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Introduction
Motivation
" We simply don’t know " (Keynes, 1937)
A fundamental issue in corporate finance is how companies make investment decisions amidst unexpected policy changes This subject has sparked extensive debate over the years, with each era uncovering new insights and factors that influence corporate investment strategies Research on corporate investment featured in the Journal of Corporate Finance and the Journal of Financial Economics highlights these evolving dynamics.
Economics over the past 10 years have also demonstrated this trend (e.g., Chen &
Recent studies indicate a significant decline in investment-cash flow sensitivity (ICF) in the U.S., particularly during the 2007–2009 credit crunch, as noted by Chen and Chen (2012) They assert that this decline cannot be attributed to factors like sample composition changes, measurement errors in Tobin’s Q, new financing channels, or corporate governance effects Additionally, Larkin et al (2018) highlight that while ICF remains stable in poorer countries, it has notably decreased in wealthier nations This trend suggests that increasing global economic wealth and diminished financial constraints on firms are influencing ICF dynamics in developed countries, contrasting with the stability observed in less affluent nations.
This thesis fills a significant research gap by investigating how Vietnamese firms modify their investment decisions in reaction to unexpected monetary policy changes, a topic that has been largely neglected in prior studies Existing research has failed to connect corporate investment behavior with unforeseen monetary shifts, hindering our comprehension of the underlying mechanisms This issue is especially pertinent in Vietnam, where the financial market is still developing and primarily consists of small and medium-sized enterprises (SMEs) The thesis raises important questions about the reasons behind the lack of exploration in this area.
In developing economies like Vietnam, where monetary policy targets multiple objectives, the likelihood of monetary policy surprises (MPS) increases This study investigates whether firms view unexpected monetary expansion as a chance to alleviate capital constraints and boost fixed investment beyond initial plans, potentially leading to a reduction in investment–cash flow sensitivity (ICF) Vietnam's unique financial landscape, characterized by a multi-instrument monetary framework, a shallow capital market reliant on banks, significant state capital influence, and a transitional economic structure, provides an ideal context for examining the impact of MPS on investment decisions The research specifically analyzes whether Vietnamese firms increase fixed investment in response to MPS and how ICF varies among different firm types, including state-owned and foreign-owned enterprises Additionally, it explores the asymmetric effects of MPS, focusing on firms' tendencies to hold more cash and decrease financial investments during such events.
By addressing these gaps, this thesis provides new insights into the interaction between monetary policy surprises and corporate investment behavior in an emerging market context
Theories of corporate investment provide diverse frameworks for understanding how firms make investment decisions, with a focus on various influencing factors Fisher (1930) and Keynes (1936) posited that firms invest when the net present value (NPV) of expected future cash flows equals zero, establishing NPV as a crucial element in investment choices Markowitz (1952) later built on this concept by incorporating discounted cash flow and internal rate of return into portfolio selection.
Investment behavior is explained by several key theories The neoclassical theory posits that perfect competition and efficient financial markets drive investment decisions (Jorgenson, 1963) Clark's accelerator theory (1917) connects capital investment to macroeconomic factors such as demand Tinbergen's internal funds theory (1938) emphasizes that profitability influences investment choices Modigliani and Miller (1958) argue that a firm's value remains constant regardless of its financing structure under ideal conditions Tobin’s Q theory (1969) examines the relationship between market value and replacement costs The pecking order theory introduced by Myers and Majluf (1984) suggests that firms prefer internal financing over external sources Agency theory, developed by Meckling and Jensen (1976), investigates the conflicts between shareholders and managers, while real options theory (Myers, 1977) underscores the importance of flexibility in delaying investments based on market conditions.
Monetary policy is a crucial macroeconomic tool for governments, particularly in Vietnam, where it shapes the macroeconomic landscape and influences microeconomic conditions It guides firms in their investment and financial decisions, aiming to maximize value As a transitional economy, Vietnam is modernizing its monetary policy to support a stable market economy, with the Governor of the State Bank responsible for implementing national policy through various tools Adjustments in monetary policy impact external financing via interest rates and asset prices, with lower interest rates and higher Tobin’s Q values promoting investment The credit channel is vital, as it affects the cost and availability of financing, directly influencing firms' investment decisions in Vietnam’s investment-led economy.
4 how monetary policy impacts corporate investment is essential, especially amid uncertainty, as shown by De Pooter et al (2021)
The modern understanding of uncertainty as surprises originated with Knight (1921), who distinguished between uncertainty and risk, highlighting situations with incomplete knowledge of probability distributions Keynes (1937) further emphasized that uncertainty often arises from insufficient information This foundational work paved the way for examining uncertainty and policy surprises in academic literature Dixit and Pindyck (1994) advanced real options theory, underscoring the significance of flexibility in investment decisions amid uncertainty The Oi-Hartman-Abel theory suggests that increased risk can lead to higher expected profits, while risk aversion theory connects greater uncertainty to elevated risk premiums, which can raise financing costs and deter investment Real options theory, as discussed by Bernanke (1983) and others, indicates that firms may postpone investments in high-risk scenarios to acquire more information Empirical research demonstrates that firms often reduce investment during uncertain times, waiting for more favorable conditions (Pindyck, 1988).
Monetary policy significantly influences corporate investment decisions by affecting capital costs and financial constraints Despite extensive research on this relationship, the effects of monetary policy surprises—unexpected shifts in policy—are underexplored, particularly in emerging markets like Vietnam Most studies focus on large economies, creating a gap in understanding how these surprises impact firms in developing financial markets with weaker investor protections Recent findings indicate that the effects of monetary policy surprises vary among firms For instance, Tang et al (2022) reveal that unanticipated expansionary monetary policy in China boosts investment in non-listed firms initially, but this effect diminishes over time, indicating a temporary acceleration rather than sustained growth Additionally, the response to such policies differs based on ownership structure and firm size, with external financing access being more critical than investment opportunities In Vietnam, Nguyen et al (2022) demonstrate that unexpected money growth affects firm-level investment similarly to monetary tightening, highlighting the challenges faced by firms reliant on external financial resources.
5 constraints rely more on internal cash flow, while ownership characteristics shape investment responses to monetary changes
This thesis explores how Vietnamese firms adjust their investment decisions in response to unexpected monetary policy changes, particularly whether they view unanticipated monetary expansion as a chance to alleviate capital constraints and increase fixed investments It also evaluates the significance of internal capital financing (ICF) in this scenario, a topic that has seen varying importance based on economic conditions During financial shocks, firms often encounter higher external financing costs due to information asymmetry, which leads them to rely more on internal funds However, these shocks can result in economic downturns, raising the critical question of how government monetary policy can effectively mitigate their effects The research aims to investigate whether prompt implementation of expansionary monetary policies can stimulate demand and promote corporate investment, thereby aiding economic recovery.
