39 Journal of Economic and Banking Studies
No.7, Vol.4 (1), June 2024 pp. 39 - 48
© Banking Academy of Vietnam
ISSN 2734 - 9853
The impact of capital structure on financial performance
- an empirical study at hotel firms in Hanoi
Truong, Thanh Hang - Dang, Thu Ha
Faculty of Accounting – Auditing, Hanoi University of Industry, Vietnam
Corresponding Authors
E-mail address: truongthanhhang@haui.edu.vn (Truong, T.H.), dangthuha@haui.edu.vn (Dang, T.H.),
[Postal Address: No.298 Cau Dien Street, Bac Tu Liem District, Hanoi, Vietnam]
1. Introduction
The capital structure (CS) determination
stands out as one of the pivotal choices
made by any organization. These deci-
sions are formulated prior to a company’s
establishment or in response to an urgent need
for funding to fulfill its capital investment
decisions. The financial manager of a com-
pany must evaluate the merits and drawbacks
of various funding avenues, rendering the CS
decision an ongoing endeavor that must be un-
dertaken whenever the company seeks capital
for its endeavors.
CS refers to the amalgamation of equity and
debt employed in funding the company. CS
refers to how an organization is financed by
combining long-term capital (common stock,
preferred stock, debt, bank loan, convertible
loan stock....) and short-term debt such as bank
overdrafts and creditor transactions. CS has
been a significant concern in financial econom-
ics ever since Modigliani and Miller (1958)
demonstrated that when markets are perfect,
there are no costs of financial distress and no
transaction costs, then decision making CS
and FP are not related. Under current condi-
tions, the decision on CS composition is quite
difficult for companies and thus it becomes
an important research area for researchers in
accounting and finance. The overall goal of
companies is to reduce the cost of capital and
maximize value with relevant CS decisions.
Therefore, the relationship between CS and
the performance of companies has always
been one of the areas of interest and attracting
researchers worldwide.
The growth rate of the system of tourist ac-
Chronicle Abstract
Article history The article examines the impact of capital structure (CS) on financial per-
formance (FP) of hotel firms. A sample size of 72 of 3 - 5 star hotel firms in
Hanoi city, Vietnam in a period of 3 years from 2016 to 2019 has been taken
to analyze. Firm FP is measured by ROA, ROE, ROS. The study which applies
quantitative methods along with the support of EVIEWS software points
out a statistical significance relationship. Firstly, the CS has a contrariwise
impact on ROA but no effect on ROE and ROS. Secondly, among control
variables (asset structure, expenditure ratio, revenue), the expenditure ratio
is the only one showing a contrariwise impact on ROS and the rest has no
statistical significance.
Received
Revised
Accepted
06th Jan 2024
30th Apr 2024
10th May 2024
Keywords
Capital structure,
Financial performance,
Hotel firm,
ROA, ROE, ROS
DOI:
10.59276/JEBS.2024.06.2652
The impact of capital structure on financial performance - an empirical study at hotel firms in Hanoi
40
Journal of Economic and Banking Studies- No.7, Vol.4 (1), June 2024
commodation and hotels in Vietnam in recent
years has been quite high and has been increas-
ing, attracting more investment in the hotel
sector in Vietnam. In 2016, international tour-
ists to Vietnam reached more than 10 million
visitors and domestic tourists reached more
than 62 million visitors. Total tourism revenue
in 2016 reached more than 400 trillion VND,
up 18.4% over the previous year. In the first 3
months of 2017, Vietnam’s tourism industry
welcomed and served more than 3.2 million
international visitors (Excerpt from Baodulich.
net.vn). The total number of accommodation
facilities increased from 69,000 rooms in 2001
to 420,000 rooms in 2016. The business effi-
ciency of the accommodation system accounts
for about 70% of the revenue of the entire
Vietnam tourism industry (information given
at the “Conference of investment and hotel
business in Vietnam”). With the 4th Industrial
Revolution, many luxury hotels are getting
ready for the changes to come. Therefore,
improving business efficiency is an important
goal of any hotel business. This study aims to
determine the influence of capital structure on
financial performance in hotel businesses (in
Hanoi city).
To address this goal, the paper includes the fol-
lowing sections: (1) Introduction; (2) literature
overview and theoretical basis; (3) research
methods; (4) results and data analysis; (5)
conclusion.
2. Literature review
Research concerning the correlation between
CS and performance is extensive and predomi-
nantly explored in advanced nations. Never-
theless, empirical findings yield contradictory
outcomes, encompassing both favorable and
adverse effects. In Vietnam, research on the
impact of CS on FP is primarily conducted
within publicly listed firms or small and
medium-sized enterprises, with divergent find-
ings as well. As Table 1.
Thus, the results of empirical research on the
relationship between CS and FP are inconsis-
tent. This study contributes to strengthening
the literature on the impact of CS on FP by
testing the relationship between CS and FP in
hotel businesses in Hanoi city, Vietnam.
