Critique of Finance Research Article for Business/Tourism: RMTD3401

This report provides a comprehensive critique of the research article "An Empirical Test of Capital Structure Theories for the Vietnamese Listed Firms." The study investigates the applicability of capital structure theories, including the trade-off, pecking order, and market timing theories, within the context of Vietnamese listed companies. The report summarizes the problem, which centers on the importance of efficient capital raising and the debate surrounding which capital structure theory best explains firms' financing decisions. It outlines the major theories examined, emphasizing the trade-off and pecking order theories, and their limitations. The report reviews the literature, highlighting the study's theoretical underpinnings and the use of recent references. The methodology employed, including the pecking order and target adjustment models, and the data analysis techniques, particularly regression analysis, are summarized. The report concludes by discussing the implications of the findings, which suggest that Vietnamese firms primarily adhere to the trade-off theory. The report also acknowledges limitations and suggests recommendations for future research, such as incorporating advanced risk measurement techniques and firm-specific characteristics.

Running head: FINANCE 1
Finance
Name
Institution
Professor
Date

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Selected Article
Nguyen, Ho, & Vo. (2019). An Empirical Test of Capital Structure Theories for the Vietnamese
Listed Firms. Journal of Risk and Financial Management, 12(3), 148.
doi:10.3390/jrfm12030148
Summary of the Problem
Capital is always crucial to any organization. Therefore, the efficient raising of capital to
finance the operational activities of the business is a vital decision for every firm. Several studies
have been carried out to evaluate the effects of capital structure decisions on the value of a firm.
Among the various theories of capital structure, three have been identified as the most important.
These include the market timing theory, the trade-off theory, and the pecking order theory. An
extensive review of the literature has indicated that the pecking order theory, as well as the trade-
off theory, play a critical role in the financing decisions of companies. However, a debate has
emerged raising significant questions regarding the theory which gives the best explanation of
companies’ decisions of capital structure. The market timing theory has also been occasionally
supported by some researchers in the sense that firms usually consider issuing new stocks in the
perfect timing of the market (Nguyen, Ho & Vo, 2019).
As a result of the mixed evidence from earlier research, especially concerning emerging
markets such as that of Vietnam, a research study was performed to assess the significance of the
theories of capital structure in the Vietnamese context. This paper, therefore, provides a report on
the survey and also explains a suitable model for the listed firms of Vietnam to take into account
when making financing decisions. The paper, as well, takes into consideration the various factors
contributing significantly to the financing decisions of companies listed in Vietnam.

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This study hypothesizes that Vietnamese listed companies follow the trade-off theory to
choose their capital structure. As such, the Vietnamese firms do not rely on the pecking order
theory as well as the market timing theory to make financing decisions. According to the study
results, fund flow deficit negatively affects the debt amount while a variation in sales affects debt
amount positively. The key terms in the study article have been operationally defined. The key
words include pecking order theory, capital structure, GMM, and trade-of theory (Nguyen, Ho &
Vo, 2019).
Major Theories Examined By the Article
According to Nguyen, Ho & Vo (2019), the main theories examined in the article are the
trade-off theory, pecking order theory and market timing theory. The theory trade-off proposes
that profitable companies tend to increase their debt to enjoy tax shield benefits. The pecking
order theory, in contrast, most profitable organizations consider prioritizing internal funds to
lower their accrued debt. As well, the firms utilize external funds when they have insufficient
retained earnings. The market timing theory, on the other hand, argues that organizational
managers will consider issuing new stocks when they anticipate the right conditions in the
market.
According to the article, all these three capital structure theories have their limitations or
shortcomings. Although the theory of trade-off describes in detail the capital structure decisions
of firms, it does not consider the negative correlation between profitability and debt. On the other
hand, the pecking order theory offers a more direct description of the relationship between debt
and profitability. Out of the three capital structure theories, the article focused much on the trade-
of theory and the pecking order theory (Nguyen, Ho & Vo, 2019).

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Summary of the Review of Literature
The study uses various sources which are pertinent to it. Most researchers have studied
capital structures of corporates, with the primary focus on the factors which determine the
financing decisions of a firm. The sources cited in this article, such as Coles and Li (2018),
describe various aspects, which include the influence of managerial features. According to the
results of these empirical studies, the characteristics of the firm mostly affect its capital structure.
Nevertheless, these studies have failed to explain the appropriateness of the theories on the
financing decisions of the firms (Nguyen, Ho & Vo, 2019).
Some of the papers have, however, tested for the suitability as well as the validity of the
theoretical models on the capital structure of firms. Examples of such studies are Vijayakumar
(2011), Atiyet (2012), Pacheco (2016), Macas Nunes and Serrasqueiro (2017), Razak and Rosli
(2014), and Balios et al. (2016). All these studies validated the pecking order theory. On the
other hand, Yu and Aquino (2009) acknowledged the trade-off theory as the most appropriate
theory of capital structure.
This article has various theoretical underpinnings. For instance, it uses the trade-off
model to analyze the capital structures of listed firms in Vietnam. The report also uses the
pecking order theory to explore the factors influencing the financing decisions of the firms.
These two theories are the two primary theoretical underpinnings of this article (Nguyen, Ho &
Vo, 2019).
Recent references have been used in the study article. More than thirty references have
been used to conduct the empirical study. Most of the texts were published not later than the year