ICF has varied with changing economic conditions, particularly during downturns when financially constrained firms rely more on internal funding, heightening their sensitivity to cash flow fluctuations In response to these shocks, governments frequently adopt unexpected expansionary monetary policies to boost demand and corporate investment Such unanticipated growth in the money supply can facilitate access to external capital, allowing firms to increase their investment beyond initial plans and lessen their dependence on internal cash flow.
This thesis examines the heterogeneity in ICF among Vietnamese firms, focusing on ownership structure Drawing on insights from prior studies published in the
Journal of Corporate Finance and the American Economic Journal (e.g., O’Toole et al.,
State-owned enterprises (SOEs) are often limited by strict investment frameworks and government oversight, which leads them to rely more heavily on internal cash flow As a result, they tend to show less responsiveness to unexpected changes in monetary policy compared to foreign-owned enterprises.
State-owned enterprises (SOEs) typically do not rely on unexpected increases in money supply for external funding, as they benefit from advantageous borrowing conditions Their strong political ties and implicit government backing enable them to obtain long-term bank loans with high credit ratings, which in turn affects the transmission of monetary policy.
Foreign-owned enterprises tend to prioritize profit maximization, allowing them to take advantage of unexpected monetary expansion This strategy enables them to secure external funding at reduced costs, thereby decreasing their reliance on internal cash flow.
This thesis explores how firms adapt their liquidity management strategies in response to unexpected monetary policy changes It suggests that during periods of unanticipated monetary growth, companies may increase their cash reserves or invest more in fixed assets, taking a cautious approach while seeking better investment opportunities The research also investigates whether firms reduce both short-term and long-term financial investments to leverage unexpected increases in the money supply Notably, it addresses a gap in existing literature by examining if easier access to external capital from monetary policy surprises allows firms to shift funds from financial investments to fixed asset projects This study introduces a novel perspective by integrating monetary policy surprises into corporate portfolio choice models, hypothesizing that firms will favor long-term investments over financial assets as these surprises occur.
Objectives
This thesis explores the adjustments made by Vietnamese firms in their investment decisions and investment-cash flow sensitivity (ICF) in reaction to unexpected monetary policy changes, filling a significant gap in current research Prior studies have faced challenges in clearly linking corporate investment behavior to unforeseen monetary shifts, which has restricted understanding of the mechanisms driving this relationship.
This research focuses on the underdeveloped financial market in Vietnam, which is predominantly influenced by small and medium-sized enterprises (SMEs) The study has two main objectives: first, to investigate if Vietnamese firms increase fixed investment in response to monetary policy surprises and to evaluate the presence of investment cash flow sensitivity (ICF), particularly examining whether ICF diminishes or vanishes with rising monetary policy surprises Second, it aims to explore the differences in ICF among Vietnamese firms, specifically comparing state-owned and foreign-owned enterprises in the context of increasing monetary policy surprises.
The thesis includes an additional analysis that examines the asymmetric effects of monetary policy surprises on Vietnamese firms It investigates whether these firms increase cash holdings and decrease financial investments in response to such surprises This analysis seeks to clarify firms' capital allocation behavior amid rising monetary policy surprises Specifically, firms may choose to maintain higher levels of liquid assets to seize fixed investment opportunities that can enhance their value This strategy may be influenced by lower interest rates in the capital market, which increase the opportunity cost and diminish the appeal of financial investments.
In 2023, firms may shift capital from financial assets to fixed asset projects or increase cash reserves, adopting a cautious "wait-and-see" strategy However, previous research has not examined if easier access to external capital allows firms to make such reallocations Therefore, the research objective is to investigate the asymmetric effects of monetary policy surprises, specifically whether Vietnamese firms tend to hold more cash and decrease financial investments in response to increased monetary policy surprises.
Research questions
This thesis seeks to address two primary research questions:
(1) How do Vietnamese firms respond to increasing monetary policy surprises in terms of fixed investment, and does ICF weaken or disappear under such conditions?
(2) How does the ICF of Vietnamese firms differ between state-owned and foreign-owned enterprises when monetary policy surprises increase?
In addition, this thesis poses a sub-question to gain deeper insights into firms’ behavioral responses, namely:
(3) Do Vietnamese firms adopt a "wait-and-see" approach by holding more cash and reducing financial investments in response to monetary policy surprises?
Delimitations of scope and key assumptions
This thesis examines a specific sample of non-financial listed firms in Vietnam, excluding financial institutions like banks and insurance companies, over a 14-year period from 2010 to 2023 The research is concentrated on key themes such as monetary policy surprises, ICF, cash holdings, and financial investments, ensuring that the findings are relevant to Vietnamese non-financial firms The study aims to provide recommendations on corporate governance and policy management based on its findings, while maintaining a focus on accuracy and avoiding overstatements.
Methodology
This thesis utilizes a quantitative approach to achieve its research objectives, employing a panel data estimation methodology with multi-way fixed effects (FE) to address variations across time, industry, and province.
To address heteroscedasticity and clustered observations, robust standard errors at the firm level are utilized, following Petersen (2008) The study employs an instrumental variables (IVs) approach using two-stage least squares (2SLS) estimation to tackle endogeneity issues Additionally, the System-GMM (S.GMM) method, as developed by Arellano & Bover (1995) and Blundell & Bond (1998), is applied to manage endogeneity and unobservable heterogeneity associated with fixed firm effects The thesis also incorporates the Hansen test for overidentification and the Arellano-Bond test for autocorrelation to ensure the validity of the model's specifications.
Research process
The thesis process begins with identifying the research problem and involves several key steps to achieve the research objectives First, the author develops hypotheses and establishes research models by clearly defining the research objectives and reviewing relevant theoretical frameworks and empirical studies Next, the thesis outlines methods to measure variables within these models, which lays the groundwork for selecting the research sample and identifying data sources Finally, econometric techniques are applied to provide statistical evidence, forming the basis for analysis and recommendations related to the research topic.
Contributions of the thesis
The thesis contributes to the literature in six significant ways:
This study is one of the first to explore how monetary policy surprises affect the unexpected component of monetary policy changes, known as ICF This measure acts as a key indicator of the overall stance of monetary policy.