After capital resources are available, the
structure of capital investment in assets will
affect the cash flow of the business. Therefore,
besides studying the effect of CS, many studies
also consider the influence of asset structure on
the FP of enterprises such as showing positive
effects (Dawar, 2014; Puoraghajan et al., 2012)
or negative effects (Muritala, 2012; Onaolapo
and Kajola, 2010; Zeitun and Tian, 2007) of
asset structure on firm profitability.
Besides, from the formula: Business results =
Table 1. Studies on the effect of CS on FP
Author (year) Dependent
variable
Independent
variables
Result
Donaldson (1985) Financial
goals
Capital
Structure
(debt and
equity)
The dependence on borrowing or
ownership of shares fluctuates with
alterations in the company’s stock
ownership, consequently influencing shifts
in the company’s financial objectives.
Bhayani (2006); Fama
& French (2002); Gill,
Biger & Mathur (2011)
Shareholder
profit
Capital
Structure
(financial
leverage)
CS has a positive relationship with
shareholder returns.
Ramachandran &
Candasamy (2011)
Financial
performance
(profit
variables)
Capital
Structure
The research illustrates that there is a
robust direct correlation between CS and
variables related to profitability, wherein CS
notably impacts the profitability of the firm.
Truong, Thanh Hang - Dang, Thu Ha
41
No.7, Vol.4 (1), June 2024- Journal of Economic and Banking Studies
Author (year) Dependent
variable
Independent
variables
Result
Abor (2007) ROA Capital
structure
The relationship between CS and return on
assets (ROA) shows consistent negative
trends across all scenarios in Ghana.
Nonetheless, concerning South African
loans, short-term debt and trade credit
exhibit a favorable correlation with ROA,
whereas total debt and long-term debt
display adverse associations with ROA.
Ebid (2009) Financial
performance
Capital
structure
Current liabilities and overall indebtedness
exhibit an inverse correlation with ROA;
The linkage between CS and ROE, as well
as gross profit margin, is not statistical
significant.
Jang & Tang (2009) Profit Financial
leverage
The financial leverage of a company
demonstrates a direct relationship with
profitability that follows an inverted
U-shaped pattern.
Salehi & Biglar (2009)
Financial
performance
Financial
leverage
Inverse relationship between ROE, ROI
and CS.
Goyal (2013) Profit Debts Debts have a positive impact on corporate
profits.
Pouraghajan et al.,
(2012) ; Olokoyou
(2013) ; Mireku,
Mensah & Ogoe (2014);
Quang & Xin (2014)
Operational
efficiency
Financial
leverage
There exists an adverse correlation
between CS and FP.
Salim & Yadav (2012);
Ali & Iman (2011)
Financial
performance
Capital
structure
Negative effect between ROA, ROE and
CS but there is a positive correlation
between CS and Tobin’Q.
Nirajini & Priya (2013) ;
Twairesh (2014)
Financial
performance
Capital
structure
There is a notable favorable correlation
between CS (Equity ratio) and FP (gross
profit, net profit margin, ROCE, ROA and
ROE)
Leon (2013) Financial
performance
Financial
leverage
Demonstrate a substantial adverse
correlation between leverage and ROE
while showing no statistically significant
association between leverage and ROA.
Mujahid & Akhtar
(2014)
Corporate
financial
perfor-
mance and
shareholder
wealth
Capital
structure
CS positively impacts a company’s FP and
shareholder wealth.
Younus, S. et al.,
(2014)
Financial
performance
Capital
structure
Weak positive correlation between CS
(equity ratio to CS) and FP (gross profit
margin, net profit margin, ROE, ROI, ROA)
The impact of capital structure on financial performance - an empirical study at hotel firms in Hanoi
42
Journal of Economic and Banking Studies- No.7, Vol.4 (1), June 2024
Revenue - Cost, it can be seen that revenue and
expenses are the factors affecting the perfor-
mance of any business. Therefore, this study, in
addition to the main factor of CS, will include
three more control variables in the research
model, which are asset structure, revenue and
expense ratio.
3. Theoretical basis
* The Modigliani-Miller Theory (M&M
Theory of Capital Structure)
This is the starting study for modern capital
structure studies introduced by Modigliani &
Miller in 1958. With two cases studied, firms
operating in a tax-free environment and in a
tax-free environment, Modigliani and Miller
made important conclusions about the capital
structure of firms. That is, in the no-tax case, the
unlevered and leveraged firms are the same, or
in other words capital structure has no effect on
firm value and no CS is optimal. In the case of
taxes, the value of the leveraged firm is higher
than the value of the unlevered firm due to the
benefit of the tax shield. The above conclusions
are made based on the assumptions of perfect
markets, no financial distress costs, and no
transaction costs. However, the above assump-
tions are unlikely to happen, thus limiting the
applicability of M&M theory in practice.
* Trade-off theory of capital structure
Trade-off theory of CS is based on the research
of Myers (1977) to explain why firms choose
a CS that is partly debt and partly equity. One
reason why businesses cannot finance with
debt entirely is that in addition to the existence
of a tax shield benefit from debt, the use of
debt financing also incurs many costs, typi-
cally the cost of financial distress (including
both direct and indirect costs of bankruptcy).
