ◽  
Muhammad Sadiq Shahid
Keyword(s):  
Firm Performance ◽  
Capital Structure ◽  
Debt Financing ◽  
External Factors ◽  
Least Square ◽  
Total Debt ◽  
Integral Role ◽  
Equity Ratio ◽  
The Impact

Purpose: A company’s capital structure is a blend of its equity and debt financing and is considered a significant factor in the valuation of any firm. The decisions related to capital structure formation play an integral role for the firms, therefore; this research tends to explore the factors of capital structure and their impact on firm performance. For this purpose, financial data for different listed companies in PSX has been gathered, and dividends and taxes are used as firm external factors.  Design/Methodology/Approach: To examine the impact, the panel data has been used for the period 2016-2020 and panel least square has been applied. Findings: The findings suggest that among the variables current ratio, dividends, taxation, total debt to total equity ratio, and the firm size are statistically significant to profitability. The study also concludes that dividends and tax have a greater impact on capital structure and firm performance.   Implications/Originality/Value: Managers and owners of the firms must make sure that their profits are used for future investments rather than payment of debts to avoid bankruptcy.  

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