Fixed Assets and Capital Structure: Evidence from Listed Companies in Vietnam

This paper examines the effect of fixed assets on capital structure. Agency theory argues that when firms use debt, there are agency costs of debt due to the information asymmetry between shareholders and lenders. Fixed assets can be used as a device to reduce the conflicts of interest between shareholders and lenders, thus reducing agency costs of debt and increasing firms’ leverage. Using a sample of Vietnamese-listed firms on Hanoi and Hochiminh stock exchanges, we find that there is a positive effect of fixed assets on firms’ financial leverage. Moreover, firms in emerging markets like Vietnam are more likely to use fixed assets as collateral for long-term rather than short-term loans since they demand high leverage but have a low level of fixed assets. Finally, the analysis indicates that the cost of debt for companies is lower for firms with a high proportion of fixed assets and this may encourage the firms to become more leveraged.