Factors affecting the level of cash holding of companies listed in vietnam stock market

List of Abbreviations BANKDEBT: Bank Debt BVND: Billion Viet Nam Dong Currency CFLOW: Cash Flow CFVOLAT: Cash Flow Volatility DF: Degrees of Freedom EBITDA: Earning Before Interest, Tax,

FACTORS AFFECTING THE LEVEL OF CASH HOLDING OF

COMPANIES LISTED IN VIETNAM STOCK MARKET

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

INTERNATIONAL UNIVERSITY SOCIALIST REPUBLIC OF VIETNAM

SCHOOL OF BUSINESS Independence - Freedom - Happiness

ASSURANCE QUALIFIED THESIS

Student’s Name: Nguyen Nhat Anh

Title of Thesis: Factors affecting the level of cash holding of companies listed in Vietnam

stock market

Advisor: PhD Duong Nhu Hung

I assure that the content of this thesis has been qualified all requirements for a research paper and able to participate in the final thesis defense

Approved by (Signed)

PhD Duong Nhu Hung

FACTORS AFFECTING THE LEVEL OF CASH HOLDING OF COMPANIES LISTED

IN VIETNAM STOCK MARKET

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

In Finance

By

Mr Nguyen Nhat Anh ID: MBA02002 International University - Vietnam National University HCMC

Sep 2014 Under the guidance and approval of the committee, and approved by all its members, this thesis has been accepted in partial fulfillment of the requirements for the degree

Acknowledge

First and foremost, I would like to give sincere thanks to my advisor of this thesis, PhD Duong Nhu Hung, Lecturer of International University, Vietnam National University, Ho Chi Minh City (VNU-HCM) for the valuable guidance and advice in such a long way for successful completion of my thesis within the time frame He inspired me greatly to work in this thesis with his initial orientation His willingness, faith and patience in my abilities always boost my confidence and motivate me contributed tremendously to this thesis I highly appreciate when each time he correct each minor error Without instructions from PhD Duong Nhu Hung, I could neither stick right way to the topic nor find the direction to complete the research

Secondly, my gratitude goes to all lecturers of the School of Business of International University, Vietnam National University, Ho Chi Minh City (VNU-HCM), who has made me familiar, understand and passion on the concepts and knowledge of all courses under MBA program Especially, Mr Lai Tran Thanh Son, Ms Pham Thi Anh Tho and Mr Nguyen Hoang Phu – please receive my thanks for your kind supports when I get stuff with papers

Finally, I am forever indebted to my parents for their understanding, endless patience and encouragement when it was most required I am also grateful to Mr Ho Huu Tien and Mr Le Minh Giac - my classmate in MBA program My classmates have followed up and supported so much on quality of thesis Last but not latest, I want to say thanks to my close friends, Ms Pham Mai Tram, Mr Nguyen Chi Thanh, Ms Nguyen Phuong Trang, Mr Nguyen Tran Phuong, and

Ms La Y Yen for their spirit support I cannot fulfil this thesis without encourage, and sometimes criticisms to helps me stand up after failures Without helps of the particular that mentioned above, I would face many difficulties while doing this thesis

Plagiarism Statements

I would like to declare that, apart from the acknowledged references, this thesis either does not use language, ideas, or other original material from anyone; or has not been previously submitted to any other educational and research programs or institutions I fully understand that any writings in this thesis contradicted to the above statement will automatically lead to the rejection from the MBA program at the International University - Vietnam National University –

Ho Chi Minh City (VNU-HCM)

Copyright Statement

This copy of the thesis has been supplied on condition that anyone who consults it is understood to recognize that its copyright rests with its author and that no quotation from the thesis and no information derived from it may be published without the author’s prior consent

© Nguyen Nhat Anh/ MBA02002/ 2010–2014

Table of content

Acknowledge IV Plagiarism Statements V Copyright Statement VI Table of content VII List of tables X List of Figures XI List of Abbreviations XII Abstract XIII

