The factors affecting capital structure for each group of enterprises in each debt ratio threshold: Evidence from Vietnam's seafood processing enterprises

Abstract

Inspired by findings of the previous study by us (Cuong and Canh, 2012), this paper assess the factors affecting capital structure of Vietnam's seafood processing enterprises (SEAs) in each debt ratio threshold. Dependent variable is the debt ratio expressed as total liabilities divided by total assets. The investigation has been performed using panel data procedure for a sample of 92 SEAs during 2005-2010. Total observations were 552, including 301 and 251 for models applied to firms that maintain a debt ratio above 59.27% and less than 59.27% respectively. Two econometric panel data techniques, fixed effects and random effects are employed. Hausman's specification test is performed in order to test appropriate model for the study. The results shows that fixed effects model should be appropriate for this study as compared to random effects model. Accordingly, capital structures present significant differences between the two groups, firms that maintain a debt ratio above 59.27% (OSEAs) and debt ratio less 59.27% (LSEAs). For both types of enterprises, size by assets has positive relationship with financial leverage, and tangible assets have negative relationship with financial leverage. They are significant determinants of enterprises' capital structure. For LSEAs, profitability and liquidity are important determinants of capital structure. Meanwhile, interest expense is significant determinants for OSEAs. In relation to interaction effects, tangible assets, and interest expense are significant in explaining the differences in capital structure between OSEAs relative to LSEAs'. Our findings are consistent with the Trade off theory and Pecking order theory. The findings suggest implications for Vietnam's seafood processing enterprises (SEAs) on flexible usage of financial leverage. Specifically, to increase or decrease the level of financial leverage, SEAs need to take into account size, tangible assets, profitability and liquidity of enterprises as well as recommend measures to cope with shocks in variations of bank interest rates.