This study explores the impact of monetary policy changes—both tight and loose—on corporate investment behavior, contributing to the literature on policy uncertainty measures Unlike the general economic policy uncertainty index, this research focuses specifically on monetary policy, distinguishing between favorable and unfavorable uncertainties It introduces a targeted measure called monetary policy surprises, which captures unexpected changes in monetary policy that can significantly influence financial and macroeconomic conditions These surprises affect firms' expectations and innovation incentives, highlighting their distinct impact on corporate investment compared to broader economic policy uncertainty Understanding both expected and unexpected monetary policy changes is crucial, as they directly relate to central bank actions, such as interest rate adjustments, which have immediate effects on firms' financing conditions.
Vietnamese firms demonstrate unique investment adjustments in response to monetary policy surprises, increasing investments during expansionary phases and decreasing them during restrictive periods Recognizing these monetary policy surprises is essential for evaluating their impacts, as they stem from unexpected changes influenced by economic fundamentals These surprises act as exogenous factors in monetary policy, although their measurement can be challenging Some research utilizes the M2 growth rate or residuals for this purpose.
A study by Nguyen et al (2022) reveals that unexpected decreases in money growth positively impact internal capital formation (ICF), especially for firms with external financial constraints Similarly, Tang et al (2022) find that unexpected expansionary monetary policy boosts investment in China's non-listed firms, with effects peaking in the first year and diminishing by the fourth year, indicating that such policies accelerate rather than sustain investment The critical question is whether firms view surprise increases in monetary policy as opportunities for easier access to external capital, enabling them to exceed their original capital expenditure plans Historically, ICF has been widely studied, with findings showing that high capital costs from external financing stem from information asymmetry and economic shocks, leading firms to favor internal funding The response of governments through monetary policy during these shocks is crucial, as immediate expansionary measures aim to stimulate demand and corporate investment for economic recovery ICF has shown fluctuations over time, often increasing during negative shocks when firms rely more on internal funding Consequently, unexpected money supply growth can enhance access to external capital, encouraging firms to invest beyond their initial expectations.
12 scenarios, firms may reduce their dependence on internal cash flow At that point, the ICF becomes weaker and may even disappear
This thesis enhances the understanding of heterogeneity in internal capital financing (ICF) among Vietnamese firms by analyzing the ownership structures of state-owned enterprises (SOEs) and foreign-owned enterprises SOEs benefit from government guarantees and preferential access to financing, making them less sensitive to monetary policy changes, while non-SOEs are more responsive to such shocks The study investigates the impact of unexpected money supply growth on ICF in SOEs, aiming to determine if their investment decisions still rely on internal cash flows, in line with the pecking order theory It highlights that SOEs have rigid investment plans and are unlikely to leverage expansionary monetary policies for unplanned investments due to governance risks Furthermore, SOEs often do not depend on unexpected monetary growth for external funding, as they enjoy favorable borrowing conditions Politically connected firms in Vietnam possess stronger bargaining power, facilitating easier access to commercial bank financing The thesis also assesses whether ICF diminishes for foreign-owned enterprises during monetary policy surprises, noting that these firms typically have better governance and more cautious investment strategies, which may result in lower capital expenditures.
Non-state-owned and foreign-owned enterprises can capitalize on unexpected growth in money supply to lessen their dependence on internal cash flows, as lower interest rates facilitate easier access to external funding through commercial banks These private and foreign firms focus on maximizing their value by actively monitoring capital markets, quickly seizing profitable investment opportunities, and effectively managing risks while utilizing external capital at reduced costs.
When unexpected monetary growth occurs, firms often adopt a “wait-and-see” strategy, increasing cash holdings and allocating more capital to fixed assets in anticipation of better investment opportunities In Vietnam, firms tend to boost cash reserves during monetary policy surprises due to precautionary liquidity motives This study investigates the relationship between cash holdings and monetary surprises, particularly in countries with weak investor protections, where controlling shareholders may extract private benefits, leading to higher cash reserves It addresses two main questions: whether firms prefer to hold more cash and if monetary policy surprises influence their financial investments in fixed assets While traditional agency theory suggests a negative relationship between uncertainty and cash holdings, the precautionary motive indicates a positive correlation, especially in emerging economies like Vietnam with low investor safeguards The research anticipates a positive link between monetary policy surprises and corporate cash holdings, as firms may postpone investments while awaiting optimal conditions amid monetary fluctuations Additionally, it explores whether firms reduce both short-term and long-term financial investments during monetary policy surprises to capitalize on unexpected increases in the money supply, as these surprises can lower interest rates and diminish the appeal of capital market investments.
Due to reduced returns on financial investments, firms may reallocate capital by withdrawing funds from these investments and directing them toward fixed asset projects or increasing cash reserves, adopting a cautious "wait-and-see" strategy for better opportunities This situation can be examined through the lenses of earnings potential and the associated risks of both fixed and financial investments Notably, previous research has not investigated whether easier access to external capital from monetary policy surprises allows firms to withdraw from financial investments and redirect funds to fixed asset projects This thesis introduces a novel perspective by integrating monetary policy surprises into firms' portfolio choice models, hypothesizing that increased monetary policy surprises will lead firms to shift their investments from financial assets to long-term investment plans.
The thesis presents a significant contribution to economics and finance by discovering new instrumental variables (IVs) for monetary policy surprises, steering clear of ineffective IVs like industry averages Effective IVs should correlate strongly with monetary policy surprises while having minimal direct effects on corporate investment The 2021 Nobel Prize in Economics recognized Joshua D Angrist and Guido W Imbens for their instrumental variable approach to establishing causality and addressing endogeneity The State Bank of Vietnam's monetary policy primarily targets domestic factors, often neglecting external influences, which can lead to unexpected changes in M2 growth rates The thesis proposes four instrumental variables, including U.S.-China tensions, measured through a UCT index based on media coverage, and U.S monetary policy uncertainty, to enhance the robustness of IV regression results.
The article examines the impact of various factors on corporate investment in Vietnam, including uncertainty that is unlikely to directly influence investment, shifts in core political positions reflecting electoral changes, and the effects of storms on economic policy These variables are instrumental in analyzing how monetary policy surprises affect corporate investment expenditures, enhancing the understanding of Vietnam's monetary dynamics while acknowledging the validity of existing methodologies.
The findings of this thesis lay a crucial groundwork for scientists and analysts to explore further studies The policy recommendations and proposed actions are based on robust scientific evidence and logical reasoning This research will be an essential reference for policymakers in crafting strategies that support socio-economic development goals Moreover, it will aid investors and business leaders in making informed investment decisions in light of macroeconomic policy changes and firm conditions.
This research establishes a theoretical framework and examines empirical data regarding the effects of monetary policy surprises on ICF in Vietnam The results will supply researchers with further empirical insights and a foundation for pursuing a wider range of research avenues.