Chapter 1 Introduction 1

1.1 Problem Statement 1

1.2 Research Objectives 3

1.3 Research Questions 4

1.4 Research Scope 4

1.6 Theoretical Framework 5

1.7 Contribution and Implication of Thesis to Business and Society 5

1.8 Structure of the Thesis 6

Chapter 2 Literature Review 7

2.1 Definitions, Time Value and Reasons for Cash Holding 7

2.1.1 Cash Definitions 7

2.1.2 Time Value of Cash 7

2.1.3 Reasons for Cash Holding 8

2.2 Information Asymmetry Theory and Related Theories 9

2.3 Factors Affecting Cash Holding from Related Theories 12

2.3.1 Size of Business 13

2.3.2 Financial Leverage 14

2.3.3 Liquid Assets Substitutes 16

2.3.4 Cash Flow 16

2.3.5 Cash Flow Volatility 17

2.3.6 Liability to Bank 18

2.3.7 Dividend Payout 20

Chapter 3 Research Methodology 24

3.1 Data Sources 24

3.2 Data Statistics 26

3.2.1 Descriptive Statistics 26

3.2.2 Univariate Analysis 26

3.2.3 Regression Analysis 27

3.2.3.1 Fama-MacBeth Regression Model 28

3.2.3.2 Cross-Sectional Regression Model with Mean Value of Variables 29

3.2.3.3 Pooled Ordinary Least Squares Regression Model with Year Dummy 30

3.2.3.4 Pooled Ordinary Least Squares Regression Model with Year Dummy and Industry Dummy 31

3.2.3.5 Fixed Effects Regression Model 33

3.2.4 Other Supported Tests for Regression Models 34

3.3 Determined Dependent and Independent Variables 35

3.3.1 Dependent Variable – Cash 35

3.3.2 Independent Variables 36

3.3.2.1 Size of Business (SIZE) 36

3.3.2.2 Bank Debt (BANKDEBT) 36

3.3.2.3 Cash Flow (CFLOW) 37

3.3.2.4 Cash Flow Violability (CFVOLAT) 37

3.3.2.5 Liquid Assets (LIQ) 37

3.3.2.6 Dividend (DIVIDEND) 37

Chapter 4 Data Analysis and Results 39

4.1 Descriptive Statistics 39

4.2 Univariate Analysis 42

4.3 Regression Results 44

4.3.1 Fama–MacBeth Regression Model 44

4.3.2 Ordinary Least Squares Regression with 5 Years Average 48

4.3.3 Pooled OLS Regression with Year Dummies 50

4.3.4 Pooled OLS Regression with Year Dummies and Industry Dummies 53

4.3.5 Fixed Effects Regression Model 56

4.4 Result from Supporting Tests for Regression Models 57

4.4.1 Hausman Test 57

4.5 Summary of Results 59

Chapter 5 Research Conclusion 63

5.1 Conclusion and Implication 63

5.2 Limitation of the Study 65

5.3 Future Research 66

References 68

Appendix 72

Appendix 1: 98 Listed Companies Chosen 72

Appendix 2: Secondary Data for Excel and Stata Input 79

List of tables

Table 1: Summary of Previous Studies 20

Table 2: List of Industry Dummies 31

Table 3: Summary of Formulas for Variables 38

Table 4: Results from Descriptive Statistics 39

Table 5: Results from Univariate Analysis 42

Table 6: Correlations Matrix of Variables from Unvariate Analysis 43

Table 7: Results from Fama – MacBeth Regression Model 44

Table 8: VIF Test for Fama-MacBeth Model 46

Table 9: Results from Ordinary Least Squares Regression with 5 Years Average 48

Table 10: VIF Test for Cross-Sectional Regression Model 49

Table 11: Results from Pooled OLS Regression with Year Dummies 50

Table 12: VIF Test for Pooled OLS Model with Year Dummies 51

Table 13: Results from Pooled OLS Regression with Year Dummies and Industry Dummies 53

Table 14:VIF Test for Pooled OLS with Year and Industry Dummies 54

Table 15: Results from Fixed Regression Model 56

Table 16: Results from Hausman Test 57

Table 17: Result Summary of Regression Models 59

Table 18: Thesis’s Result Summary 60

List of Figures

Figure 1: Theoretical Framework to Be Applied in This Research 5

Figure 2: Selected Regression Models 28

Figure 3: Cash Ratio Over Five Years 40

Figure 4: % Standard Deviation of Cash Flow over Total Assets 41

Figure 5: Graphical Correlation Matrix 43

Figure 6: Percentage of Cash Holding in Years Firms Paid Dividend 47

Figure 7: Correlations between Cash, Income and Bank Debt 47

List of Abbreviations

BANKDEBT: Bank Debt

BVND: Billion Viet Nam Dong (Currency)

CFLOW: Cash Flow

CFVOLAT: Cash Flow Volatility

DF: Degrees of Freedom

EBITDA: Earning Before Interest, Tax, Depreciation and Amortization

EMH: Efficient Markets Hypothesis

EMU: Euro Countries

FV: Future Value of Cash

HNX: Ha Noi Stock Exchange

HOSE: Ho Chi Minh Stock Exchange

LEV: Leverage

LIQ: Liquidity

OLS: Ordinary Least Square Regression

Pooled OLS: Pooled Ordinary Least Square Regression Model

PV: Present Value of Cash

SIZE: Size of Firm

VIF: Variance Inflation Factor

Keywords: Vietnam stock market, descriptive, univariate, regression, level of cash

holding

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Chapter 1 Introduction

The aim of this chapter is to provide the problem background and then to understand the purpose behind the research and questions, to which this thesis seeks and answer It also states goals that the author will seek in respect to both theoretical and practical contribution

1.1 Problem Statement

The phrase “cash is king” is an expression commonly referred to finance, although its meaning might not be as simple as this expression suggests Until now, there are two opposing views when looking at the level of cash that a company should hold

For the first view, cash is normally regarded as "just an asset that a firm need to help it to function” (Atrill & McLaney, 2004, p.124) In order to support for this statement, Berk and DeMarzo (2011) gave several reasons for a company to hold cash Those researches believed that holding cash was one of the essential elements needed for a firm to grow and prosper Cash

is also considering as the life-blood of any firm and if so without it, the survival is very unlikely Every firm needs cash daily to pay its bills and to pay off its liabilities on time, so that it can survive The firm can make use of cash to invest; for strategic purposes such as acquisitions; for

a marketing tool; to solve short-term obligations, to pay daily transactions, for repaying its loans, paying its employees, even to satisfy bank requirements and so on

Contrary to above arguments, the optimal level of cash holdings in a company should be zero, Maness and Zietlow (2004) supported This relates to the old personal saying of Plautus is that people have to spend cash to earn cash Instead of holding on cash, a company could has either invested in a new project to earn a potential return or distributed it among shareholders to let them invest elsewhere, also this resulting in a potential return This was not just a theoretical perspective as around the new millennium increasingly many companies were striving for decreased cash balance; financial managers globally advocated the benefits of small cash

holdings, Mintz (2000) stated Holding excess cash might lead to a loss of an opportunity that could have increased the company’s value With holding high level of cash, it will decrease earning yield of business indirectly, or even directly, because it does not maximize profit or potential opportunity from daily transactions or long-term investments If the management capability is weak in cash monitoring, it may lead to liquidity crisis, even to bankruptcy If so, what factors will decide this optimal level of cash holding by making costs and benefits on balance?

