- The industrial impact may play an important role in the relation between financial decisions and profitability at a certain level of competition. - The debt-profitability relationship attracts much attention and raises many debates in the global science community. - Modigliani and Miller [1] suggested that capital structure does not determine firm performance under some assumptions of a perfect capital market. - Surprisingly, almost all of their findings came to the consensus that capital structure is relevant to firm performance through the mechanism of the trade-off effect, limited liability effect, and discipling effect [2-8].. - Besides, the predation theory suggests that when a market is highly concentrated, it is easier for a company in the market to be swallowed by others in case it uses much debt in its capital structure [12-14].. - The predation theory emphasizes on the role of market product competition in regulating the real impact of debt on firm performance. - In practice, some studies gave empirical evidence on such a role in the US and some emerging markets [15-20]. - Thus, debt ratio in essence is a decisive factor of performance in the case of Vietnam [21-23]. - In short, such a circumstance facilitates the moderation role of industry competition in capital structure of Vietnamese companies.. - Generally, with high debt in the capital structure, enterprises operating in a concentrated market and experiencing overinvestment tend to perform inefficiently. - In short, debt ratio, industry competition, and overinvestment should be collectively studied in the research.. - For another thing, they help investors set up a suitable investment portfolio and the government make appropriate policies in order to promote the freedom of the market as well as heighten the level of market competition in Vietnam.. - The original data includes 699 companies listed on Vietnam‟s two stock market exchanges namely HOSE and HNX in the period of . - The result implies the existence of the predation theory in Vietnam‟s product market. - In this situation, an increase in debt ratio implies the reduction in the free cash flow and the participation of different partners in the capital market in the monitoring tasks with various disciplines as well as covenants [4, 5, 27]. - As a result, the use of debt is supposed to heighten firm performance by decreasing agency problems in an enterprise.. - The limited liability effect suggests that companies with high debt ratio can aggressively compete with others in the market [2]. - The predation theory suggests that firms with high debt are more likely to be disadvantageous in terms of competitiveness compared to those with low debt in their capital structure. - Financially constrained enterprises are more vulnerable to the predation from other rivals in the market. - is the constant. - w i,t is a set of control variables described in the variable definition. - The instrumental variables used to handle the endogenous problem in the regression model are tangibility (TANG) and non-debt tax shield (NDTS). - To examine the role of industry competition in the relationship between financial leverage and firm performance, the research has to identify the proxies for industry competition. - Meanwhile, non-structural approach measures the level of competition from the market‟s behaviors. - This measurement is appreciated more highly than structural approach because a high level of concentration does not imply lower competition in the market [45]. - In fact, the hypothesis on the relationship between market structure and the effectiveness shows that high concentration is simply the results of the market‟s effectiveness [46]. - Moreover, high concentration sometimes comes from the fierce competition of various companies in the market, leading to the fact that effective companies force ineffective ones to exit the market [48]. - Thus, the level of concentration cannot correctly predict the level of competition in the market. - The index measures the sensitivity of firm profitability to the ineffectiveness of the market. - Hence, BI is the proxy that is preferred in studies on industry competition and firm performance [51].. - In the formula, HHI jt is HHI of industry j at time t. - BI is considered to be the index that helps directly evaluate the level of competition in the market. - Therefore, an industry with high competition is expected to have a sharp decrease in variable profits due to the increase in the marginal costs. - t is the coefficient of the model that is changing overtime. - As pointed out in the hypothesis development, market competition is an important factor in analyzing the effect of financial leverage on firm performance. - Besides, the research also takes into account the problem of endogeneity in the model which are originated from three major reasons:. - To mitigate the simultaneous effect between LEV and ROA, the study uses the lag of LEV due to the fact that financial leverage in the past often affects profits at present but the reserve relationship is impossible. - In the equation, NewInvestment i t , represents for the investment decision. - RevenueGrowth i t , demonstrates the growth of the firm. - Leverage i t , is the capital structure of the company. - The estimated error-term ˆ i t , taken from the above model is considered as the abnormalities in the investment decision. - P-Values are given in the parentheses Source: Author’s calculation. - Specifically, the lower the HHI, the lower the competition, while BI is in the opposite direction. - Therefore, two competition variables, Competition 1 = (-HHI) and Competition 2 = BI, are generated to interpret the impacts of these two indicators on performance in the same direction.. - Additionally, the significant positive impact of the two-variable interaction term between debt and competition is clearly shown in the estimation. - This result demonstrates that when the market is highly competitive, the positive impact of debt on profitability is stronger when firms are less likely be driven out of the market. - Interestingly, the influence of the debt-competition interaction becomes weaker overinvestment because overinvestment increases agency problems and weakens the good impact of debt. - The estimation robustness is tested using alternative representatives for industry competition and firm performance. - All the relevant tests of System Generalized Method of Moments (SGMM) estimator appear to be comfortable in every single regression model in the research.. - 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