Academy of Accounting and Financial Studies Journal (Print ISSN: 1096-3685; Online ISSN: 1528-2635)

Abstract

The Impact of Product Market Competition on Debt Ratio in Vietnam Stock Market

Author(s): Tan Vinh Nguyen

Asymmetric information has caused difficulties for investors in the financial market when the enterprises have high competitiveness in the market but there are acts of using unusual debt ratio. Investment decisions on the stock market of investors will be negatively affected by asymmetric information. Therefore, the authors conduct research to assess the impact of product market competition on the debt ratio of enterprises listed in the Vietnam stock market (excluded the enterprises operating in the financial field) from 2010 to 2018. By analyzing panel data through the Difference Generalized method of moment (D-GMM), the research results indicate: Competitiveness factors (Tobin's Q and HHI) have a negative impact on debt ratio (DR)- the results support the predation theory. When businesses are highly competitive, there will be a tendency to reduce the debt ratio. From the results of this research, good signals of enterprises in the market (Tobin’s Q high) will reduce external debt. Besides, if these companies issue more shares, it is also a good signal for investors (according to the pecking order theory) because capital is not an urgent issue for businesses at this time when they are high competition in the market. At the same time, low-competitive enterprises will be threatened when the debt ratio tends to increase, making pressure on loan payments increase. HHI competition index (Herfindahl-Hirschman Index) has the opposite effect on debt ratio of large-scale enterprises. It can be seen that large-scale enterprises, with high economic potential when highly competitive, create pressure on enterprises with low competition, enterprises tend to reduce debt ratio. At the same time, low-competitive enterprises cannot increase their capital by issuing shares because this reduces the value of the business according to information asymmetry theory.