Company can hold cash for many reasons, short-term or long-term, finance or finance, strategic or operational objectives No matter what purpose, cash flow shows us how the company has performed in managing inflows and outflows of cash and provides a sharper picture of the company's ability to pay bills and creditors, and to finance the growth Deep understanding on factors affecting the level of cash holding first, and then implementing effective cash management solutions are the most popular approach to improve business performance by now For this reason, it is very important for every firm to monitor its cash flow

non-in order to adequate plan expenditures

The author’s personal opinion is that cash management is always a hot spot for managers With context of high inflation and economic downturn in Vietnam currently, high liquidity of cash will enhance the confidence of investors Masan group (1,970 bVND); Techcombank (3,142 bVND); Dam Phu My (3,748 bVND); PetroGas service (3,621 bVND); Vinamilk (3,101.4 bVND); FPT (1,900 bVND); Bao Viet insurance (2,700 bVND); Hoa Phat group (1,064 bVND) and Hoang Anh Gia Lai group (2,335 bVND) were highlighted as bright spots for cash management and creating advantage with outstanding profit in their market segments Looking into the financial reports at the end of 2011s, many companies cannot have good financial results like above companies

The factors, which affect cash holding, are investigated by many authors in the developed countries Kim et al (1998) and Opler et al (1999) did use data of American companies

Pinkowitz and Williamson (2001) did use data of American, German and Japan Ferreira and Vilela (2014) were with Euro companies (EMU); Ozkan and Ozkan (2004) were with the UK companies; Custodio et al (2005) and Bates et al (2009) were with the US companies; and Meggison and Wei (2012) were with Chinese companies These researches had been giving important resources to other researchers, investors and managers

As summary of financial reports of companies listed in Vietnam stock market from 2009

to 2012, the ratio of cash and cash equivalence over the total asset is decreased from 2009 (9.9%) This ration is lowest in 2011, with 8.9% However, at the end of 2012 (9.2%), this ratio grow up, reach to the ratio of 2010 (9.2%) Beside some basic statistics on non-business magazines, there are few researches on cash management The empirical studies are actually lack for demands of researchers and investors

In the context of Vietnam, rapid changes in business environment, but there are few academic researches on evaluating the factors that affect level of cash holding in firm With this research, the author research and supplements a close analysis to cash management of companies listed in Vietnam stock market based on historical data By combining and simulating approaches of previous empirical researches, the author also expects to provide the answer for management issue of what factors create strong influences on their cash levels

1.2 Research Objectives

This research will concentrate on clarifying factors which affect decision of how much cash was hold by companies listed in Vietnam stock market The objectives are:

 To identify factors that affect the level of cash holding and then measure on their impact

to cash management of companies listed in Vietnam stock market

 To propose recommendations for the management

The data set is mainly extracted from annual consolidated financial reports, which we have checked for errors Due to the size and early stage of the stock market, the sample could only cover in five years and for ninety-eight companies The methodology part will clearly show other criteria for selecting and filtering data set

Decision and Implication

Conclusion and Recommendation

Figure 1: Theoretical Framework to Be Applied in This Research

1.7 Contribution and Implication of Thesis to Business and Society

This research provides a review of Vietnam stock market based on examining the level of cash holding and cash management It suggests an approach allowing local individual investors

to make informed decisions in stock market A suitable model for analyzing cash holding is really necessary for any local individual investor to make informed decisions in the local stock market

1.8 Structure of the Thesis

The research will be in such a way as below Chapter 1, introduction, will includes the research problem and the importance of research It also mentions to research’s scopes, objectives, questions, structure, and contribution Chapter 2, literature review, will deal with the origin, terminology, and reasons why companies want to hold cash The next part will point out factors, which affect the level of cash holding predicted by related theories and research’s results

of previous authors, both in foreign countries and Vietnam Chapter 3, methodology, describes approaches for statistics It describes the methods by which the author used to collect primary and secondary data; as well as how to describes and check variables Regression methods will be introduced to show how to analyze dataset; depending on analyzing the advantage and disadvantage of previous authors and current practice on Vietnam stock market Chapter 4 discusses results at length and detail Chapter 5 will be a summary of results, conclusions, implications and limitation also The author will focus to answer the main questions mentioned

in the beginning of this research The author will also initiate several suggestions to make this research more complete and thorough

Chapter 2 Literature Review

This chapter uses existing concepts, models, formulations and frameworks on the basis of previous authors and substantially develops own views and insights It includes two main parts First one explains definitions and reasons why companies want to hold cash The next part explains factors predicted, which affect level of cash holding, by using financial theories, as well

as presents academic results of previous authors

2.1 Definitions, Time Value and Reasons for Cash Holding

2.1.1 Cash Definitions

Everyone is actually familiar with the term cash daily, and more generally, the Oxford online dictionary defines cash as “coins and notes” According to financial theories, they definite cash that include cash, short-term securities, and cash equivalences (Opler et al., 1999; Ferreira

& Vilela, 2004; Bates, Bates et al 2009) Many investors accept as true that cash equivalences convert into cash in short period

