How does financial depth influence corporate performance? Evidence from logistics sector

Accounting 6 (2020) 937–942 Contents lists available at GrowingScience Accounting homepage: www.GrowingScience.com/ac/ac.html How does financial depth influence corporate performance? Evidence from logistics sector Thu-Trang Thi Doana* Faculty of Finance and Banking, Industrial University of Ho Chi Minh City (IUH), Vietnam CHRONICLE ABSTRACT a Article history: Received July 2 2020 Received in revised format July 26 2020 Accepted July 29 2020 Available online August 1 2020 Keywords: Corporate performance Financial depth Financial development Logistics sector Vietnam This paper focuses on analyzing the impact of financial depth on corporate performance. The study data is collected by the author from World Bank statistics and financial statements of companies in the logistics sector, which is a relatively young industry but has great potential for development in Vietnam. Using the Generalized Method of Moment (GMM) to estimate the study model, the author finds out a significant impact of financial depth on corporate performance. In particular, the financial depth from a banking perspective has a positive impact on corporate performance. However, the financial depth from a stock market perspective has not brought positive results to the corporate performance. Not only that, the author also finds out significant impacts of financial leverage and firm size control variables on corporate performance. Therefore, it can be said that the financial depth from the perspective of banks plays an important role in stimulating the corporate performance. Meanwhile, the financial depth from the perspective of the stock market has not shown this role, this is the difference between this study result and the previous studies. The results of this study are important for logistics managers and policymakers in Vietnam. © 2020 by the authors; licensee Growing Science, Canada 1. Introduction Since the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) was signed in Chile on March 8, 2018, goods from many countries will have the large opportunity to enter the Vietnam market. In addition, Vietnamese goods also have many opportunities to be exported to other countries. This will bring many development opportunities for logistics sector in Vietnam (Bui, 2020a). However, the challenges which this sector shall face are not small, especially in terms of access to capital to enhance competitiveness, and especially to improve the corporate performance in this sector. In order to overcome these challenges, the financial depth is an issue of concern for logistics companies. Because, the financial depth shows the size of the banking system and the stock market compared to the economy (Klein & Olivei, 2008), these are two important components of the financial system that the companies in logistics can be accessed to raise capital (Beck et al., 2006; Levine et al., 2000; Love, 2003; Rajan & Zingales, 1998). Indeed, when the financial depth is improved, the companies will have favorable conditions to improve the operating capacity, as well as to improve the profitability (Bui, 2020b; King & Levine, 1993; Levine, 2005). The impact of financial depth on corporate performance is also found in many empirical studies, such as: Guiso et al. (2004), Dehejia et al. (2007), Fafchamps and Schündeln (2013), Lee (2015), O’Toole and Newman (2017). This shows that the companies can access the loans from the banking system, and can also access equity (through share issuance) and source of loans (through issuance of bonds) from the stock market. However, most empirical studies look at the impact of financial depth * Corresponding author. E-mail address: (T.-T. T. Doan) © 2020 by the authors; licensee Growing Science, Canada doi: 10.5267/j.ac.2020.8.003 938 from a banking perspective on corporate performance, and there is a lack of empirical studies that look at financial depth in a general way through the simultaneous development of the banking system and the stock market. In fact, the companies can flexibly raise capital from the banking system and stock market. Even the access to medium and long-term capital from the stock market is very important for the companies in the context of international economic integration. Therefore, it is essential to consider the impact of the financial depth through the overall development of the banking system and the stock market, and there is plenty of gap to explore. 150 100 50 0 2015 2016 2017 Domestic credit to private sector (% of GDP) 2018 2019 Stock market capitalization (% of GDP) Figure 1. Financial depth in Vietnam The author chose the logistics sector to analyze since this sector is still young and has great development potential in Vietnam, especially it is possible to have a close relationship with the financial depth. On the other hand, in Vietnam, the financial depth is limited with the size of the stock market is still small compared to the economy (Bui, 2019a, 2020c; Nguyen & Bui, 2019) (Fig. 1). Therefore, with this study article, the author expects to discover many interesting things compared to the previous studies. 2. Literature Review The financial depth is an important component of the financial development of each country (Bui, 2020d; Nguyen et al., 2020). In terms of measurement, the financial depth is often measured through the size of the banking system and the stock market compared to the economy (Bencivenga & Smith, 1991; Bui, 2019b; Greenwood & Jovanovic, 1990; Pradhan et al., 2014). However, in countries with limited financial depth, this indicator is often focused mainly on the size of the banking system compared to the economy. Because, in these countries, the banking system plays a key role in providing capital for the economy. Therefore, most empirical studies often use the domestic credit to private sector (% of GDP) to represent the financial depth (Ashraf, 2017; Bui, 2020). Meanwhile, the stock market also plays a very important role in improving the capital access of companies, which is clearly shown in countries with high levels of international economic integration. It can be said that financial depth plays an important role in helping the companies maintain operations (King & Levine, 1993), improving capital access (Beck et al., 2006; Levine et al., 2000; Love, 2003; Rajan & Zingales, 1998), and especially improving the profitability (King & Levine, 1993; Levine, 2005). The impact of positive financial depth on corporate performance is also found in many empirical studies, such as: Guiso et al. (2004), Fafchamps and Schündeln (2013), Lee (2015). In addition, Dehejia et al. (2007) also emphasized that financial expansion plays a role in promoting growth in the manufacturing sector. In another study, Chauvet and Jacolin (2017) suggested that difficulties in accessing credit is one of the main obstacles in the development process of the private sector. In addition, Fowowe (2017) stated that companies in A (...truncated)