Factors affecting investment rate of vietnamese enterprises listed on stock market in 2021

We consider the identification of the most significantpredictors affecting the investment rate of Vietnam enterprises to be the main contribution ofthe paper; those are cash flows, sales

NATIONAL ECONOMICS UNIVERSITY

Faculty of Mathematical Economics

-*** -ASSIGNMENT SUBJECT: ECONOMETRICS GROUP 10 – TOPIC

FACTORS AFFECTING INVESTMENT RATE OF

VIETNAMESE ENTERPRISES LISTED ON STOCK MARKET IN 2021

Group members

1 – 11219243 – Nguyen Thi Lan Nhi

2 – 11219238 – Nguyen Ngoc Minh

3 – 11213889 – Nguyen Sy Minh

Instructor: Bui Duong Hai

Hanoi, 2023

- Collecting Data

- Calculating variables

- Proof-reading

25%

- Editing format

INSTRUCTOR COMMENT

Table of Contents

1 Introduction 5

2 Research Questions 5

3 Literature review and Research Hypotheses 6

3.1 Literature Review 6

3.2 Research Hypotheses 7

4 Data and Methodology 8

4.1 Data 8

4.2 Methodology 9

5 Empirical Results 9

5.1 Descriptive Statistics 9

5.2 Correlation analysis 10

5.3 Regression Model 10

5.4 Estimation Results 10

5.5 Diagnostic Test Results 10

5.6 Residual plot 12

6 Discussion 14

7 Conclusion 15

8 Limitation 16

9 References 16

The originality of the research lies in the identification of crucial determinants of Vietnamlisted enterprises’ finance that can predict the fluctuation of investment rate of one business.Fazzari et al (1988) examined investments under the effect of cash flow, investmentpossibilities, and the ratio of return to price equity value while utilizing the dividend paymentratio as a measure of financial constraints This author group's research demonstrates thatenterprises with financial restrictions are more receptive to investments than those with little

or none

The creation of the regression model serves the paper's primary goal of expanding ourunderstanding of the identification and impact of investment rate in relation to the company'sfinancial status

The purpose of the paper is to measure investment rates in terms of enterprises’ cash flowsand other financial indicators The research problem includes the formation of an econometricmodel of the corporate finances, using the results of the regression analysis, based on thesignificant financial indicators We consider the identification of the most significantpredictors affecting the investment rate of Vietnam enterprises to be the main contribution ofthe paper; those are cash flows, sales growth, firm size, fixed capital intensity and leverage

In addition to the introduction, the paper includes 05 main contents: Research Questions,Literature Review and Research Hypotheses, Data and Methodology, Empirical Results,Discussion, and Conclusion

2 Research Questions

Investment rate is commonly one of the most fundamental issues in corporate finance, asshown by modern corporate finance theory Since it provides value for enterprises, the capitalinvestment choice is regarded as the most crucial decision in an enterprise's or economicgroup's financial decisions A good investment choice will contribute to raising the value ofthe organization, hence increasing the value of the owner's assets; on the other hand, a badinvestment decision will reduce the value of the business Understanding the importance ofinvestment rate and its impact on a business’ financial health, our group were intrigued toseek answers to the following questions:

What are factors affecting the investment rate in Vietnam’s enterprises in 2021?

How can those factors influence the investment rate?

3 Literature review and Research Hypotheses

Furthermore, Fazzari et al (1988) conducted a pioneering study of the sensitivity betweencash flow and investment under limited or unrestricted financial conditions, in financiallyconstrained firms that had a relationship between cash flow and investment, are moresensitive than businesses with no financial constraints

Additionally, there are two other factors - agency costs and transaction costs - that canaccount for fluctuations in investment Firstly, the agency costs theory, developed by Jensenand Meckling (1976), addresses why a firm facing higher interest costs does not seek fundingfrom alternative sources such as debt or equity markets The conflict of interests amongmanagers, shareholders, and creditors with differing goals leads to agency problems.Secondly, the combination of transaction costs and debt and equity issues can increaseexternal financing costs Debt financing obliges the firm to make interest payments tocreditors and repay the principal at the end of the term If the scheduled payments are notmade, the firm's assets are sold to raise funds However, durable assets in a specificinvestment project are usually not easily recoverable, making it challenging to recoup fundsthrough liquidation As a result, creditors may impose higher interest payments and limit loansizes to protect their interests and create disadvantages for the debtors