2.1.2 Time Value of Cash

Time value of cash is one of the most basic principles in finance “One dollar today is worth more than a dollar tomorrow” is perhaps one of the most famous quotes in the finance It means that if a person should invest one dollar today it will earn interest and will therefore be worth more the day after Berk and DeMarzo (2011) postulated that the interest rate would be dependent on the investment and has to adjust by subtracting the amount of inflation on the currency Both investors and companies use the concept of time value of cash in order to calculate the present as well as the future value (FV) of their operations For example, they calculate the present value (PV) of the cost and benefits for a project in order to determine if the project is profitable or not Berk and DeMarzo (2011) gave another example to calculate if their

current cash level is worth enough to cover their future expenditures The formula shows the calculation for PV, which is the present value calculated by the future value FV, the interest i, and the period n as shown in the formulas Thus, Maness and Zietlow (2004) postulated that this leads to the argument that the optimal level of cash that a company should hold is zero, since it is then considered as an idle resource for the company that do not provide any or little additional value

2.1.3 Reasons for Cash Holding

In summary, the four following reasons that companies want to hold cash The first reason is for business operating transactions Businesses do need cash to use for operating activities business The demands for cash among different types of firm are also different For example, the retail business has available cash in safe box to control operations In addition, these businesses need cash to replenish inventory deficits or to pay salaries Conversely, Damodaran (2008) confirmed that trades computer software could operate with much smaller cash balances The second reason is for reservation motivation According to Custodio et al (2005), a business held cash to finance the activities and investments when no other financial resources available or too expensive The firm holds cash to cover unexpected costs and potential liabilities cannot be determined For example, Damodaran (2008) confirmed that is cyclical business to accumulate cash during the economic boom and use that cash in case of recession to cover deficit from operations If the firm does not have available liquid assets, the cash flow shortage can stop investing in the profitable projects Thus, Ozkan and Ozkan (2004) advised that keeping cash is to avoid financial cost and depletion Managers consider this motivation to hold cash as reservation motivation The third reason is the agency cost In public businesses, it always exist problem between owners and managers The board will decide whether to return into stock or to retain in the business In many businesses, the managers, with available programs and activities, create funds to help them pursue these programs Therefore, when the

management pays more attention to gain more control over the optimal allocation of resources, they will accumulation of cash Damodaran (2008) gave his opinion that it is not for shareholders but for the purpose of opening wide funds The management is favorite cash holdings, because they are afraid of risks According to Opler et al (1999), the management holds cash to get flexibility in pursuing their own goals The final one is for investing in the future If the capital market is efficient, businesses can raise capital to invest in new and potential profitable projects

or other investments that has no transaction costs However, in reality, businesses must always face with the limitations of borrowing and the cost to access capital markets These restrictions may stem from inside, or can also come from outside the firm, but mostly, from outside the firm According to Damodaran (2008), In order to face these challenges, firm must reserve cash available to cover investment needs in the future If not, they run into the risk of reject the project and investment value The author mainly uses the first two reasons in this study Two main theories used to explain factors are the trade-off theory and the pecking order theory

2.2 Information Asymmetry Theory and Related Theories

In the 1960s, both Fama and Samuelson developed independently the efficient markets hypothesis (EMH), that market prices fully reflect all available information In practice, behavioral economists attributed the imperfections because of cognitive biases such as representative bias or information bias Information asymmetry theory is mainly used in this study And other related theories are also referred, including agency theory, trade-off theory, pecking order theory, and cash flow theory These theories play a central role in corporate finance and directly associate with level of cash holding in firms

Asymmetric information occurs when one group of participants has better or more timely information than other groups According to Myers and Majluf (1984), asymmetric information makes raising capital more difficult and answer the reason why existence of asymmetric information makes external financing costly The outside parties want to ensure that they

purchase securities not priced too high, so they will need a reasonable discount Because parties outside the enterprise hold less information than the management, they can evaluate too low stock valuations based on the information provided by the management Smith and Stulz (1985) delivered evidence that is consistent with asymmetric information problems of external financing For example, investors discount the value of firms when they attempt to sell risky securities As view of Opler et al., (1999) asymmetric information led to situation that outside capital becomes more expensive This model predicts increased costs when raising capital securities, which sold, are sensitive and the problem of information asymmetry information becomes more important Growth opportunities are intangible in nature and their value fall precipitously in financial distress and bankruptcy This would in turn imply that firms with greater growth opportunities have greater incentives to avoid financial distress and bankruptcy and hence hold larger cash and marketable securities

Agency theory is using in many fields and concerns itself with the problem of ensuring that someone acting on the behalf of another, an agent representing a principal, serves the interest of the principal Agency problem arises where the two parties have different interests and asymmetric information, such that the principal cannot directly ensure that the agent is always acting in the principal’s best interests As opinion of Eisenhardt (1989), the issue at hand is that the agent might have other goals and interests than the principal and would act to achieve these

at the expense of the principal The theory assumes that in certain situations, if possible, the agent would act to serve his or her objectives and the solution in these situations comes from aligning the interests of the principal and the agent Harris and Raviv (1978) showed that these relationships are numerous and cross-links, as such lawyer - clients, employer - employee and shareholders-managers Agency problems that might arise in a shareholder-manager situation, concerns among other things the optimal level of cash holdings Jensen (1986) worried that managers have motives for having higher levels of corporate cash holdings than what is optimal for shareholders