This study will be a crucial resource for the economic sector, related fields, and researchers, especially those conducting in-depth studies For undergraduate and graduate students in Vietnam, grasping this topic will enhance their synthesis and analytical abilities, foster dialectical thinking on economic matters, and facilitate the application of quantitative research methods Additionally, it will enrich their practical knowledge, empowering them to make informed scientific judgments and recommendations.
Organization of the thesis
The thesis is organized into five chapters (see Figure 1.1)
Figure 1.1 Organization of the thesis
Theoretical Framework and Literature Review
Theoretical framework
Theories of corporate investment, ranging from Fisher and Keynes' net present value (NPV) to contemporary concepts like real options and agency theory, provide a comprehensive understanding of investment decision-making While each theory offers valuable insights, none fully encapsulates the complexities of real-world investment behavior Neoclassical and accelerator theories emphasize macroeconomic factors and capital allocation, while Tobin’s Q theory highlights the significance of market value and replacement costs Additionally, the internal funds theory plays a crucial role in understanding investment dynamics.
Investment- Cash flow Sensitivity (ICF)
Heterogeneous Responses Monetary Policy Surprises (MPS)
Neoclassical theory The internal funds theory
Accelerator theory Pecking order theory
1 Do firms prefer to hold more cash?
2 Do firms decrease financial investments?
2 Random shocks to money growth
The pecking order theory highlights the significance of internal liquidity and financing preferences amid information asymmetry While the Modigliani-Miller theorem suggests that capital structure is irrelevant under ideal conditions, trade-off theory introduces a practical perspective by balancing the benefits of debt against financial distress Additionally, liquidity and agency theories examine how cash reserves and governance influence corporate investment decisions, whereas real options theory emphasizes the need for flexibility in uncertain environments Financial market frictions, including transaction costs and information asymmetry, further complicate access to capital and decision-making efficiency Together, these theories form a comprehensive framework for understanding the strategic, economic, and financial factors that drive corporate investment, underscoring the necessity of adapting to changing market conditions and specific firm constraints.
Identifying the key drivers of corporate investment is crucial and encompasses three main areas: financial characteristics like investment opportunities, cash flow, cash holdings, firm size, and financial leverage; corporate governance factors such as ownership structure, board composition, and managerial attributes; and external influences including environmental uncertainty, national culture, legal frameworks, and macroeconomic conditions These topics will be explored in detail alongside the research hypotheses in Chapter 2 and the identification of research variables in Chapter 3.
Fisher (1930) and Keynes (1936) argued that corporate firms delay investments until future cash flows, adjusted for net present value (NPV), reach zero, highlighting the importance of NPV in physical investment decisions Markowitz (1952) further developed this concept by introducing additional factors for portfolio selection, such as discounted cash flow, payback period, and internal rate of return This foundation has led to the emergence of various theories that seek to explain investment behavior, each detailing the assumptions that influence investment decisions.
The article presents 19 compelling examples demonstrating the application of various economic theories in investment strategies Key economic drivers, including cash flow, taxes, information asymmetry, agency costs, financial distress, and external shocks, significantly influence these investment tactics However, it is important to note that no single theory offers a complete understanding of investment strategy, as they serve only as conditional frameworks.
Jorgenson (1963) introduced neoclassical investment theory, which relies on the neoclassical production function and is based on key assumptions such as the absence of market uncertainty, perfect competition, full employment, efficient financial markets, and corporate firms maximizing the net present value (NPV) of cash flows However, these ideal conditions are challenging to achieve in the real economy, prompting the development of alternative investment theories Bischoff et al (1971) highlight significant factors affecting investment in the 1970s, including inflation and interest rates, revealing that traditional neoclassical models fail to explain investment behavior during this time Their study underscores the necessity of considering economic uncertainty and external shocks in investment evaluations, advocating for more robust frameworks to understand firms' investment dynamics in fluctuating economic environments.
The accelerator theory of investment, initially introduced by Clark in 1917 and later refined by Keynesian concepts, posits that capital investments are significantly affected by macroeconomic factors like demand and income In times of robust GDP growth and increasing income, the heightened demand for industrial goods drives firms to either increase prices or enhance their production capacity through capital investments.
Investment behavior is crucial for enhancing profitability, as firms often increase production through capital investment Chenery (1952) and Koyck (1954) advanced this understanding by analyzing how firms adjust their capital in response to economic conditions, emphasizing demand as a primary driver of investment They introduced concepts like overcapacity and the acceleration principle, linking changes in consumer demand to investment fluctuations, and highlighted the importance of distributed lags in past investments affecting current decisions Junankar & Junankar (1972) further explored the relationship between investment behavior and economic growth, stressing the influence of macroeconomic factors on investment decisions They argued for the integration of various theories to better understand these dynamics and suggested that investment strategies should adapt to changing economic conditions, underscoring the significance of GDP growth and income in driving capital investment across industries.
Tinbergen (1938) introduced the internal funds theory of investment, emphasizing that a firm's investment decisions are primarily influenced by profitability Profits are essential for providing the necessary funds for new investments, and corporate managers typically evaluate both internal and external financing options Internal funds, which include capital reserves, retained earnings, and depreciation expenses, are preferred for acquiring new physical assets While firms may also seek external financing through the sale of stocks or bonds, they often hesitate to rely on external borrowing due to concerns about control and bankruptcy risks Advocates of the internal funds theory suggest that companies should focus on enhancing profitability to generate internal funds for future investments.
21 profitability ratios are seen as key factors influencing investment decisions Later classic studies by Meyer & Kuh (1957), Stiglitz & Weiss (1981), and Fazzari et al
(1988) continued to extend this theory
Modigliani and Miller (1958) proposed that a firm's investment decisions are independent of its capital structure under ideal conditions, suggesting that a firm's total value remains constant regardless of whether it uses debt or equity for financing This theorem relies on assumptions of perfect capital markets, no taxes, and no bankruptcy costs, allowing investors to achieve their desired leverage independently Therefore, a firm's investment policy should prioritize project profitability over financing methods, as the cost of capital adjusts to the firm's risk profile without impacting overall value However, in reality, factors like taxes and market inefficiencies complicate this theorem's applicability Despite this, the Modigliani-Miller Theorem is a cornerstone of corporate finance, influencing the understanding of capital structure and investment decisions The capital-structure irrelevance theory asserts that, with few exceptions, a firm's value and investment choices are largely unaffected by financing decisions, with differences in financing strategies often viewed as minor tactical noise that has little effect on core operations and overall value.
