The impact of debt diversification on the performance of SMEs in Vietnam

Abstract This article aims at evaluating the impact of debt diversification on the performance of SMEs in Vietnam. The COVID-19 pandemic has severely affected the operation results of SMEs which are looking for solutions to be able to maintain sustainable production and business activities as soon as the pandemic is under control. One of the most sought-after urgent working solutions today that SMEs are resorting to is funding from loans in various forms to avoid short-term liquidity risks. Using estimation from panel data, empirical results show that multiple lenders measured by the number of debt sources and the dispersion of debt has a negative impact on the performance of SMEs. The results imply that increase of agency costs resulting from inferior monitoring may decrease the performance of firms. Our findings contribute to the sparse literature on debt diversification of SMEs in a developing country like Vietnam.


Introduction
When the economy faces uncertain issues such as economic crises and pandemics, the first normal reaction of SME managers is to worry, then search for means to improve the performance of their companies. The most common measure applied by managers is to increase the use of debt and strengthen the implementation of debt management measures for businesses. In the past two years, following the COVID-19 pandemic, the solvency of SMEs has become increasingly difficult, and firms have a much higher debt ratio. Therefore, to be able to maintain operations, businesses do not only use debt from a single certain source, but they also simultaneously use various separate sources of debt with the desire to reduce financial constraints or legal hassles such as cash flow struggles, creditors who will not provide supplies unless payment are made, ABOUT THE AUTHORS Hong Thu Nguyen is a lecturer at Thu Dau Mot University, Binh Duong, Vietnam. She graduated with a doctorate in economics, finance and banking from Banking University of Ho Chi Minh City. Her research covers a variety of topics related to banking and finance Van Cuong Dang is a lecturer at the School of Public Finance, University of Economics Ho Chi Minh City, Vietnam. He received his PhD in public finance from University of Economics Ho Chi Minh City. His research interest could be found in banking, policy and public finance Quoc Thuan Pham is a lecturer at the Faculty of Accounting and Audit, University of Economics and Law, VNU HCMC, Vietnam. He received his PhD in accounting from University of Economics Ho Chi Minh City. His research interest could be found in accounting, audit, policy and public finance fixed cost expenses, rent arrears, etc, thereby, making operations easier and increasing the operational efficiency of the enterprises.
The issue of diversification of debt sources is taking place as a global phenomenon, and scholars around the world are studying this issue. However, there are very few studies that analyze the relationship of debt diversification to performance, and even so, only indirectly mention the correlation between these two issues. Is the implementation of debt diversification efficacious? Can debt diversification help in avoiding financial constraints and increasing the operating efficiency of the business? This very specific issue has hardly been mentioned, or studied in-depth.
For the Vietnamese economy SMEs have begun to take advantage of the various sources available for debts, including but not limited to bank loans, business partner debt, government financial assistance reliefs, and some even going as far as foreign investments. SMEs all have the expectation that using multiple sources of debt at the same time is beneficial for the business. Post Covid, the number one issue that most businesses, regardless of countries, are having is a cash flow problem. Most businesses do not have enough cash to propel the business forward, thus, their recourse towards traditional and new forms of debt institutions. This leads to agency problems, thus, affecting the performance of SMEs.
In the past, there have been studies on debt diversification or factors affecting the performance of a company. However, empirical studies on debt diversification in parallel with corporate performance have not been popularized. Currently, there are two outstanding research papers on this issue, Jadiyappa et al. (2019) and Jadiyappa, Saikia, et al. (2020).
Therefore, this article aims to evaluate the impact of debt diversification on the performance of SMEs in Vietnam. Vietnam is a full member of the ASEAN countries and is one of the rapidly growing economic markets in the region Q. K. Nguyen, 2022). Therefore, any research regarding debt diversification and management will prove to be of the utmost importance to the Vietnamese SMEs. The results obtained from the analysis will provide a meaningful contribution to the literature.

