Inter-relasionship between capitalstructure, free cash flow, diversification and firm performance

Abstract

Improving firm performance is always a top concern of companies. The global financial crisis and public – debt crisis in Europe has had a negative impact on the economy of Vietnam, especially on Vietnamese companies. Therefore, the issues of performance enhancement, escaping from stagnating production and increasing sales are more necessary with the company. Besides, the trend of diversification has become more common in Vietnamese companies. These companies are attracted to investment projects outside the industry, even these industries are not related to the core business of the companies. The selection of the investment plan of how, what industries, how combining funds, or the evaluation of the firm operations to take the right investment are always the most important issues. The objective of the study was to find evidence of the inter – relationship between the four factors capital structure, free cash flow, diversification and firm performance in the Vietnamese market. The study used data from 118 non-financial companies listed on the Hanoi Stock Exchange (HNX) and Hochiminh Stock Exchange (HOSE) in the period of 2009-2014. By using 2SLS and 3SLS regression methods, combined with comparable results from Odinary least squares estimator, the study found out the evidence of the negative impact of firm performance to leverage, but this impact is positive to diversification. Free cash flow was also shown to have a positive impact on the firm performance and diversification. And finally, leverage reduces free cash flow in a company. From the empirical results, the study also proposes some advices to support companies in making decisions about capital structure and investment. The study also points out some of its limitations and futher research.