Optimal capital structure of Vietnamese listed firms - finance industry and consumer discretionary industry

Abstract

AbstractThis study makes effort in considering the static structural models with the endogenous bankruptcy boundary in order to maximize the firm’s value. This research starts with highly recognized theoretical frameworks on the capital structure including Modigliani and Miller Theory’s contribution, trade-off theory, agency theory, pecking order theory and equity market timing theory. This paper investigates the experiential implementation of Black-Scholes (1973), Merton (1974), Leland (1994), and Leland and Toft (1996) models on capital structure in accordance with various assumptions. Moreover, this research is based mainly on static structural models to go into depth to determine the optimal debt level of the finance and consumer discretionary industries. From secondary information on stock volatility and drift, this study determines the adjustments in capital structure as well as the changes in the probability of default of 50 listed Vietnamese firms in the last three years from 2018 to 2020. The results indicate that the target capital structure changes proportionally to the tax percentage due to tax benefits (deductible interest payments) and varies inversely to the cost of debt (default and financial distress costs). In addition, instead of static structural models, firms can apply the theories on the debt level to determine the optimal leverage based on the complication of capital structure.

Keywords

• static structural models
• optimal debt level
• capital structure
• finance
• consumer discretionary
• Vietnamese firms