PHD SYNOPSIS THESIS: THE EFFECTS OF CASH FLOW, SYSTEMATIC RISK IDIOSYNCRATIC RISK, AND STOCK LIQUIDITY ON FIRMS’ INVESTMENT DECISIONS IN VIET NAM Koontz and Weihrich 2010 said that, the
Trang 1PHD SYNOPSIS THESIS:
THE EFFECTS OF CASH FLOW, SYSTEMATIC RISK IDIOSYNCRATIC RISK, AND STOCK LIQUIDITY ON FIRMS’ INVESTMENT DECISIONS IN VIET NAM
Koontz and Weihrich (2010) said that, the decision is a process of selecting one of the actions given The decision is the core
of a plan and a plan can not be said to exist unless there is a decision
In corporate finance, there are many decisions such as investment decisions, financing decisions, production decisions Among those decisions, investment decisions is one of the important decisions, because it is closely linked with the financing plan, production plan, plans to buy raw materials Because of important features of investment decisions, it has attracted many studies which analyse the effect of financial factors on investment Up to now, a wide range of theoretical foundation of research study about the relationship between investment and financial factors Studies have indicated some financial factors affecting on investment decisions, such as the effect of internal cash flow on investment, uncertainty on investment However, not many studies have shown the relationship between firm investment and stock liquidity Therefore, I summarizes the empirical study about the impact of internal cash flow, systematic risk, idiosyncratic risk and stock liquidity to firm investment and introduce related theoretical background to explain the link of this research From the empirical results, I found research gaps in these study to guide research for my PhD thesis
Trang 2CHAPTER 1: LITERATURE REVIEW
1.1 The research related to cash flow and investment:
- For full data, cash flow is positively related to firm investment (Fazzari et al., 1988; Kaplan and Zingales, 1997; Bhagat et al., 2005; Bloom et al., 2007; Firth et al., 2012…) However, the effect of cashflow on investment of financially distressed firms is ambiguous: some research suggest a positive relationship between cash flow and investment, others suggest a negative relationship (Bhagat et al., 2005; Almeida and Campello, 2007; Cleary et al., 2007)
- The excess investment-cash flow sensitivity to financing constraints, there are two conflicting conclusions At the one hand, firm as most financially constrained, investment is more sensitivities to cash flow than firms as less financially constrained (Fazzari et al., 1988; Hoshi et al., 1991; Alti, 2003; Bhagat et al., 2005…) At the other hand, firms as that appear less financially constrained exhibit signicantly greater sensitivities than firms that appear more financially constrained (Kaplan and Zingales, 1997; Cleary, 1999; Moyen, 2004; Hovakimian and Titman, 2006; Cleary et al., 2007… ) Levels of investment-cash flow sensitivity are different from each other, and depend on respect that proxy for financial constraints
- The effect of cash flow on investment of government controlled firms versus privately controlled companies was found in studies
in China These studies provide evidence that government controlled listed firms have greater investment–cash flow sensitivities than do privately controlled listed companies (Firth et al., 2012) It is explained that besides profit targets, government
Trang 3controlled firms have to achieve multiple socio-economic objectives of the Government Moreover, the agency cost of state-owned firms is higher than that of non state-owned firms (Huang
et al., 2011), state-owned firms are more willing to invest in accordance with policies (Wang và cộng sự, 2014)
1.2 The research related to uncertainty and investment:
- The sign of the effect of uncertainty on investment depend on respect that proxy for uncertainty However, the negative effects
of uncertainty on investment was found more than positive effects from empirical researchs, especially in the real options theory (Leahy and Whited, 1996; Catherine Pattillo, 1998; Guiso and Parigi, 1999; Bond and Cummins, 2004; Bulan, 2005; Bloom et al., 2007; Panousi and Papanikolaou, 2012…)
- Stulz (1999), Ghosal and Loungani (2000), Panousi and Papanikolaou (2012), Koetse et al., (2006) found that, there is a difference between the sign and the level of the effect of uncertainty on investment of financially constrained firms This difference can arise from respect that proxy for financial constraints or uncertainty and financial characteristics of firm
- Xu et al., (2010), Wang et al., (2014), argued that the effect of uncertainty on investment of government controlled firms and privately controlled companies are difference between the sign and level
1.3 The research related to stock liquidity and investment::
- Becker-Blease and Paul (2006), Muñoz Francisco (2013) concluded that, there are a positive relationship between liquidity and investment, because firms with higher liquidity can take
Trang 4advantage of external financing When financing of investment is conditional on the rise, investment will increase
- Muñoz Francisco (2013) found that, positive effect is greater for firms with bigger financial constraints This is consistent with the fact that increasing liquidity can encourage investment, as it improves the conditions for external financing
