Relationship between Capital Structure and Firm Profitability: Evidence from Vietnamese Listed Companies

Abstract

This research focused on exploring capital structure that would have an impact on the Vietnamese company’s profitability. Theoretically, we apply agency theory which mentions the separation of ownership and management, which leads to the problem when the managers act in their own interests rather than the owner’s interest. We built a research model, and the quantitative data was clarified thanks to the regression model with the data given by 300 Vietnamese firms for the period from 2012 to 2018. The findings indicated that firm profitability, represented by Return on Equity (ROE) and Return on Assets (ROA), was associated with liquidity and debt. In detail, it was indicated that there would be a positive relationship between liquidity and profitability of Vietnamese entrepreneurs, while there was a negative relationship between long-term debt and profit maximization. Moreover, the short-term loan also has a positive impact on the firm’s profitability in the context of Vietnam. These preliminary outcomes negated some previous research, confirming that the higher the leverage, the better the firm’s profitability. The difference in findings may provide information about a dynamic Vietnam market as well as the financial environment that require changes in the capital structure to gain the optimal profit.

Keywords

• capital structure
• firm profitability
• agency theory
• Vietnam