Literature review and hypothesis development
Previous studies show that the problem of debt diversification is related to agency problems. According to the theory of Jaffee and Russell (1976) and Fama and Jensen (1983), agency problems are potential conflicts of interest between principals and business representatives, whereby this conflict is caused by business managers who do not work for the benefit of the principal such as shareholders, creditors, incurring agency costs Q. K. Nguyen & Yang, 2020). The origin of the theory of debt diversification can be traced back to Jaffee and Russell (1976) and Stiglitz and Weiss (1981), who argued for the existence of credit allocations in the market. Accordingly, having access to multiple sources of debt can alleviate the financial constraints that companies face when there is a division of credit among individual institutions. Companies that intend to use large amounts of debt must diversify their sources of borrowing to finance promising investment projects. Debt diversification becomes an optimal strategy that managers can implement to overcome obstacles caused by credit division. According to agency theory, there are two contrasting views which are further explained in the following paragraphs.
On the one hand, scholars argue that debt diversification reduces agency problems. Harris and Raviv (1990) and Rajan (1992) show that debt diversification will help increase firm value by reducing agency costs. This is because creditors are often inclined to increase oversight of firms' activities and help in reducing agency costs. From this argument, they argue that firms with more debt sources, with more creditors, will have relatively stronger supervisory mechanisms than a company with fewer creditors. Therefore, a firm with a higher degree of debt diversification will have lower agency costs and higher firm value, i.e. there is a positive relationship between debt diversification and firm value. Jiraporn et al. (2012) also find evidence that leverage can replace corporate governance in reducing agency problems. Rajan (1992) also supported that the above argument is correct. He pointed out that creditors, especially banks, have the right to check the accounts and reports of companies. Constance supervision allows banks to monitor the company's activities in a timely manner effectively. Datta et al. (2005) also emphasized that since all loans have a fixed term, firms must frequently re-enter the debt market, leaving them subject to constant scrutiny by market participants such as financial institutions and underwriters. Ghorbani and Salehi (2020) used a sample of annual data of 200 firms listed on the Tehran Stock Exchange during 2002-2016 to to investigate whether financial leverage reduces agency and information problems caused by earnings management. The results suggest that a higher level of financial leverage can discipline managers and generate useful information about firm quality. The paper also highlights the informational and disciplining role of debt in the presence of severe uncertainty about firm quality in a developing country. Therefore, when companies issue debt to investors and borrow from a myriad of sources, they will be evaluated and scrutinized by different creditors with different views, which leads to lower agency costs.
On the other hand, a number of researchers have completely opposite views. Krugman (1988), Carletti et al. (2007), Brunner and Krahnen (2008) argue that debt diversification may increase agency costs since the presence of multiple sources of debt can lead to reduced corporate oversight due to the free-rider problem. Theoretically, the term beneficiary is an economic concept that refers to someone who gets benefits but does not make a contribution corresponding to the benefits received. Regarding to the issue of debt diversification, Brunner and Krahnen (2008) reported that when a firm has access to many different sources of loans, it will lead to a percentage of individual creditors lending smaller amounts of money to the company, so there is no incentive to scrutinize corporate behavior. This can cause lenders to rely on other organizations to set the direction of supervision for businesses, making this supervision less effective (Brunner & Krahnen, 2008). If more creditors do so, the overall level of oversight may be reduced, increasing the likelihood of agency costs that negatively affect the performance of the business. Thus, the free-rider hypothesis predicts that firms with diversified sources of debt will have a lower market value than firms with less diversified debt (Carletti et al., 2007). Zubair et al. (2020) showed that investments of small and medium-sized private enterprises declined significantly both during and after the financial crisis. The findings of the study also suggested that borrowing from banks remained critical in determining the investments of private SMEs during the financial crisis of 2008-2009. Additionally, Carletti et al. (2007) proposed a model explaining the relationship between the individual subject and effective monitoring based on the free-rider problem. Their empirical results show that the incentive for creditors to