Both neoclassical and accelerator theories of investment exhibit significant shortcomings They both assume that capital adjustments happen instantly within each period, neglecting the impact of adjustment costs Additionally, these theories fail to consider the crucial role of future expectations in shaping investment decisions.
Brainard and Tobin (1968) and Tobin (1969) proposed a groundbreaking investment theory, which posits that corporations will only invest when the market value of their assets aligns with the replacement cost of existing assets This Q theory of investment enhances understanding by factoring in adjustment costs within the profit function It suggests that firms are incentivized to invest in physical capital when the replacement cost is lower than the market value of their installed capital Erickson and Whited (2000) examined the discrepancies in investment–cash flow regressions, attributing many findings to measurement errors in marginal “q.” Their research indicates that cash flow has minimal impact on investment decisions, even for financially constrained firms, and affirms that the Q theory remains robust and explanatory when adjusted for these inaccuracies.
The pecking-order theory, developed by Myers and Majluf (1984) and Myers
The article discusses how firms with existing assets and growth opportunities navigate external financing, grounded in the premise of generally efficient financial markets affected by asymmetric information Investors often lack insight into a firm's true asset value and investment potential, complicating share pricing for financing Consequently, stock issuance announcements can yield mixed signals, indicating growth potential while also triggering negative market reactions due to uncertainties The pecking-order theory posits that firms follow a financing hierarchy to minimize costs, starting with internal funds like retained earnings to avoid transaction costs and concerns over undervaluation When internal resources are exhausted, firms resort to debt financing, with equity issuance as a last option, as prioritizing internal financing helps mitigate negative signaling effects that could depress stock prices.
Managers possess superior insights into firm value compared to external investors, particularly in emerging markets where access to external capital is often expensive or restricted This dynamic highlights the importance of understanding corporate financial behavior in contexts characterized by financial frictions and asymmetric information.
The trade-off theory, as articulated by Kim (1978), Kraus and Litzenberger
The trade-off theory, refined by Scott (1977) and building on Modigliani and Miller’s (1973) work, offers a nuanced perspective on how firms balance the benefits and costs of debt and equity financing It emphasizes that companies aim to optimize their capital structure by weighing the tax advantages of debt, such as interest deductibility, against the risks of financial distress associated with high leverage While debt can boost equity returns through tax shields, it also increases bankruptcy risks and related costs, including reduced operational flexibility and heightened creditor scrutiny This theory highlights the proactive management of capital structure to maximize tax benefits while controlling financial risks, enabling informed investment decisions that support growth without exposing firms to excessive financial risk Ultimately, the trade-off theory illustrates the importance of strategic financial planning in enhancing corporate investment decisions and ensuring long-term sustainability.
Monetary policy surprises and investment-cash flow sensitivity
2.2.1 Monetary policy surprises and corporate investment
The modern concept of uncertainty, particularly as it relates to surprises, was notably discussed by Knight (1921), who differentiated between uncertainty and risk due to incomplete knowledge of probability distributions This idea was further supported by Keynes (1937), who famously stated, "We simply don’t know," establishing a foundation for extensive theoretical exploration of uncertainty and policy surprises Key theoretical models, particularly real options theory as analyzed by Dixit and Pindyck (1994), emphasize the precautionary motive identified by Keynes, which, along with transactional and speculative motives, influences liquidity preferences The Oi-Hartman-Abel framework suggests that convex profit functions can lead to increased expected profits through greater probability weight on price fluctuations, while the growth options mechanism indicates that heightened risk can stimulate investment by raising expected profits Conversely, risk aversion theory posits that increased uncertainty results in a higher risk premium, raising financing costs and negatively impacting investment decisions Real options theory, developed by Merton (1973), Black and Scholes (1973), Cox and Ross (1976), and Bernanke (1983), highlights that investment projects occur under irreversibility, allowing for project delays as new information becomes available.
A study by Caballero (1991) found that corporate investment declines as risk levels increase, as firms must weigh the current return on investment against potential future returns In high-risk environments, the increased cost of expected returns can lead companies to delay, reduce, or even abandon investment and lending activities (Tan et al., 2022).
Uncertainty about future investment returns and the irreversibility of investments often leads to cautious behavior among firms (Demir & Danisman, 2021) Empirical studies indicate that higher risk correlates with increased potential returns from delaying investments (Bernanke, 1983; McDonald & Siegel, 1986; Pindyck, 1988; Titman, 1985) As a result, in uncertain environments, companies tend to decrease their current investments and prefer to wait for more favorable conditions before proceeding with future investments.
Regulating the macroeconomy is a crucial responsibility for nations, with central banks prioritizing inflation control, interest rate management, economic growth support, and regulation of money and foreign exchange markets through monetary instruments (Mishkin, 2017) In Vietnam, despite rapid capital market growth, credit supply remains the primary financing channel for firms Monetary policy significantly influences corporate investment and financing decisions (Morck et al., 2013; Kashyap & Stein, 1994), with numerous studies highlighting its impact on capital structure, cash holdings, and investment behaviors (Cook & Tang, 2010; Ma & Hu, 2012; de la Horra et al., 2021; Han & Wang, 2023; Yang et al., 2017) This research explores how corporate investment varies during periods of expansionary or tightening monetary policies aimed at achieving targeted inflation rates, with empirical consensus indicating that expansionary policies increase credit supply and lower interest rates, thereby boosting investment and consumption, while tightening policies have the opposite effect (Bernanke & Gertler, 1995; Kashyap & Stein, 1994).
Recent research on monetary policy shocks in developed economies reveals significant effects on corporate investment Firms adjust their investment levels in response to both expansionary and contractionary shocks, showcasing heterogeneity and various transmission channels Notably, Cloyne et al (2020) demonstrate that younger, non-dividend-paying firms respond more robustly to these shocks due to financial frictions Additionally, high-frequency evidence from Ottonello and Winberry (2020) supports these findings.
Research indicates that firms with low default risk are most responsive to changes in monetary policy Jeenas (2023) highlights that highly leveraged firms with limited liquidity tend to reduce investment following contractionary shocks due to fixed debt issuance costs Tang et al (2022) find that while unexpected monetary policy easing initially boosts investment in China's non-listed firms, this effect diminishes by the fourth year, indicating a temporary acceleration rather than a sustained increase in investment The response to monetary policy varies among state-owned and private firms, as well as across different sizes, with access to external finance playing a more significant role than investment opportunities Ma and Wang (2024) present strong evidence that firms enhance their innovative activities in reaction to monetary policy shocks Additionally, Ren et al (2024) reveal that uncertainty in US monetary policy significantly hampers green investment in China by raising default risk, increasing financing constraints, and reducing competitiveness, with a more pronounced effect on declining firms, state-owned enterprises, and those in non-heavy pollution sectors.
