Study the Impact of Growth, Firm Size, Capital Structure, and Profitability on Enterprise Value: Evidence of Enterprises in Vietnam

• Date: 01 January 2019
• Published date: 01 January 2019
• DOI: http://doi.org/10.1002/jcaf.22371

Study the Impact of Growth,

Firm Size, Capital Structure,

and Profitability on Enterprise

Value: Evidence of Enterprises

in Vietnam

Hung Ngoc Dang, Van Thi Thuy Vu, Xuan Thanh Ngo and Ha Thi Viet Hoang

PROBLEM

INTRODUCTION

A business always

aims at maximizing

the owner’s assets or

maximizing the busi-

ness value. What is

the business value of

a joint-stock com-

pany? Some said that:

“Maximizing business

value is to maximize

profits,”the more

profitable the business

is, the higher the

value of the business.

However, if the busi-

ness is only pursuing

profit maximization,

it will raise several

issues as follows:

For profit, com-

monly, businesses

can either increase

sales revenue or

reduce costs. First,

how do businesses

increase sales? If

increasing sales on

credit, businesses can

raise revenue, yet,

may also face credit

risks, in which their

buyers are unable to

repay in cash on time

or at all. On the other

hand, risk increases if

there is no cash flow

into the business for

a long period of time

while waiting to

receive money from

buyers. Second, how

do businesses reduce

costs? The company

can cut down the

costs of staff training,

This article studies the effect of growth, firm

size, capital structure, and profitability on

enterprise value (EV) in Vietnam. The study

used a panel of 1.070 observations at 214 com-

panies listed on the Vietnamese stock market

for the period of 2012–2016. According to

regression results by generalized least squares

and structural pathways analysis, the results

detected size and profitability are positively

correlated with the enterprise value, while capi-

tal structure is a factor that negatively affects

the enterprise value. On the other hand, growth

factor does not have any impact on enterprise

value. However, when measuring enterprise

value under EV or Tobin’sQ,thestatistical

results are not entirely consistent. In addition,

the results of the study have also shown that

the measurement of EV on enterprise value will

be more appropriate. The results of empirical

research are useful to help businesses improve

their values. © 2019 Wiley Periodicals, Inc.

© 2019 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22371

146

or maintenance costs of

machinery and equipment, and

so on. This will only increase

profits in the short term, yet, in

the long run, the business is

unable to grow or even lose

more money from improper

operation. At the same time,

the future cash flow that

owners receive will become less

and less when cash are not

invested and spent reasonably.

As a result, the value of equity

is not maximized but reduced,

corresponding to the reduction

of enterprise value. Can a com-

pany increase its future profit-

ability by reducing its dividend

payout and retaining profits for

reinvestment? If the business

only aims at short-term profit-

ability, then it is very likely

that they will miss out many

long-term investment opportu-

nities. They can be such good

projects that require companies

to take a loss in the early years

in order to get a much larger

cash flow in the future. In addi-

tion, when the business retains

profits for reinvestment without

paying investors their expected

returns via dividend payout,

the value of the business will

also ultimately decrease.

Profits do not always accu-

rately reflect the cash inflows

or outflows of the business,

leading to the situation that

many businesses have a profit

on books without actual cash.

And so, the goal of maximizing

profits sometimes does not help

to achieve the goal of maximiz-

ing enterprise value

(or maximizing the value of

equity) but instead, reducing

the value of equity.

In addition, there is a view

that “maximizing enterprise

value is maximizing earnings

per share (EPS) or maximizing

return on equity (ROE).”How-

ever, EPS does not consider the

time value of money, the

waiting period for expected

profit, and the amount of capi-

tal spent to make that profit.

Additionally, EPS maximiza-

tion does not consider the risk

factors in doing business.

Finally, EPS maximization

does not allow the use of divi-

dend policy to influence stock

prices in the market. If only for

the purpose of maximizing

EPS, perhaps the business

would never pay dividends. On

the other hand, the goal of

maximizing ROE is also to

consider net profit alone, so it

does not consider the time

value and risk factor of the

currency.

Enterprise value maximiza-

tion addresses the aspect of

increasing the value of an

owner’s assets in a sustainable

manner. What is the goal of

maximizing enterprise value

and maximizing stakeholders’

equity? Maximizing enterprise

value is maximizing market

value. The value of assets of

the owner of a shareholding

company is determined by the

market through the share price.

Thus, the value of share-

holders’assets is maximized,

equivalent to maximizing stock

prices in the market. In other

words, a business’goal is to

maximize the value of the

owners’assets, and for a joint-

stock company, its goal is to

maximize the price of its stock

in the market. The formula for

determining the value of an

enterprise is given by the cur-

rent market capitalization of

the enterprise:

Enterprise value is a topic

of great interest to business

executives and researchers,

what factors affect enterprise

value? There have been a num-

ber of studies by authors such

as Varaiya, Kerin, and Weeks

(1987), Liow (2010), Her-

muningsih (2014), Kodongo,

Mokoaleli-Mokoteli, and

Maina (2015), (Mule, Mukras,

& Nzioka, 2015), and Sucuahi

and Cambarihan (2016), study-

ing the effect of growth, size,

and capital structure on enter-

prise value. The results of these

studies have both similarities

and differences with one

another due to the use of differ-

ent measurements.

In Vietnam, studies on the

relationship and impact of

growth, size, capital structure,

and profitability on enterprise

value are not fully complete.

While the results of oversea

studies are not similar, they are

sometimes contradictory to the

situation of Vietnam. On the

other hand, the measurement

of enterprise value used in

researches is different, such as

return on assets (ROA), ROE,

EPS, Tobin’s Q, EV, and so

on. Based on the results of the

study, there is evidence that in

a developing economy, matters

regarding legal regulations,

business environment, and the

development of the stock mar-

ket have not been finalized.

Studying the effects of growth,

firm size, capital structure, and

profitability on enterprise value

will have many meanings for

Vietnamese companies. More-

over, in Vietnam, there has not

been any comprehensive

research on the impact of

increasing capital, size, capital

structure, and profitability to

the value of the enterprises.

THEORETICAL BASIS

Some Theories

Agency Theory

One of the fundamental

theories involved in the invest-

ment selection of shareholders

The Journal of Corporate Accounting & Finance / January 2019 147

© 2019 Wiley Periodicals, Inc. DOI 10.1002/jcaf