Numerous empirical studies have been conducted on the determinants of investment inscientific firms, including the works of Hall et al (1998) and Hubbard (1998) Hall et al usedthe Panel Data version of the VAR methodology to examine the relationship betweeninvestments, profits, sales, and cash flow in the United States, France, and Japan from 1979 to

1989 Their findings suggest that this relationship varies across countries On the other hand,Hubbard analysed several factors that affect the link between cash flow and investment rate inthe United States, such as inventory investment, research and development, employment,

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business formation and survival, pricing, and corporate risk management His results stronglysupport the notion that there is a significant connection between investment and changes innet worth.

Moreover, Carpenter and Guariglia (2008) conducted a study on the financial factors thatinfluence investment rate and found evidence to support their findings Specifically, they usedinvestment regressions to estimate the impact of financial constraints on UK firms from 1983

to 2000 Their research revealed that for large firms, cash flow was not a sufficientexplanation for the sensitivity of investment decisions However, for small firms, theexplanatory power of cash flow remained unchanged This suggests that the significance ofcash flow in the investment equation may be due to information asymmetries in the capitalmarket

On the other hand, Kaplan and Zingales (1997) disputed the findings of Fazzari et al (1988)regarding the relationship between investment sensitivity and cash flow Their researchdemonstrated that the more financially unconstrained a company is, the more sensitive itsinvestment rate are to cash flow availability Furthermore, Gomes (2001) found that financialconstraints alone are neither necessary nor sufficient to generate significant cash flow effects

on investment rate

Bokpin and Onumah (2009) conducted a study on the micro factors that affect investment rateincluding past investment, firm size, cash flow and growth opportunities They found that allthese factors play a significant role in predicting investment decisions Ruiz-Porras andLopez-Mateo (2011) also examined the effects of firm size and cash flow on investmentdecisions and found that they have a positive impact In contrast, Saquido (2003) concludedthat liquidity and firm size are insignificantly related to investment; but there remains asignificant relationship between investment and revenue growth and fixed capital intensity.Aviazian et al (2005) showed that the link between leverage and investment is negative, andthat effect is significantly stronger for firm with low growth opportunities than those withhigh growth opportunities Nevertheless, the findings of Li et al (2010) mixed significantlythe relationship between debt financing and corporate investment rate, by using the method ofthe multiple linear regression on the data from 2006-2008 of 60 Chinese real estate listedcompanies

These researchers however have only focused on developed economies and some emergingcountries, namely the US, the UK, Canada, India, China, etc In Vietnam, Ninh L.K et al.(2007) analysed some factors that affect the investment rate made by private enterprisesoperating in the Mekong River Delta However, their research did not consider other potentialvariables that could impact such decisions, such as investment firm size, sales growth As aresult, the paper’s aim to explore these additional factors on Vietnam’s enterprises to addressthe concerning issues

3.2 Research Hypotheses

Table 1 Describe the research hypotheses

Hypotheses Content Literature Review Expected

sign

H1 There will be a Aivazian et al (2005), Azzoni and

positive relationship

between cash flow

and investment rate

Kalatzis (2006), Adelegan and Ariyo (2008), Jangili and Kumar (2010), Nair (2011), Ruiz-Porras and Lopez-Mateo (2011)

H4

There will be a

positive relationship

between sales growth

and investment rate

Erickson & Whited (2000), Gomes (2001), Saquido (2003), Carpenter and Guariglia (2008), Bokpin and Onumah (2009), Ruiz-Porras and Lopez-Mateo (2011), and Nair (2011)