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2010. This is an indication that the references are extremely up to date and valid. Most of the
resources are journal articles, which have been reviewed by peers.
Furthermore, the research problem has been articulated clearly. The article uses various
models to acquire essential evidence from Vietnamese firms. For instance, Yu and Aquino
(2009) acknowledged that the pecking order theory is useful in explaining the firm’s decisions of
capital structure. This model is more powerful than the model of target adjustment. The pecking
order theory, therefore, offers a better explanation of the financing behavior of most listed firms
in Vietnam, than the theory of trade-off.
Practically, most firms face the challenge of capital structure as well as debt
management. During 2010 to 2015, the deposit rate of interest in Vietnam was 8% while firms
borrowed at a rate of more than 10% from banks and other financial institutions. This was due to
the financial crisis of 2008 that led to the establishment of strict monetary policies by the State
Bank of Vietnam. The policies led to unmeasurable pressure on Vietnamese firms. As a result,
firms could not acquire formal debts to improve their level of production by increasing their
business operations. Also, from the year 2014 following the two recent international crisis, the
State Bank of Vietnam canceled its loosening policy to lower and stabilize the interest rate of
lending to 8% at most. In the year 2018, the Vietnamese government, however, allowed firms to
issue private bonds even if they had made losses during their previous financial years. Despite
the policy change by the government, the total issuance of individual bond in 2018 amounted to
about 7% of the country’s GDP, which was significantly lower than the average amount of 21%
(Nguyen, Ho & Vo, 2019).
Summary of the Design and Procedures

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The research methodology used in the article was the original pecking order model as
well as the aggregated pecking order model. The two models were useful in testing the pecking
order theory. The research article also used the target adjustment model to test the trade-off
theory.
As well, the article uses the panel GMM estimation for testing the powerfulness of the
trade-off theory and the pecking order theory. It also uses the model to assess the effect of
various factors on the capital structure decisions of the listed firms in Vietnam (Nguyen, Ho &
Vo, 2019).
The research used various tools of measurement, such as the amount of debt issued or
retired, profitability, fund flow deficit, and the market-to-book ratio. However, the procedures in
the article were not structured. The variables in the study include the net investment, dividend
payments, operating cash flows and net working capital, as well as the retired or issued debt. The
sampling was performed using the technique of random sampling. As well, the firms which did
not have complete data were not included in the study. Also, firms from the sectors of
investment, finance, and insurance were not selected for the study.
Summary of Data Analysis and Presentation
According to Nguyen, Ho & Vo (2019), the collected data was analyzed through
regression analysis. From the investigation, the fund flow deficit had a negative regression
coefficient and a statistical significance level of 1%. The data collected from the study was
highly quantitative. The study involved the collection of numeric variables from the financial
reports as well as the annual reports of the selected Vietnam listed companies. For instance, the

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data collected included variables such as dividend payments, operating cash flow, issued and
retired debt, as well as net working capital and investing cash flow.
The findings of the research article support the study hypothesis as well as its purpose.
For instance, they are consistent with the researcher’s observations on the Vietnamese economic
environment. The results show that the lending interest rate in Vietnam is 7.8% per annum
during the last five years that were studied. The interest rate stability can encourage Vietnamese
companies to acquire more debts and issue more bonds to increase their financial leverage. The
results from the article have reconfirmed this position as well as the observation. The article has,
however, discussed some weaknesses or problems. For example, it was challenging testing for
the validity as well as the appropriateness of the three models (Nguyen, Ho & Vo, 2019).
Summary of Conclusions and Implications
The conclusion of the study corresponds to its original purpose. The article concludes that
financing decisions are among the most vital decisions which any company should make.
Therefore, a suitable model should be used to create secure financing decisions. As a result of the
mixed evidence in studies done before, this article evaluates the appropriate model which is
essential for listed firms in Vietnam to use to make decisions on their capital structures. As well,
the study examines the influence of various factors on the financing decisions of the firms.
Various implications have been discussed in this study. For instance, the study offers
further empirical evidence for answering one of the most debatable topics in the field of business
and financial management. The research article proves that the pecking order theory is not
appropriate for making financing decisions and, therefore, Vietnamese firms rarely use it. They
often use the trade-off theory to make their financing decisions (Nguyen, Ho & Vo, 2019).

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The results and conclusions of this study will affect various parties such as the
academicians, the Vietnam government, the listed firms, and investors. For instance, the firms in
Vietnam will refer to this paper when choosing a suitable capital structure that would maximize
their profits. Due to the various limitations of this study, however, the article has several
recommendations. For instance, it is essential to consider advanced techniques on the
measurements of risk. These techniques include credit risk measurements. As well, the article
recommends the inclusion of the features of firms in the research since they affect a firm’s
capital structure (Nguyen, Ho & Vo, 2019).

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References
Nguyen, Ho, & Vo. (2019). An Empirical Test of Capital Structure Theories for the Vietnamese
Listed Firms. Journal of Risk and Financial Management, 12(3), 148.
doi:10.3390/jrfm12030148