monitor a company's activities is directly proportional to the amount of money the company lends. As firms enter multiple credit relationships, the amount of borrowing from individual entities decreases, thereby, reducing the incentive for creditors to monitor the firm's activities. The model predicts the highest supervisory efficiency when there is only one creditor with a substantial amount. From that, it can be seen from their point of view, that when businesses approach multiple sources of debt, the effectiveness of supervision decreases, leading to a decrease in the value of enterprises on the capital market. Dalwai and Salehi (2021) used the Granger-causality test to investigate the influence of business strategy and intellectual capital on firm performance and bankruptcy risk of Oman's non-financial sector companies.The empirical results show a negative relationship between business strategy and return on equity (ROE), suggesting defender-type strategy leads to an increase in firm performance. Rauh and Sufi (2010) and Colla et al. (2013) have documented the existence of firms in the United States accessing multiple sources of debt and the factors influencing this issue. Colla et al. (2013) argue that enterprises have a total of seven main sources of debt, namely commercial paper debt, credit line debt, multi-term debt, senior promissory note, secondary bond, contracts of finance leases, and other liabilities. Meanwhile, Jadiyappa et al. (2019) affirm that businesses can access a total of eleven main sources of debt, including the State, banks, shareholders, foreign enterprises, related companies, bond debt, intra-company debt, debt from other organizations and individuals, prepayments from customers, commercial paper, and outstanding balances to sellers. In addition, Al-Maliki et al. (2022) assessed the effect of the COVID-19 on small and medium-sized family firms' risk-taking in Iraq. The paper used data collected by distributing the questioners from 600 employers and small and medium-sized family and non-family firm managers. The results indicate that COVID-19 influences small and medium-size family and non-family firms' risk-taking. Johnson (1997) proclaims that about 79% of businesses in the United States are using multiple sources of debt. Although Vietnam is an emerging market, most companies' financial statements show that businesses use more than one source of debt. According to previous studies, the problem of debt diversification is measured in two ways: counting based on the number of sources of debt that enterprises are using and assessing the dispersion of debt among debt sources. Jadiyappa et al. (2019) have been evaluating based on eight main sources of debt, namely seller and customer debt, commercial paper, senior debt, secondary debt, bond debt, convertible bond, finance leases, and other long-term liabilities. They conducted a study with 149.938 observations including 2.829 enterprises over a period of 53 years from 1962 to 2015. The study used Tobin's Q to represent the value and performance of firms. The results show that debt diversification, regardless of measurement methods, has a negative effect on Tobin's Q at 1% significance level. However, the research data-carried out by Jadiyappa, Hickman, et al. (2020), that were obtained had a narrower time frame with only 16 years, from 2001 to 2016. This study was conducted with a more extended direction since debt diversification is measured by eleven types of debt sources. In addition, the study also takes a closer look at how debt diversification affects agency issues. At the same time, the study considers two indicators of enterprise efficiency, namely Tobin's Q and ROA, which represents for the performance of firms. Although the results show that debt diversification is a common problem faced by companies and corporations around the world, they also reveal a negative impact on the performance of the businesses. This indicates that debt diversification reduces the ability of creditors to monitor the business. Furthermore, the results also show that debt diversification does not seem to relieve firms' financial constraints, but instead leads to a free-rider problem among lenders affecting firms' agency costs and performance. Additionally, Pascucci et al. (2021) showed that lower financial constraints and stronger financial flexibility improve the relationship between family ownership and export performance.
Previous studies show that the impact of debt diversification on the performance of firms is still controversial. According to uncertain issues, Vietnamese SMEs have been facing pressures to maintain sustainable production and business activities. One of the most sought-after urgent working solutions today that SMEs are resorting to is funding from loans in various forms to avoid short-term liquidity risks. This will put upward pressures on increasing both agency costs and interest rates. Besides, the pressure to pay debts and operate under the supervision of creditors also cause difficulties to the efficiency of enterprises. Therefore, we propose the following hypothesis: H: Debt diversification has a negative relationship with the performance of SMEs.