Trade-off theory implies that businesses will set up an objective of cash level by balancing between marginal cost and marginal benefit of holding cash The author summarizes three main benefits from holding cash as below Firstly, holding cash is to reduce the ability of financial exhaustion, because the amount of cash held will act as a safety provision for unexpected losses or limitations from raising capital from outside sources Secondly, cash holding allows businesses to pursue optimal investment policy, even whenever businesses encounter financial constraints As enterprises face difficulties in raising external capital, businesses may be forced to abandon the investment project has a positive net present value Thirdly, holding cash reduces the cost of raising capital from outside or avoid forced liquidation

of existing assets of the enterprise The role of cash is considering as a buffer between the source and use of firm resources Ferreira and Vilela (2004) proved that traditional marginal cost of holding cash is the opportunity cost of capital because it reduces the rate of return calculated on current assets

Pecking order theory implies that the cost of financing increases with asymmetric information Managers know more about their companies’ prospects, risks and value than outside investors Pecking order theory of Myers and Majluf (1984) said that companies finance for investments in the order as follows: the first is retained earnings, then safe debt, followed by risky debt, and finally equity The basic purpose of this order is to reduce funding costs due to problems of asymmetric information and other financial expenses When having enough sufficient operating cash flow, it will fund new projects to seek potential returns Otherwise, businesses will pay the debt and holding cash As research of Ferreira and Vilela (2004), when retained earnings are not sufficient to fund existing projects, they will use the amount of reservation and, if necessary, will now borrowings

According to free cash flow theory, Jensen (1986) did define that free cash flow is cash flow exceeds the amount necessary to fund all projects with positive net present value, discounted at the cost of capital involved Free cash flow theory is a subordination of agency cost

theory Interests and motivations of shareholders and management have conflicting issues related

to the optimal size of the firm and the payment of dividends to shareholders The conflict is particularly severe in the enterprise with great free cash flow Jensen (1986) believed that it is usually the enterprise free cash flow greater than the opportunity profitable investment Free cash flow theory is also basing on the theory of asymmetric information and the theory of agency costs According to Jensen (1986), the payment to shareholders will reduce the resources under management's control, thus reducing their strength Therefore, the management tends to increase the amount of cash available under their control to achieve power and autonomy in investment decisions When cash is available to serve the purpose of investment, management does not need

to raise capital from outside and not provide the external parties information about the investment projects It is called the independence in management power Therefore, management can make the investment projects negatively impact the welfare of shareholders In reality, the shareholder wishes to receive more cash back when having free cash flow

2.3 Factors Affecting Cash Holding from Related Theories

Based on related theories, the author will present clearly how firms reacted with; and changes on level of cash holding when having changes of independent factors Related factors, which presented in previous academic researches, will be summarized along with above trade-off, pecking order and/or cash flow theories, if any Size of business, financial leverage, bank debt, cash flow, cash flow volatility, liquidity of working capital, and finally dividend payout yearly are exact main seven factors that previous authors reviewed Those factors have close relationship with marginal cost and benefit; with the investment and reservation purpose, and with asymmetric information and agency cost People can see the details in below review and result summary at the end of this chapter

2.3.1 Size of Business

Based on trade-off theory, Faulkender (2002) argued for that if a firm was larger, the demand for cashing holding is lower A similar result also presented by Bover and Watson (2005) that larger firms were likely to have lower demand of cash holding Actually, as to Kim et

al (1998), large firms were less likely to face borrowing constraints than small firms, because of scale economies resulting from a fixed cost component of security issuance costs Furthermore, Ferreira and Vilela (2004) protested that small firms with high business risks and strong growth opportunities tended to hold more cash because it will be more expensive for small firms’ to raise funds The transaction fees, which usually accompany with raised funds, were fixed, and thus, the marginal cost were higher for small firms Besides that, Ferreira and Vilela (2004) advocated that larger firms were more likely to be diversified to be in probability of financial distress so larger firms hold less cash These arguments proposed a negative relation between the size of a firm and the demand of cash holding In the research of Pinkowitz and Williamson (2001), the determinants of cash holding for the United States, Japan, and Germany were investigated A regression for all the three countries showed that there was a negative relation between firm size and cash holding Nevertheless, when they tested the three countries separately, evidence shows that Japan and the US had a negative relation whereas Germany had

a positive relation between firm size and cash holding Bates et al (2009) investigated why cash holding for US industrial firms doubled from the year 1980s to 2000s, and related factors Initially, they found evidence that there is a negative relation between firm size and cash holding

in the 1980s and 1990s and they are consistent with models of a transaction demand for cash However, in the year 2000s they concluded that there is a positive relation between firm size and cash holding due to agency problems One more study, Ozkan and Ozkan (2004) found a positive but insignificant relation between firm size and cash holding This positive coefficient suggested that there might be other factors affecting the way in which size of firms applies

more successful in generating cash flows and profit so that they can go back to accumulate more cash In addition, large firms have greater growth opportunities and smaller liquid assets besides cash In this case, they may decide to hold more cash, Ozkan & Ozkan (2004) argued However, these arguments were not strongly supported by evidences

According to pecking order theory, Ferreira and Vilela (2004) and Opler et al (1999) found no evidence to support for a positive relation between firm size and cash holding They presumed that large firms had more successful, and have more cash after controlling for investment But it is weak confirmation

Pointing to cash flow theory, Ferreira and Vilela (2004) debated that larger firms are more likely to have more stakeholders, which will increase the management’s self-determination

of making decisions In addition, larger firms are not likely to be the target of a takeover, which requires more resources Thus, it was expected that managers of large firms have powers that are more discretionary over the investment and financial policies of the firm, which leads to a greater amount of cash holding So there is a positive relation between firm size and cash holding However, at the end Ferreira and Vilela (2004) and Opler et al (1999) did not still find any evidence to support this positive relation They are their subjective consider for reference only