Identifying monetary shocks is crucial for evaluating the effects of monetary policy, as these actions often respond to economic fundamentals Monetary shocks represent unexpected changes in policy, making the formulation of identification strategies for these surprises a complex task Some studies utilize the M2 growth rate or residuals from VAR models to analyze monetary policy effects In Vietnam, research has shown that unexpected money growth impacts firm-level investment, particularly enhancing investment for firms with external financial constraints Furthermore, the ownership structure of non-financial firms can weaken the investment impact of monetary tightening, highlighting the importance of cash flow and ownership characteristics This thesis seeks to identify monetary policy surprises and their effects on corporate investment, particularly whether firms view a surprise increase in monetary policy as an expansionary strategy that allows for easier access to external financing.
The article discusses the impact of capital and lower capital costs on expanding fixed investment, also referred to as capital expenditure, beyond initial plans It highlights that Chapter 3 will provide a detailed examination of methods for measuring monetary policy surprises in Vietnam The research introduces its first hypothesis regarding this topic.
H1 Vietnamese firms expand fixed investment when monetary policy surprises increase 2.2.2 Monetary policy surprises, cash flow, and corporate investment
The relationship between cash flow and corporate investment (ICF) has been extensively studied, yet the impact of monetary policy surprises on this relationship remains unexplored Such surprises can affect corporate investment behavior by enabling easier access to external capital, prompting firms to invest more than anticipated and reducing their reliance on internal funding Research indicates that increased internal funding through cash holdings can lessen investment sensitivity to economic uncertainty, as firms often prefer internal financing to mitigate risks from financial shocks High external financing costs, driven by information asymmetry, further compel firms to prioritize internal funding While monetary policy shocks typically have negative effects on economic growth, the critical question is how government responses, particularly through expansionary monetary policy, can effectively stimulate demand and encourage firm investment to aid economic recovery This thesis aims to investigate this crucial area.
According to the pecking order theory by Myers and Majluf (1984), companies generally prefer to utilize internal resources, particularly retained earnings, to meet their capital needs As a result, firms often rely significantly on internal cash flow to enhance corporate investment, leading to a positive relationship between cash flow and corporate investment (Frank & Goyal, 2008; Fazzari et al.).
Research indicates that the relationship between cash flow and corporate investment is significantly influenced by the availability of internal cash flow (Fazzari et al., 1988; Hovakimian, 2011) A transition from a stable to an uncertain environment can lead to a negative correlation between investment and cash flow, as firms may struggle to secure the necessary internal funds for their investments According to the neoclassical Q theory, corporate investment decisions are primarily driven by marginal Q, which is the ratio of the market value of an additional unit of capital to its replacement cost (Tobin, 1969; Von Furstenberg et al., 1977) However, Fazzari et al (1988) demonstrate that investment remains positively correlated with cash flow, even when considering Tobin’s Q, attributing this relationship to financial frictions In markets characterized by such frictions, firms facing financial constraints often depend on internal liquidity for their investment needs.
Financial frictions significantly impact corporate investment, as research indicates that the expenses related to acquiring external debt and equity financing are higher than those linked to internal liquidity (Lamont, 1997; Shin & Stulz).
The debate surrounding the Investment-Cash Flow (ICF) relationship centers on its reliability as a measure of financial constraints Kaplan and Zingales (1997) found that firms deemed more financially constrained showed lower sensitivity to cash flow compared to less constrained firms Additionally, Kadapakkam et al (1998) noted that cash flow impacts investment more significantly in larger firms Cleary (2006) argued that firms in stronger financial positions tend to be more sensitive to cash flow, as those with higher cash flow volatility are less responsive in their investment decisions Fazzari et al (2000) critiqued the theoretical and empirical methods used by Kaplan and Zingales, asserting that ICF remains a valuable indicator of financial constraints.
Numerous studies, including those by Cleary (1999), Fazzari et al (2000), Alti (2003), and Gatchev et al (2010), challenge the effectiveness of using Internal Capital Flows (ICF) as a measure of financial constraints Despite this skepticism, ICF remains a prevalent tool in research, as evidenced by works from Beatty et al (2010), Fazzari & Petersen (1993), and Hoshi et al (1991).
What accounts for the puzzling decline in ICF observed over the past five decades? Allayannis and Mozumdar (2004) documented a decline in ICF between
1977 and 1996 Brown and Petersen (2009) link the weakening relationship from
Between 1970 and 2006, the importance of public equity and the share of R&D in total investment grew significantly Chen and Chen (2012) observed that this sensitivity diminished and nearly vanished in the U.S during the 2007–2009 credit crunch, suggesting that this trend cannot be solely attributed to factors like sample composition changes, measurement errors in Tobin’s Q, new financing avenues, R&D and intangible asset impacts, or corporate governance influences Larkin et al (2018) examined ICF across global markets, revealing stability in poorer nations but a notable decline in wealthier ones, which they linked to rising global economic wealth and diminished financial constraints for firms in developed countries Their findings highlight the critical role of access to external finance, especially equity financing, in shaping how a country's development level influences ICF.
Heterogeneous responses
This thesis investigates the variations in investment-cash flow sensitivity (ICF) among Vietnamese firms, focusing on the influence of ownership structure It builds on insights from previous research to provide a comprehensive analysis of how different ownership models affect investment decisions in these enterprises.
2024; Gutiérrez & Philippon, 2018; Larkin et al., 2018; O’Toole et al., 2016; Wang,
2023), including state-owned enterprises (SOEs) and foreign-owned enterprises
Monetary policy surprises significantly influence corporate investment, with varying effects on state-owned enterprises (SOEs) and non-state-owned enterprises (non-SOEs) Research indicates that ownership structure is vital in shaping firms' access to external financing and in preventing the misallocation of internal resources Additionally, numerous studies have shown that political connections and SOE status improve firms' capacity to obtain external funding, especially long-term bank loans for investment.
Political influence from state-owned enterprises (SOEs) in Vietnam significantly shapes the effects of monetary policy, as these entities often benefit from government guarantees that enhance their credit ratings for bank loans This preferential financial access stems from government intervention rather than reliance on collateral, leading to a correlation between higher government involvement and improved credit access The issue of soft-budget constraints for SOEs becomes more evident during economic downturns and reforms Research indicates that investment efficiency among private firms in Vietnam varies based on size, industry, financial constraints, and location, while SOEs show no link between investment spending and marginal returns However, privatized former SOEs with minority state ownership demonstrate a stronger positive relationship between Tobin's Q and investment than private firms, highlighting the impact of divestment methods on efficiency across different firm groups and industries.
