The Impact Of Capital Structure On Firm Value: Evidence From Vietnamese Manufacturing Companies

Abstract

In recent decades, there has been a significant increase in both academic and practical attention towards capital structure in the field of financial management. Growing recognition of its potential influence on firm value has spurred research efforts. Although recent studies indicate that capital structure may enhance company value in some nations, the specific impact within the Vietnamese manufacturing sector has not been thoroughly investigated. To address this gap, this research utilizes a sample of 702 observations drawn from the HOSE and HNX stock exchanges for the period 2020-2022. The empirical findings reveal a statistically significant inverse correlation between capital structure, as assessed by the firm's leverage ratio, and firm value, as assessed by Tobin’s Q ratio and PBV ratio. Additionally, firm size, firm tangibility, and firm profitability exhibit statistically positive impacts on firm value. Interestingly, firm liquidity shows a negative association with firm value. These results are consistent with the expectations made by Pecking Order Theory (Myers and Majluf, 1984). The theory suggests that companies prioritize using their own funds for financing due to the potential drawbacks and higher costs associated with borrowing from external sources, especially in emerging nations. Higher levels of debt burden companies with default risk, particularly in an uncertain economic environment, which can hinder a firm's ability to meet its debt obligations. The increased risk of default translates to potentially higher borrowing costs, further supporting the observed negative relationship between leverage and firm value