The Interaction of Institutional Quality and Human Capital in Shaping the Dynamics of Capital Structure

Abstract

This chapter aims to find if trade-off theory or pecking order theory best explain the capital structure of non-state firms during the post-transition process in Vietnam. We investigate the effect of human capital, institutional quality, and their interaction on the capital structure decision. Findings suggest the capital structure of Vietnamese firms is a balance between the trade-off theory and the pecking order theory. Accessing formal debts is tough for young and non-state firms, whereas those with access to formal loans take advantage of their leverage tools to exploit the tax benefits against the costs of financial distress. Other findings include: (i) profitability and debt tax shields are no longer important when entrepreneurs adopt informal debt financing; (ii) high-quality institutions enable firms to reduce reliance on debt financing; (iii) while human capital encourages entrepreneurs to obtain more loans, its interaction with institutional quality deters debt financing and favours other financial sources.

Relationship between Ownership Structure and Capital Structure

“…The result of TANG shows that it is statistically negative influenced by STD and TD. This finding is similar to the study of (Santarelli & Tran, 2018;Zeitun & Tian, 2014). Which indicates that firm with higher tangibility tends to have lower firm performance and this support to pecking order theory.…”