Empirical model
To test the relationship between debt diversification and performance of SMEs in Vietnam, we estimate the research model as follows: Where the dependent variable PER is the performance of SMEs, and DEBT is the explained variable that represents the diversification of debt.
In this study, we apply the Tobin's Q index to proxy for the performance of SMEs (Jadiyappa, Hickman, et al., 2020). We use booking values to compute Tobin's Q since we cannot obtain market values for SMEs from annual financial statements. Therefore, Tobin's Q is calculated by the following formula: TobinQ ¼ Booking value of debt þ Booking value of equity Total asset (2) Moreover, Short and Keasey (1999) also argue when measuring operational efficiency, it is advisable to use an index reflecting the profitability of the business, which is represented by the rate of return on total assets (Return on Assets). This ratio reflects the efficiency of using assets of the enterprise. Based on that, investors can know, in the past, whether the company's assets have been used effectively or not and would generate reasonable profits or not. The rate of return on total assets is determined based on the formula:

ROA ¼
Income after tax Total asset (3) Jadiyappa, Hickman, et al. (2020) show that there are two ways to measure the term of debt diversification. The first is counting the number of sources of debt that businesses are using, and the second is assessing debt dispersion among debt sources. In this study, we use two independent variables based on the above two methods to measure the debt diversification of enterprises.
First, we use the number of debt resources (DEBT). Of the two debt diversification variables, this is the most commonly used and easiest to measure. DEBT measures the number of debt sources that a firm is using. This variable is taken based on the study of Jadiyappa, Hickman, et al. (2020) and normalized according to the Vietnamese data source. The study shows that businesses have eleven types of debt sources that can be accessed, including: bank debt, shareholder debt, foreign debt, bond debt, government debt, financial loans from individuals and organizations other institutions, prepayments from customers, commercial papers, debts to related organizations, intra-corporate debts and outstanding amounts to sellers. Therefore, the variable DEBT has a value ranging from 1 to 11. And then, we use Herfindahl-Hirschman Index (HHI): The second debt diversification measure is the HHI index that measures the dispersion of corporate debt in year t based on Jadiyappa, Hickman, et al. (2020). This index is determined by dividing the sum of the squares of the value of each source of debt by the square of total debt: HHI has an obtained value ranging from 0 to 1. In which, the closer the value is to 1, the higher the ability to diversify the debt of the enterprise, and vice versa, the closer the value is to 0, the more likely it is to diversify debt, the lower the firm's ability to diversify debt.

Data
Our data comprise of 254 non-financial firms and all of them are SMEs. Financial data were collected from Datastream, and some of variables were collected manually from annual reports of the firms. After excluding some outliers, our data include 1524 firm-year observations.

Estimated method
We use Fixed Effect Model (FEM), Generalized Least Square (GLS), and System Generalized Method of Moment (SGMM) for panel data. SGMM developed by Arellano and Bond (1991) has been widely used because it addresses the endogeneity of the exploratory variables through a variety of instrumental variables (Arellano & Bover, 1995;Arellano, 2003). In addition, we also apply the Hansen test with over identification to examine whether there is a correlation between the instrumental variable and the residual in the model. These estimation methods were applied in large literature (Hamza Almustafa et al. 2023Q. K. Nguyen, 2021aQ. K. Nguyen, , 2021b. Table 2 presents the summary statistics of all variables. The mean of Tobin's Q and ROA are much lower than the sample of Jadiyappa, Hickman, et al. (2020). This indicates that the performance of SMEs in Vietnam may be lower than in developed countries. The mean of DEBT is 4.02. It is lower than the average level of 6. Moreover, the mean of HHI is also very low, at 0.32. Both of DEBT and HHI show that SMEs have a low tendency to diversify debt in under-developed and developing countries.

Descriptive statistics and matrix
We produce the Pearson correlation matrix to detect the preliminary relationships between variables. Table 3 shows the correlation coefficients between our primary variables. Results reported in Table 3 show that the explanatory variables have a close relationship with the dependent variable, Tobin's Q and ROA. In addition, the correlation coefficients between the variables are less than 0.8 (the maximum value of coefficients is 0.53) indicates that there is no multicollinearity in the model. This result strongly supports the implementation of multiple regression steps for Equation 1 to test the main hypothesis H.     Table 4 presents the regression results of the impact of debt diversification on the performance of SMEs measured by Tobin's Q with three different methods including Fixed Effect Estimation (FEM), Generalized Least Square (GLS) and Generalized Method of Moment (GMM). Table 4 reports the results of Equation 1 that examines the relationship between debt diversification and performance of SMEs. In this table, we use Tobin's Q to proxy for performance of SMEs. For each of the performance measures, we run fixed effect regressions (Column 1). And then, we run generalized least square to address the problems of autocorrelation and heteroskedasticity of panel data (Column 2).