In Vietnam, Trinh (2012) did use financial data in order to look into the percentage of holding cash over total assets The author explained that the market is volatile much, so big firms did tend to hold more cash

2.3.2 Financial Leverage

According to trade-off theory, Ferreira & Vilela (2004) recognized that leverage ratio performs as a proxy for the ability of the firms to issue debt In this way, the firm has a higher ability to increase debt so that firm will hold less cash On the other hand, a firm with less capability to increase debt holds more cash Ozkan and Ozkan (2004) observed and saw that

firms with high leverage have lower cash holdings in order to lower the cost of cash holding This means that leverage has a negative relation on cash holding In common, it is believed that leverage increases the probability of bankruptcy due to the stress that amortization plans placed

on the firm treasury management To reduce the chance of experiencing financial distress, firms with higher leverage are expected to hold more cash There was the same result as Ozkan and Ozkan (2004), however Thomas et al (2007) mentioned the defensive purposes for cash holdings when firms could settle up all of their debt duties at the end of the sample period Thomas et al (2007) saw that the considerable average ratio of cash over assets for the U.S industrial firms increased rapidly, by 129%, from 1980 to 2004 Because of this increase in the average cash ratio, firms could settle up all of their debt duties with their cash holdings at the end

of the sample period, so that the average firms had no leverage when leverage is measured by net debt This change in cash ratios and net debt was the result of a secular trend, but is more pronounced for firms that do not pay dividends The average cash ratio increased over the sample period because firms change: their cash flow became riskier, they hold fewer inventories and accounts receivable, and were increasingly R&D intensive The defensive purposes for cash holdings appeared to explain the increase in the average cash ratio However, Ferreira & Vilela (2004) found no evidence for this positive relation between leverage and cash holding These arguments finally suggested that leverage may have an unknown (positive and negative) relation between leverage and cash holding

Relying on pecking order theory, Ferreira & Vilela (2004) perceived that debt grows when investment exceeds retained earnings and falls down when investment is less than retained earnings Cash holding fall when investment exceeds retained earnings and grow when investment is less than retained earnings That was a reason why Ferreira & Vilela (2004) suggested that there was a negative relation between leverage and cash holdings According to Opler et al (1999), a firm’s debt reacted to changes in the internal funds of the firm When the

firm’s internal funds increased, its leverage decreased For more details, most of the time firms gained internal funds instead of issuing equity because it was expensive due to adverse selection Because with internal funds the firm often spent more cash than receiving cash, the firm decreases cash holdings and raises debt In short, this relationship between cash holdings, debt, and internal resources suggested that there is a negative relation between leverage and cash holdings

Relating to cash flow theory, Ferreira and Vilela (2004) noticed that firms with low leverage were less subject to monitoring, allowing for superior managerial discretion This meant that firms with less leverage hold more cash which is a negative relation between leverage and cash holding

2.3.3 Liquid Assets Substitutes

In balance sheet, firms can have liquid assets substitutes These assets can be converted into cash easily in short time and with low costs These include accounts receivable and inventories and this is in fact the net working capital minus cash They are substitutes for cash and therefore trade-off theory predicted a negative relationship between liquid assets and cash holding, Bigelli and Sanchez (2010); Ferreira and Vilela (2004); Ozkan and Ozkan (2004) examined Furthermore, Opler et al (1999) found evidence that large firms hold liquid assets substitutes so that they could be able to keep investing when cash flow is too low and when outside resources are costly Those evidences came from analysis on balance sheet of firms researched It has a relation with pecking order and cash flow theories

2.3.4 Cash Flow

Ferreira and Vilela (2004) believed that areal reason for firm to hold cash is cash flows Cash flow was recognized after corporate tax profit plus depreciation If there is large cash flow means that there is enough liquidity so the firm holds less cash However, they had found no

evidence to support this relation It is clear to say that short-term and long-term abilities are balance with large cash flow According to the trade-off model, cash flow provides a ready source of liquidity Kim et al (1998) alleged that cash flow could be seen as cash substitutes Consequently, they expected that there is a negative relation between cash flow and cash holdings

When cash flow is high, means that the operating activities are going well and positive cash flow can buffer for any loss from financing or investing activities The firm can invest more

in order to grow, so that the firm has to hold more cash, Ferreira & Vilela (2004) confirmed one more time Likewise, when there is high cash flow are expected to hold more cash because the firm prefer internal finance more than external finance, Ozkan & Ozkan (2004) analyzed It helps to reduce cost much Due to pecking order theory, these arguments strongly pointed out that there were a positive relation between cash flow and cash holding

In Vietnam, Phuong (2013) did research on special factors that affect cash level of 125 listed firms in Viet Nam from 2009 to 2012 As author’s result, seven factors that affects to level

of cash in those firms are size of business, leverage, bank liability, cash flow, cash flow violability, and dividend The pecking order theory is concluded as the most suitable theory to explain for changes on corporate cash management

2.3.5 Cash Flow Volatility

According to trade-off theory, cash holding can be very important for a company when it

is suffering because of lower cash flows or worse firm circumstances Bigelli and Sanchez (2010); and Ozkan and Ozkan (2004) dealt with that literature therefore expected a positive relation between volatility of cash flows and cash holding The greater the volatility of cash flow, the greater the possibility that the firm will be short of liquid assets It is easy to see that if the firm has to pass up some valuable growth opportunities, it will be costly to be short of cash Therefore, firms with high cash flow volatility hold more cash in order to avoid the expected

costs of liquidity constraints, Ozkan & Ozkan (2004) concluded Another supporting is that, Ferreira & Vilela (2004) also found evidence that there is a positive relation between cash flow volatility and cash holding in the EMU countries Firms with more cash flow volatility faced a higher probability of experiencing cash shortages due to unexpected bad cash flows, they supported In their paper, Opler et al (1999) also had found evidence that US firms with more cash flow volatility hold larger amount of cash Two remaining theories do not much relate to cash flow volatility