Since the Doi Moi reforms in 1986, Vietnam has been transitioning to a market- oriented economy, yet state-originated firms remain dominant In low-investor-
In Vietnam, the government's intervention is perceived to be more restrictive than supportive, overshadowing its efforts to foster growth Despite ongoing reforms, the financial markets continue to be underdeveloped, with bank loans serving as the main source of external financing.
State-owned banks play a crucial role as primary creditors for equitized firms, providing them with preferential capital access and increased chances of bailouts during financial distress Politically connected firms gain early access to policy information, allowing them to navigate uncertainty more effectively This combination of favorable financing and insider knowledge helps these firms mitigate the impact of economic fluctuations, making them less sensitive to changes in monetary policy Consequently, state-owned enterprises (SOEs) enjoy significant advantages in external financing, leading to a muted response to monetary policy shocks In contrast, non-state-owned enterprises (non-SOEs) lack these benefits and are more likely to adjust their investment strategies in response to unexpected monetary policy changes.
This thesis investigates how unexpected growth in the money supply affects the sensitivity of state-owned enterprises (SOEs) to internal cash flows when making investment decisions It aims to determine the continued significance of internal cash flows in SOEs' investment strategies, as explained by the pecking order theory Furthermore, the study highlights that SOEs often have rigid investment plans that are not easily adjusted in response to monetary policy surprises Consequently, SOEs are unlikely to leverage overly expansionary monetary policies for unplanned investments, as this could jeopardize their commitments to state capital-holding agencies and increase governance-related risks.
State-Owned Enterprises (SOEs) may not need to leverage unexpected growth in money supply, as lower interest rates already enhance their access to external funding through commercial banks under normal conditions Research has consistently highlighted the significance of political connections in enabling SOEs to secure external financing, especially long-term bank loans for investment purposes.
State-owned enterprises (SOEs) enjoy high credit ratings for bank loans due to explicit or implicit government guarantees, which significantly impacts the transmission of monetary policy (Gao et al., 2019; Gulen & Ion, 2016; Li et al., 2020) In Vietnam, research by Tran et al (2024) indicates that firms with political connections possess greater bargaining power in capital markets, allowing them to obtain external funding from the commercial banking system more readily.
Research indicates that while controlling shareholders can create principal-principal conflicts, foreign investors help mitigate these issues and encourage governance reforms The recent opening of Vietnam's economy to foreign investment allows for an exploration of how foreign ownership affects firm structures Vietnamese firms that engage with foreign capital and technology experience enhanced oversight from foreign owners In transitional economies such as Vietnam, the influence of foreign controlling shareholders on investment decisions is significant, highlighting the need for further investigation into their impact.
Theoretical predictions suggest that ownership by foreign controlling shareholders may reduce investment, supported by evidence from Harford et al
Long-term investors often reduce investment while increasing shareholder value, highlighting the influence of controlling shareholders in restraining managers' empire-building tendencies Research indicates that high institutional ownership, particularly from quasi-indexers, is associated with larger payouts and lower investment, suggesting improved governance practices Additionally, well-governed firms are linked to lower capital expenditures and decreased acquisition activity.
In Vietnam, companies with higher levels of foreign ownership tend to adopt a more cautious investment strategy, thoroughly assessing their decisions prior to action This careful approach is influenced by enhanced governance and the oversight provided by foreign stakeholders.
Foreign investors play a crucial role in influencing corporate investment behavior in Vietnam This thesis evaluates the impact of monetary policy surprises on foreign-owned enterprises, specifically whether the internal cash flow (ICF) effect diminishes or vanishes It posits that these enterprises can benefit from unexpected increases in money supply, allowing them to rely less on internal cash flows due to easier access to external funding at lower interest rates Additionally, private and foreign firms focus on maximizing their value by actively monitoring capital markets to quickly seize profitable investment opportunities while effectively managing risks and utilizing external capital at reduced costs.
H3 Vietnamese firms with state ownership or foreign ownership exhibit heterogeneity in investment–cash flow sensitivity under the impact of increasing monetary policy surprises.
Unveiling the asymmetric effects
Unexpected monetary growth prompts firms to allocate more capital to fixed assets or increase cash reserves, adopting a "wait-and-see" strategy for better investment opportunities In Vietnam, firms often boost cash holdings during monetary policy surprises due to precautionary liquidity motives (Tran et al., 2024) This thesis investigates the link between cash holdings and monetary policy surprises, especially in countries with weak investor protections, where controlling shareholders may extract private benefits, resulting in higher cash reserves (Pinkowitz et al., 2006) The research focuses on two main questions: (1) Do firms prefer to hold more cash? (2) Do monetary policy surprises influence firms' financial investments in fixed assets?
2.4.1 Monetary policy surprises and corporate cash holdings
When the government alters its economic policies, businesses face uncertainty from unforeseen changes in the economic landscape Consequently, firms may need to modify their financial strategies to adapt effectively.
A crucial decision for corporations is determining the optimal amount of cash to hold, as maintaining cash reserves can safeguard against liquidity challenges However, excessive cash holdings can be detrimental, yielding no net present value and incurring additional costs Two prominent theories that elucidate corporate cash holding behavior are the precautionary motive and the trade-off theory.
1937) and agency theory (Jensen, 1986; Meckling & Jensen, 1976)
The precautionary motive for cash holdings indicates that during times of policy uncertainty, external financing becomes costlier and cash flow becomes less predictable Consequently, firms are inclined to maintain higher levels of liquid assets Furthermore, when confronted with investment opportunities that are either irreversible or poorly timed, companies tend to retain more cash, biding their time for the most advantageous moment to invest amidst potential uncertainties.
& Ion, 2016; Liu et al., 2021) This implies a positive relationship between monetary policy surprises and cash holdings
This thesis introduces a revised agency perspective, highlighting a positive correlation between cash holdings and policy surprises in countries with weak investor protection In these environments, shareholders lack the power to ensure that managers prioritize their interests, leading firms to retain excess cash instead of distributing it to owners Research by Pinkowitz et al (2006) indicates that controlling shareholders in weak investor protection countries are more likely to extract private benefits from cash holdings, diminishing the value of corporate cash Additionally, Dittmar et al (2003) reveal that firms in these countries hold nearly twice as much cash compared to those in stronger investor protection environments El Ghoul et al (2023) further note a negative correlation between uncertainty and cash holdings, with this effect diminishing in nations with stronger investor safeguards.