Main results
The results show that both DEBT and HHI variables have a negative effect on Tobin's Q. However, the variable DEBT is statistically significant while HHI is not. This result supports hypothesis H. This shows that debt diversification reduces the performance of SMEs in Vietnam. This result is completely consistent with previous studies by Jadiyappa, Hickman, et al. (2020), Jadiyappa et al. (2019), Krugman (1988), Carletti et al. (2007), Brunner and Krahnen (2008). We can explain this result as the high cost of loan in Vietnam because the average lending interest rate in Vietnam has been high during the recent decade (over 10%/ year on average). Meanwhile, the ability to use debt of SMEs is not quite effective as these businesses often borrow to supplement working capital and ensure solvency rather than using debt for investment into projects. These activities do not contribute significantly to the financial performance of SMEs. In addition, the results also show that agency costs increase when businesses have access to different sources of loan capital due to the appearance of guarantee costs, collateral costs, maturity costs, etc. All of them are quite common in emerging markets like Vietnam.
Similarly, Table 5 shows the regression results of Equation 1. We use the ROA variable to represent the efficiency of SMEs. We also repeat the estimation methods as in Table 4. The results also show that both DEBT and HHI still have negative effects on ROA and are statistically significant. This result once again confirms hypothesis H. Thus, debt diversification has a negative impact on the performance of SMEs in Vietnam. This result is intended to give advice to the enterprises that need to be careful when accessing loans. Instead, the enterprises should focus on preferential loans to both reduce interest costs and lower agency costs.
The regression results of the control variables also show numerous interesting results. The variable LEV has a negative effect and is statistically significant in both Tables 4 and 5. This shows that SMEs do not effectively use debt leverage to increase operational efficiency (Antwi et al., 2012;Hoque, 2014). Meanwhile, the more leverages these firms use, the less efficient they are. Additionally, all of the variables TAN, SIZE, GAIN, and GRO have a positive sign. This shows that fixed assets increase the operational efficiency of SMEs ( (Farooq & Masood, 2016)). The enterprises with large assets are also more efficient (Nguyen and Dang, 2020). The greater the annual growth rate of assets, the more efficient it is. Finally, capital gains also contribute to promoting operational efficiency in SMEs (M'rabet & Boujjat, 2016).

Robustness test
As a robustness test, we applied the System GMM method to estimate Equation 1 and the results were reported in Column 3 of Table 4 and Column 6 of Table 5. The signs of coefficients on DEBT and HHI remain negative and consistent with our first results in Fixed Effect regression and Generalized Least Square, strongly supporting our hypothesis H. In addition, the signs and statistical significance of the control variables are also consistent with the estimation methods. This shows that the estimated results of the model are robust and consistent.
In the System GMM method, we test the instrument validity by using Hansen's J statistic of overidentifying restrictions. The test results that were reported in both Tables 4 and 5 show that the models do not reject the null hypothesis of valid instruments (because all p-values are higher than 0.1). Moreover, the Arellano-Bond test p-values of the two models are 0.398 and 0.377, respectively, both values are greater than 5%, from which it can be seen that the autocorrelation has been resolved.

Conclusion
The study examines the impact of debt diversification on performance of SMEs in Vietnam. We used the panel data of 254 SMEs from 2015 to 2020 and address three estimation methods for panel data. Our results strongly suppose that debt diversification negatively affect the performance of SMEs. In particular, we find that the number of debt sources has a negative correlation with Tobin's Q and ROA of SMEs, and the dispersion of debt also has a negative correlation with Tobin's Q and ROA of SMEs in Vietnam. In addition, the findings indicate that firms' total asset, fixed asset and growth of asset contribute to improving performance of SMEs meanwhile debt leverage has a negative effect on operational efficiency of these enterprises. Last but not least, our results are robust due to using different estimating methods and alternative measures for performance of SMEs.
The results imply that small and medium enterprises in Vietnam currently use debt from diverse sources, while an increase in debt sources may reduce the efficiency of enterprises due to the appearance of agency problems and free-rider problem. Therefore, businesses need to be careful about using several sources of debt. In addition, not every business has a source of debt that matches the amount of debt. We propose policy implications for businesses that before deciding on the source of debt they should pay attention to matters such as choosing the debt ratio to suit their business situation, the origin of the funding source, and how much debt is appropriate. These subject matters can better help SMEs use debt effectively.
In addition, the biggest concern of SMEs today is the difficulties caused by the narrowing of the market and the high production costs. Accompanying SMEs to overcome the difficulties of the COVID-19 pandemic and helping businesses access more preferential credit sources, the government should implement various support policies to help businesses overcome the difficulties. Therefore, supporting SMEs is always the government's top priority. In addition, banks should also synchronously deploy solutions and credit policies to support capital for SMEs, contributing to mitigating the impacts from the COVID-19 pandemic such as cutting down interest rate, debt extension for efficient enterprises.

Disclosure statement
No potential conflict of interest was reported by the author(s).

Citation information
Cite this article as: The impact of debt diversification on the performance of SMEs in Vietnam, Hong Thu Nguyen, Van Cuong Dang & Quoc Thuan Pham, Cogent Social Sciences (2023), 9: 2191897.