In addition, the study of Jesen and Meckling
Author (year) Dependent
variable
Independent
variables
Result
Githire & Muturi (2015) Financial
performance
Capital
structure
The equity ratio positively influences the FP
of the company. Similarly, the proportion
of long-term debt exhibits a favorable and
notable effect on the FP of the enterprise.
Mauwa et al., (2016) Financial
performance
Capital
structure
CS exhibits adverse correlations with
both ROA and ROE. Additionally, the
research findings indicate a substantial
negative relationship between CS and the
FP of firms listed on the Rwanda Stock
Exchange.
Doan Ngoc Phuc
(2014) ROA, ROE
Long-term
debt ratio,
debt ratio
Long-term debt ratio has a positive effect,
debt ratio has a negative effect.
Le Thi My Phuong
(2017) ROE Capital
structure CS has a positive effect on ROE
Bui Dan Thanh &
Nguyen Tran Thai Ha
(2017)
Financial
performance
Capital
structure,
working
capital
The ratio of short-term debt to total assets
has a positive effect on ROA, ROE; while
long-term debt/total assets ratio has no
positive effect on ROA, ROE
Nguyen Thi Minh Hue
& Dang Tung Lam
(2017)
ROA
Ownership
structure,
financial
leverage
CS (Total long-term debt/total assets) has a
negative effect on ROA.
Source: Authors’ summary
Truong, Thanh Hang - Dang, Thu Ha
43
No.7, Vol.4 (1), June 2024- Journal of Economic and Banking Studies
(1976) also extended the inclusion of agency
costs into the costs of borrowing.
According to the trade-off theory, as the debt
ratio rises by each additional percentage,
the tax advantages increase, but so does the
financial distress cost up to a certain threshold
with each debt ratio increment. If the current
value of tax shield benefits does not surpass
the current value of financial distress costs,
then borrowing ceases to be advantageous
for the company, leading to a decline in the
business’s value. An optimal CS for the firm at
which the present value of the tax shield from
debt should be sufficient to offset the increased
costs of using debt (financial distress costs and
agency costs). From calculating the balance
between the benefits of the tax shield and the
increased costs of increasing the leverage ratio,
the capital structure planner will come up with
his or her own target debt ratio. The trade-off
theory has elucidated the constraints of the
M&M theory regarding the financial distress
costs incurred by indebted companies. Further-
more, the theory also highlights the variations
in CS across various industries with distinct
levels of tangible fixed asset utilization.
4. Research methods.
* Research sample
The research sample includes hotel businesses
from 3 to 5 stars located in Hanoi city, Vietnam
and operating for at least 3 years or more. With
the number of hotel enterprises meeting these
standards is 74, however, because 2 enterprises
do not have enough research data, the list of
enterprises serving the research is 72 enterpris-
es. This study uses a secondary data set taken
from the Vietnam National Administration of
Tourism for a period of 3 years from 2016 to
2019 for analysis. Thus, the total number of
observations is 216 observations.
To analyze data, statistical software EViews
was used to apply necessary statistical analysis
techniques such as descriptive statistics, corre-
lation matrix, Hausman test, impact regression
model estimation. fixed, random effects model.
* Research model and explain variables
In addition to studying the influence of CS
as the main independent variable on FP, the
author includes three more control variables in
the model, which are asset structure, expense
ratio and revenue (Ln (revenue)). The research
model has the following form:
FPit = Cit + β1iCAPSTRit + β2iASSSTRit +
β3iCOSTit + β4iREVENUEit + Uit
(i: 1- 72; t : 2016- 2019)
In which the variables are described in table 2.
Specifically, the regression equations are in
table 3.
Table 2. Description of variables
Symbol Variable name Variable Type Recipe
FP
Financial performance:
using 3 indicators:
ROA; ROE; ROS
Dependent variable
(3 dependent
variables)
ROA = Profit after tax/Total assets
ROE = Profit after tax/Equity
ROS = Profit after tax / Net sales
CAPSTR Capital Structure Independent variables Total liabilities/Total assets
ASSSTR Asset structure Control variable Total long-term assets/Total assets
COST Cost ratio Control variable Total cost/Total revenue
REVENUE Revenue Control variable Ln (revenue)
Source: Authors’ summary
Table 3. Regression equation
Model 1: ROA
it
= C
it
+ β
1i
CAPSTR
it
+ β
2i
ASSSTR
it
+ β
3i
COST
it
+ β
4i
REVENUE
it
+ U
it
Model 2: ROE
it
= C
it
+ β
1i
CAPSTR
it
+ β
2i
ASSSTR
it
+ β
3i
COST
it
+ β
4i
REVENUE
it
+ U
it
Model 3: ROS
it
= C
it
+ β
1i
CAPSTR
it
+ β
2i
ASSSTR
it
+ β
3i
COST
it
+ β
4i
REVENUE
it
+ U
it