Megginson and Wei (2012) studied the relation between state ownership and cash

holdings in China’s share-issue privatized firms from 1993 to 2007 In their research, level of cash holding had negative relation with size of business, financial leverage, and net non-fixed assets, but had positive relation with cash flow fluctuation

In Vietnam, Khanh (2013) did support the opinion that many firms in samples held much cash, because of economic crisis and fluctuation Firms held cash to avoid risks, not because of finding good opportunities They balance their operations and focus on their strength, not diversify investment The result showed that cash flow, cash flow volatility, level of leverage, and debts were factors affecting to cash level

2.3.6 Liability to Bank

Based on trade-off theory, Ferreira and Vilela (2004) provided evidence that EMU firms had a closer relationship with banks In EMU countries, banks owned a significant proportion of firm’s stock; they provided more In addition, according to Krivogorsky, Grudnitski, and Dick (2009), firms in Continental Europe relied more on bank debt than bonds for their external funds

It seem that firms that rely on bank loans as major source of financing are less likely to experience agency and asymmetric information problems associated with other kinds of debt Ferreira & Vilela (2004) argued that banks were in a better position to evaluate the firm’s credit quality and to monitor and control the firm’s financial policies Pinkowitz and Williamson

(2001) used industrial firms from the Germany, U.S, and Japan to explain effects of bank power

on cash holdings The first notice is that Japanese firms hold a greater percentage of their assets

in cash, which is slightly greater than the U.S The author recorded that Japanese cash balance were affected by the monopoly power of banks During periods of powerful banks, firms’ high cash holdings are steady with banks extracting charges The explanation also suggested for this finding is that banks encourage firms to maintain large cash balances in order to extract charges from firms or to reduce their monitoring costs When banks weakened, because of war, Japanese cash levels became more like U.S firms This author went to conclusion that strong Japanese banks persuade firms to hold large cash balances This is contrary to widely held beliefs about the Japanese governance system According to Ozkan and Ozkan (2004), banks could minimize the information costs and could get access to information not otherwise publicly available Banks could monitor borrower’s private information more effectively than other lenders When a bank provide a loan or renew a loan to a firm means that there is positive information about that firm

So when a firm has bank debt means that it decreases the probability of experiencing financial distress In this case, firms with bank debt hold less cash It seems that it is a secure and very popular relationship

According to pecking order theory, Ferreira and Vilela (2004) noted that bank debt was negative related to cash holding of a firm for precautionary reasons It is expected that firms that rely on bank loans as major source of financing are less likely to experience agency and asymmetric information problems associated with other kinds of debt This is because banks are

in a better position to evaluate the firm’s credit quality and to monitor and control the firm’s financial policies Finally, Ferreira and Vilela (2004) gave a clear opinion that because agency and asymmetric information problems were a source of significant indirect financing costs, which may limit the access to capital markets, one would expect that firms with a greater proportion of bank debt had less cash holdings for precautionary motives

Same evaluation as leverage factor, relying on cash flow theory, Ferreira and Vilela (2004) concluded that firms with a good relation with banks were more subject to monitoring, which could decrease superior managerial discretion This means that firms with bank debt hold less cash

In Vietnam, according to Trinh (2012), firms which had more debts and long-term debts, did hold less cash

2.3.7 Dividend Payout

In relation with trade-off theory, according to Ferreira and Vilela (2004); Ozkan and Ozkan (2004); and Pinkowitz and Williamson (2001), there is a negative relation between dividend payment and cash holdings Their viewpoints are that firm pays dividends could afford

to hold less cash when they are more capable of raising funds when needed by cutting dividend The same opinion, a firm that does not pay dividends had to use the capital markets to raise funds, Opler et al (1999) and Ferreira and Vilela (2004) agreed Therefore, an important job of top management level is to balance profit and price of common shares Current volume and price

of common share are the positive input factor dividend paid-out, however profit is the key factor

to decide how much firm gave out

Hereby is the summary table of above related studies, which provided ideas, concepts, and theories for this study

Table 1: Summary of Previous Studies Author Research

Year

Source of Data

Research Result

Kim et al 1998 U.S Level of cash holding has positive relation with

investment opportunity and cash flow; however it has negative relation with size of business, financial leverage, cash conversion cycle and financial crisis

possibility

Opler et al 1999 America Group businesses of high growth opportunity, low

risks, or small size hold more cash than other businesses Simultaneously, firm which easily got entrance to capital market holds less cash than others did

Japanese firms hold more cash than others do in German and the U.S The author noted that cash balance of Japanese firms did effected by bank’s monopoly power

Ferreira and

Vilela

2004 EMU Research’s result showed the positive relation

between the level of cash holding and investment opportunity; and has negative relation with total assets that not include cash, leverage and size of business

Ozkan and

Ozkan

2004 UK The author did find evidences of inverse correlation

between ownership structure and level of cash holding Level of cash has positive relation with cash flow from operations and growth opportunity, but it has negative relation with non-fixed assets and liabilities to bank

Custodio, et

al

2005 U.S The author found that level of cash holding

increased during economic crisis Firms hold more cash or kept cash balance stable while risk-free interest in short-term went down

