Firm Characteristics and Capital Structure Decision: Evidence from Seafood Processing Enterprises in the South Central Region of Vietnam

Abstract

Purpose: The aim of this study is to investigate the firm characteristics that affect capital structure of seafood processing companies in South Central Coast of Vietnam. In addition, this study also explores the differences in capital structure among companies with different types of ownership in various regions as well as those with debt ratio greater than and less than the optimal debt threshold (57.39 per cent, see Nguyen Thanh Cuong (2014) for details). Design/methodology/approach: The investigation has been performed using panel data procedure for a sample of 90 unlisted seafood processing enterprises in the South Central region (SEASCRs) and 22 listed seafood processing enterprises in the other region of Vietnam (SEALISTs) during 2005–2011. The firm characteristics are analyzed as determinants of capital structure according to different explanatory theories. The hypothesis that is tested in this paper is that the debt ratio at time t depends on the size of the firm at time t, tangible fixed assets of the firm at time t, the growth opportunities of the firm at time t, the profitability of the firm at time t, the business risk of the firm at time t, its liquidity ratio at time t, its interest expense ratio at time t and its income tax ratio at time t. The SEASCRs that maintain a debt ratio above 57.39 per cent using a dummy variable are also distinguished. We also using a dummy variable to evaluate the differences about the capital structure of SEASCRs with regard to firm ownership. In addition, with regard to evaluate the differences about the capital structure of seafood processing enterprises in different regions, we also using a dummy variable.Findings: The findings of this study justify the hypothesis that there is a negative relation between the debt ratio of the firms and their tangible fixed assets, their growth opportunities, their profitability, their liquidity ratio and their business risks. Size and interest expense ratio appears to maintain a positive relation. According to the dummy variable there is a differentiation in the capital structure among the SEASCRs with a debt ratio greater than 57.39 per cent and those with a debt ratio lower than 57.39 per cent. In addition, this study also findings the differences in capital structure among SEASCRs with different types of ownership and the differences about the capital structure of seafood processing enterprises in various regions. Our findings are consistent with the Trade off theory and Pecking order theory. Originality/value: The findings suggest implications for SEASCRs on flexible usage of financial leverage to increasing firm value and lowering cost of capital.

Keywords: Capital Structure, Debt Ratio Threshold, SEASCRs, regional characteristics.

JEL code: G32, G34