In weak investor protection environments, traditional agency theory may be less effective, as inadequate capital market oversight fails to pressure managers to
Under a modified agency perspective, managers may opt to maintain higher cash reserves, leading to lower cash holdings overall Furthermore, companies often retain additional cash as a precautionary measure, preparing for potential challenges in obtaining future financing (Dudley & Zhang, 2016; Demir).
During uncertain times, firms face challenges in securing external financing due to increased financial frictions and cash flow risks To mitigate potential cash flow shortfalls, companies often accumulate cash to seize valuable investment opportunities High information asymmetry can render external financing costly and difficult, prompting firms to rely on internal funds, which in turn raises their cash demand Research indicates that cash holdings can buffer the adverse effects of monetary tightening on investments, particularly for firms struggling with external financing A recent study highlights that negative monetary policy surprises lead to increased corporate cash reserves, especially among financially constrained firms with limited access to bank credit This trend is more pronounced in non-state-owned enterprises during periods of monetary tightening, although it does not appear to influence corporate investments, challenging traditional real-option theory.
In 2024, research indicates that politically connected firms experience a diminished impact of uncertainty on their cash holdings Unlike most firms that typically adjust their cash reserves based on cash flows during periods of increased uncertainty, these politically connected firms are less dependent on internal cash flows for accumulation in such circumstances.
Traditional agency theory suggests a negative relationship between uncertainty or monetary surprises and cash holdings However, the precautionary motive and modified agency perspective indicate a positive correlation, particularly influenced by investor protection levels In emerging economies with weak investor safeguards, like Vietnam, firms tend to hold more cash to alleviate financial constraints and investment risks, especially in an underdeveloped financial market.
This study suggests a positive correlation between monetary policy surprises and corporate cash holdings, indicating that firms are likely to delay investments in anticipation of more favorable economic conditions.
H4 Vietnamese firms prefer to hold more cash in a "wait-and-see" stance when monetary policy surprises increase
2.4.2 Monetary policy surprises and corporate financial investment
This thesis investigates the impact of monetary policy surprises on firms' financial investment strategies, focusing on how unexpected increases in the money supply influence both short-term and long-term investments According to Harford et al (2018), firms with excess cash are inclined to make acquisitions that may ultimately diminish shareholder value under the guise of diversification Additionally, the thesis delves into essential financial theories concerning capital structure, which posits that firms finance their investments through a combination of internal and external sources Internal financing is derived from surplus operational funds, such as retained earnings and depreciation, which are evident in cash holdings and balance sheet deposits Numerous studies have thoroughly analyzed corporate financing patterns.
& Singha, 2000; Shyam-Sunder & Myers, 1999) According to the well-established
"pecking order" theory (Myers, 1984), internal financing is the most cost-effective option As a result, firms prioritize internal funds and resort to external financing only when internal resources are insufficient
The traditional pecking order and trade-off theories of capital structure provide crucial insights into firms' financial investment decisions, explaining the rationale behind these choices Despite a decline in financial constraints due to deeper international financial integration, corporate financial investments have significantly increased in many industrialized nations over the past two decades Additionally, an alternative perspective examines how firms allocate resources between financial and real investments, emphasizing that financial investments can yield varying outcomes (Zhang & Zheng, 2020a, 2020b; Demir, 2009).
42 complement or substitute real investments, depending on whether the return gap between these investments or risk-averse motives take precedence
Shocks have negatively impacted financial decisions at the firm level, as highlighted by Jones & Olson (2013) and Kahle & Stulz (2013) Monetary policy is essential for macroeconomic development and significantly influences firms' investment and financing choices (Morck et al., 2013) Research shows that non-financial firms often face a decision between financial assets and fixed assets Evidence from Epstein and Jayadev (2005) and Demir (2009) indicates a trend where firms increase financial investments while reducing fixed investments, a process referred to as financialization As risk and uncertainty grow, along with imperfect capital markets and elevated capital costs, firms are more inclined to invest in financial assets over fixed assets.
As surprises increase, firms tend to shorten their investment cycles and enter a
In a "defensive" mode, firms focus on highly liquid financial assets to capitalize on price differences, aiming to offset the opportunity cost of withdrawing capital from long-term investments (Grabel, 1995) Myers' pecking order theory (1984) suggests that internal financing, which has a lower cost of capital, stabilizes investment activities by increasing cash holdings Corporate managers prefer internal funding to mitigate financial shocks (Yang et al., 2017) However, when risks and costs rise, projects with negative net present values or returns below the internal rate of return are often abandoned This misallocation of resources can lead firms to prioritize investments in higher-yielding current assets over fixed assets, resulting in significant economic repercussions.
Keynes (1936) laid the foundation for modern macroeconomic theory, highlighting the structure of economic instability that emerged after the crises of the 1930s He emphasized that such instability affects the actions of individuals, firms, and governments in the economy, with shocks or unexpected events significantly influencing firms' investment decisions.
Research gaps
Research has not thoroughly investigated how Vietnamese firms modify their investment decisions in reaction to unexpected monetary policy changes, highlighting a crucial gap in understanding corporate investment behavior Although prior studies have addressed the connection between monetary policy and firm investment, they have failed to establish a clear link between monetary policy surprises—specifically unexpected money supply growth—and corporate investment choices This issue is especially pertinent in Vietnam, where the financial market is still developing and small and medium-sized enterprises (SMEs) often encounter significant challenges in obtaining external capital.
This thesis investigates the response of Vietnamese firms to monetary policy surprises, focusing on fixed investment expansion and the role of internal capital financing (ICF) It examines whether firms view unexpected increases in the money supply as an opportunity for expansionary monetary policy, enabling them to access external capital and lower borrowing costs for increased capital expenditures The research also analyzes the differences in ICF responses between state-owned enterprises (SOEs) and foreign-owned firms While SOEs may struggle to adapt due to rigid investment plans imposed by state ownership, foreign-owned and private enterprises are likely to leverage unexpected money supply growth by minimizing reliance on internal cash flow and utilizing external financing options.
The asymmetric effects of monetary policy surprises on corporate investment behavior remain largely unexplored, particularly regarding firms' tendencies to hold more cash and reduce financial investments while seeking optimal opportunities Although unexpected growth in money supply can encourage investment, firms may adopt a cautious stance, postponing decisions until economic stability is achieved Additionally, there is a lack of research on whether easier access to external capital from monetary policy surprises enables firms to withdraw funds from financial investments and redirect them toward fixed asset projects This thesis aims to fill these gaps, enhancing the understanding of how monetary policy surprises influence corporate investment, and providing valuable insights for policymakers and businesses in emerging markets like Vietnam.
Please see Appendix A for essential reference papers that provide a clearer understanding of the studies cited in this thesis.