Bates et al 2009 U.S The author found some main reasons for high level

of cash holding, such as decrease in inventory (decrease in non-fixed assets); high fluctuation of cash flow; increase in investment opportunity and R&D expenditures

Meggison

and Wei

2012 China Level of cash holding had negative relation with

size of business, financial leverage, and net fixed assets, but had positive relation with firm profit, growth opportunity, expenditures and cash flow fluctuation

non-Trinh 2012 Vietnam Vietnamese companies did not concentrate on

opportunity cost The author explained that in the testing period, the market is volatile, so big firms did tend to hold more cash Firms, which had more debts and long-term debts, did hold less cash

Khanh 2013 Vietnam Cash flow, cash flow volatility, level of leverage,

credit limit, outsider finance, debts, business cycle, economic risks and investment opportunity were factors affecting to cash level

Firms held cash to avoid risks, not because of finding good opportunities

Phuong 2013 Vietnam Seven factors that affects to level of cash in firms

are size of business, leverage, bank liability, cash flow, cash flow violability, opportunity and dividend

The pecking order theory is concluded as the most suitable theory to explain for changes on corporate cash management

Chapter 3 Research Methodology

This chapter will explain the theoretical and logical thinking of the author regarding the approach and structure of the thesis

3.1 Data Sources

In this research, the author has used secondary sources of data

The author has collected data of the selected firms and design own database structure The data is collected from official website of Ho Chi Minh (HOSE) and Ha Noi (HNX) stock exchange and Cafef website (http:// http://cafef.vn/) Those data are considered by the author to

be reliable due to the requirement of publicly companies listed to be independently audited Financial statements of selected companies are collected

Companies listed in both stock exchanges are selected as followings criteria Firstly, Companies must be listed in one of two stock exchanges at least five years back from 2014 Five years are selected because of time limit and long enough to do thesis Secondly, companies which operates in field of finance, bank, insurance, stock market, real estate and energy Thirdly, construction or energy companies, which operate on trading real estate or hotel, are also eliminated The financial condition of those firms has under special control of government and has different kind of operations 98 listed companies were finally selected The main industries

of companies listed are clearly defined in a stated document of government It is called VSIC

2007 Revenue is the united reason to decide what company is in what industry Twenty one industries are showed in Pooled OLS regression analysis below for united presentation purpose only

The sample size is reviewed again to ensure that they are enough for thesis analysis Since multi-regression is mainly used in this thesis, practical theory of Tabachnick and Fidell, (1996) guided that minimum sample size could be calculated as formulas 50 + 8*m (in which m:

number of independent variables In this thesis, the author will tend to use 33 variables, so minimum sample size is 314 In reality, total sample size of thesis is 490, as formulas 98*5 (in which 5: five years) Therefore, current sample size of thesis can be satisfied

Data set is gathered from financial reports, and then grouped as tabular table The purpose is mainly using for below statistics, such as descriptive statistics, unvariate analysis, and four multi-regression As following empirical models of previous researches, the author uses six variables, including size of firm, leverage, bank debt, cash flow, liquidity, and dividend The author combines Stata 12 software to generate complex statistics such as percentile, quartiles, R-square, P-value, F test, and regression data The author also uses Excel 2007 as supporting tool for Stata 12 to compute and draw out tendency of cash holding over the years Software has specific strength and then when the author combines, they will save much time for this thesis

Other than the created database, a number of other secondary sources have been used There are both advantages and disadvantages with having secondary sources according to Bryman & Bell (2011) Firstly, it has saved both cost and time in the data collection process Secondly, the data collected has higher quality than the author would have been able to produce

by myself and finally it allows the author to conduct their study over a number of years in the past The disadvantage is that the author might lack familiarity with the data since they has not collected the data by themselves, might lack understanding on the complexity of the data and do not has any control over the data (Bryman & Bell, 2011, p.320-321) However, the data collected was of the nature that the author had previously encountered academically Given the advantages and disadvantages, the author has chosen to use the following secondary sources

The historical database of stock closing prices of the listed firms that has been investigated is a widely used database when it comes to business research and has a high quality

of data Stock prices at the end of each companies and each year are collected from Cafef website (http:// http://cafef.vn/) Since the author is a student at Ho Chi Minh International University, the author has authorized to buy the access to the university library database and

related academic link for relevant literature Keywords that has been used in searches has ranged from, cash holdings, cash to corporate finance In addition to articles, a wide variety of textbooks has been used in this thesis These books are mostly related to business research, cash, cash holding, statistics and corporate finance

3.2 Data Statistics

This part says clearly about how statistics and models will be used for analyzing dataset

to develop results They include three main methods They are descriptive statistics, univariate analysis, and fours models of regression Reliability and validity of variables and the united techniques of the data treatment will be concerned carefully

3.2.1 Descriptive Statistics

Descriptive statistics will be completed basically by computing quantities from research data The author uses percentile and quartiles to measure the tendency of data set and observe the balance of entire distribution of data points The author will essentially use the mean and median

A graphical technique, area chart is used to extend and visualize data set and then help the author

to see the initial tendency of cash holding The author combines Stata 12 software to generate percentile and quartiles and Excel 2007 to compute and draw out tendency of cash holding over the years

3.2.2 Univariate Analysis

In statistics, the Pearson correlation is a measure of the linear correlation (the dependence) between two variables X and Y It was developed by Karl Pearson from a related idea introduced by Francis Galton in the 1880s Checking univariate will be done by comparisons of independent variables on the quartile points, through the observation on percentages of cash to the total assets Built quartile for each year in period, will help to explain why their positions are maybe overlap The construction and comparison across quartiles are to