4 Data and Methodology

4.1 Data

The data used in the research were collected from the financial statements of 52 enterpriseslisted on Vietnam Stock Market in 2021 from database Vietstock The financial ratios arecalculated using the Excel Microsoft, with the formula detailed in Table 2 below The data can

be found in Appendix Table B

Table 2 Description of variables in the research model Variable

name

Co

de Formula/Description Unit

Expected sign

Investme

Cash

where

● Dependent variable: Investment rate

● Independent variables: Cash flow , Sales growth , Leverage , Fixed capital intensity ,Size and Industry variables

We built and fitted our model and used the OLS method to estimate the coefficients andstandard errors We also conducted diagnostic tests along with every model, including Overallsignificant test, Ramsey’s RESET test, Multicollinearity test, Heteroscedasticity test(Breusch-Pagan test, White test), and Reduced model test Moreover, we detected unusualpoints in each model using observation leverages, adjusted standardized residuals and Cook’sdistance Based on the residual plot, we were able to show the linearity of the data, theresiduals have a mean of 0, the residuals are normally distributed, and the variance of theresiduals is constant Finally, we compare and evaluate the results of the tests to choose themost suitable model The model comparison can be found at Appendix Table A

5 Empirical Results

5.1 Descriptive Statistics

Table 3 exhibits the overall observations, mean, standard deviation, minimum, and maximumvalues of variables that included in the model It shows that there is a distinction among theinvestment rate and the factors influencing the investment rate of listed Vietnameseenterprises On average, companies in the sample had their investment rate near 0.22; theinvestment rate has a minor variation among enterprises, the maximum value reaches 0.5812while the smallest is 0.0587 Remarkable disparities occur in Sales growth , Cash flow andSize in listed Vietnamese companies

Table 3 Descriptive statistics

Variable Observations Mean S.D Min Max

5.2 Correlation analysis

Table 4 shows the correlation coefficient between the dependent variable and the independentvariables and between the independent variables The correlation coefficient between theindependent variables is not greater than 0.8, so there is no multicollinearity phenomenon.The variables Sales growth , Leverage , Fixed capital intensity and Size were inverselycorrelated with the variable Investment rate (IR), while the variable Cash flow is positivelycorrelated with the dependent variable Investment rate

Table 4 Correlation analysis

5.5 Diagnostic Test Results

Overall Significant Test

Hypotheses pair

Table 7 Overall significant test result F-stat P-value

At significant level 5%, we can conclude that our model is overall significant

Reduced Model Test

At significant level 5%, we can conclude that reduced model is correct

Ramsey’s RESET Test

Multicollinearity Test

Table 10 Multicollinearity test result

VIF

All VIFs , we can conclude that our model does not suffer from high multicollinearity

Unusual Points Detection

Table 11 Sequential change-points detection results

Number of observations High leverage points

Outliers Influential points

There are 03 high leverage points in our model after calculating observation leverages,adjusted standardized residuals and Cook’s distance

5.6 Residual plot

Figure 1 Residuals vs Fitted

This plot is used to test thelinearity of the date and assumethat the residuals have a mean of

0 If the red line on the scatterplot is a horizontal line and not

a curve, then the linearityassumption of the data issatisfied The assumption thatthe residual has a mean of 0 issatisfied if the red line is close

to the horizontal line

It can be seen that theassumption of linearity of thedata is slightly violated.However, the assumption of themean of the residuals can beconsidered satisfied

Figure 2 Normal Q-Q

The plot is used to test thehypothesis that the residualshave a normal distribution Ifthe residual points lie on thesame line, then the condition forthe normal distribution issatisfied

The Normal Q-Q plot showsthat the assumption of normallydistributed residuals is satisfied

Figure 3 Scale – Location

The plot is used to test thehypothesis that the residualvariance is constant Becausethe red line has a curve and the

distributed around the line, thisassumption is violated

The plot along with the results

of Breusch-Pagan and Whitetest show that our model occurthe heteroscedasticity issue.Therefore, we decided toresolve by re-estimating ourstandard errors, which bedisplayed in Table 6 of section5.4

Secondarily, the sales growth has a negative impact on the investment rate of listed enterpriseswith a significance of 5% This result shows that an increase in one unit in sales growth mightlead to a decrease of 0.0674 in investment whilst other independent variables are constant.This result is in contrast with the findings of Erickson & Whited (2000), Gomes (2001),