The Influence of External or Contex

The Influence of External or Contextual Factors
Studies that explore the influence of external or contextual factors on capital structure usually take the form of international analyses. These international comparisons have highlighted the impact of country-specific factors on capital structure irrespective of whether those analyses are of developed countries, in developing economies generally and specifically in the Asia-Pacific region (See Boothet al., 2001; Deesomsak et al. 2004; de Jong et al., 2008). The contextual factors identified by the literature include GDP growth rate, the strength of the legal system and the related strength of creditor/shareholder protection/rights (de Jong et al., 2008)Other contextual factors that tend to impact results and that are particularly relevant to the Vietnamese context are the level of capital market development and ownership structure . For instance, in the former case evidence for the UK by Marsh (1982) and for the USA by Friend and Lang (1988) supports Pecking Order theory. In contrast, research in developing and transitioning economies such as China, Poland, Russia,Czech Republic and Slovakia find a “modified” Pecking Order (i.e. internal finance, equity and debt) (See Chen, 2004; Delcoure, 2007). In these countries, under-developed bond markets drive firms to equity issuance for long-term financing.
Ownership structure is another factor that can influence capital structure. For example, in Asian-Pacific countries such as Indonesia and Thailand family-dominated
listed firms are commonplace. Accordingly Witwattanakantang (1999) and Bunkanwanicha et al. (2008) attribute high leverage in Thai publicly listed firms partly to family controlling interests preferring debt over new equity in order to avoid ownership dilution. Another influence is state-ownership. Rajan and Zingales (1995) observe a positive impact of state-ownership on leverage when government serves as a debt guarantor. Similarly, Bradley et al. (1984) and Booth et al. (2001)
acknowledge government influence on firms’ debt policy. In particular, the former recognizes that highly-geared firms dominate state-regulated industries like electricity or airlines while the latter reports state credit programs granted to preferred sectors (i.e. agriculture in Thailand). Another example comes from China where most of the listed firms are ‘equitized’ state-owned enterprises or formerly state-owned enterprises. Chen (2004) using data from 1995 to 2000 concludes that these firms are protected from bankruptcy by the government, causing the pecking order and trade-off models to have limited explanatory power in China. However, Huang and Song (2006) report an insignificant relationship between leverage and state-ownership when analysing a much larger dataset spanning 1994 to 2003. This might imply that ‘equitized’ Chinese SOEs are gradually becoming more independent from government.