- When it comes to the effect of stock liquidity on investment of government controlled firms, I have not found empirical evidence before However, related studies such as the study of Firth, Lin and Wong (2008), Lesmond et al., (2008), Lipson and Mortal (2009), Muñoz (2013) take me expect that investment of government controlled firms will be less sensitivities to cash flow than investment of private controlled firms
CHAPTER 2: RESEARCH METHODS
2.1 Research models
Dependent variable (I/K): is defined as investment (I) in net fixed assets (K) in year
Main independent variable:
- Internal cash flow ratio (CF/K): Internal cash flow is
estimated as net profit plus depreciation From the results of previous empirical studies, I expect regression coefficient of CF/K to
be significantly positive
- Systematic risk (Sysrisk): is estimated the following CAPM
model
(Ri,t - Rf,t)= β0 + β*(Rm,t – Rf,t)+ εit (1)
- Idiosyncratic risk (Idiorisk): is defined as the standard
deviation of the residuals from (1) model
Idiorisk = √𝑉𝑎𝑟(𝜀𝑖,𝑡)
Trang 5- Stock liquidity (Liquid): is defined as
𝐿𝑖𝑞𝑢𝑖𝑑 =∑ Traded Shares𝑡
𝑄 𝑡=1
𝐷𝑄∗ Total Shares The estimation period is one year I predict that the effect of stock liquidity on investment is positive
Control variables:
- Q: is measured as the sum of market value of tradable shares,
book value of nontradable shares, and liabilities, divided by book value of total assets Basing on empirical studies, I expect regression coefficient of Q to be significantly positive
- Lev: is the ratio of total liabilities to total assets Data which
I am studying, has overinvestment firms more than underinvestment firms, hence I expect the positive regression coefficient when estimating model
- Sale: The proportion of change in sales from year t to year
t−1 I predict the effect of sale on investment is positive
- Size: The natural logarithm of beginning book total assets I
expect a positive relation between size with firm investment
- Return: is the stock price return of a firm The estimation
period is one year Return is measured as the difference between the closing price and opening price at day t, divided by opening price I expect a positive relation between Return with firm investment
- Age: The natural logarithm of the number of years since
establishment of stock company I expect a negative relation between Age with firm investment
Trang 6 Dummy variables and interactive variables
- DumGov: Dummy variable, coded 1 for firm-years that have
a government institution as the controlling shareholder and 0 otherwise
- RateGov: The proportion of shares owned by state
shareholders
- Interactive variables as CFDumGov, SysDumGov, IdioDumGov, LiquidDumGov, CFRateGov, SysDumGov, IdioRateGov, LiquidRateGov
2.2 Financial constraint Firms
2.2.1 Choosing representatives to determine the financially constraint firms
Due to financially constraints are not directly measurable, it is represented by many different factors It can be represented by a factor or a composite index, but that proxy must reflect the ability to access external finance of firm For my thesis, I choose KZ index (1997) by Kaplan và Zingales, to determine the financial constraint firms
2.2.2 Identify the financially constraint firms
KZ index (1997) by Kaplan và Zingales as equation (2):
KZ (1997) = 0,283*M/B + 3,139*Debt/TA – 39,368*DIV/NFA – 1,315* CashHoldings/NFA – 1,002* CF/NFA (2)
Which, CF is internal cash flow, is defined as net profit plus depreciation; NFA is Net Fixed Asset; M/B is measured as the market value total assets divided by book value of total assets; DEBT
is total liabilities; DIV is dividend; CashHoldings is cash and cash equivalents KZ index has been used to identify firms that are more
Trang 7likely to face financially constraints Higher levels of KZ index indicate higher likelihood that a firm is financially constrained
2.3 Identify government controlled firms
To make sure that a decision is adopted by one shareholder, the shareholder must own 51% of shares with voting rights However, under regulations corporate law with a percentage of shareholders voting shares less than 51% still capable of governing a decision Specifically, if a decision is adopted at the 1st meeting of shareholders, it required number of shareholders representing at least 65% X65% = 42.25% of the total votes of all shareholders attending the meeting In the case of the second meeting occurred, just the percentage of shares of 33.15% (= 51% X 65% ) is required to accept
a decision of the shareholders meeting When a shareholder holding 33.15% of shares with voting rights, they should calculate to make the second meeting aims to adopt a decision So, the first I am based
on the percentage 33.15% to determine the goverment controlled firms The firm has proportion of shares owned by state shareholders greater than or equal 33.15%, it is defined as firms with the control
of the state The firm has proportion of shares owned by state shareholders less than 33.15%, it is determined that the firm does not have the control of the state With defining government control firms
as above, I use DumGov variable representing the control of the State DumGov is dummy variable, code 1 for firm-years that have a government controlling shareholder and 0 otherwise
More certainly, I use the extra ratio 42.25% and 51% to determine the government controlled firms
Trang 82.6 Method research
The thesis use GARCH (p,q) (Generalized Autoregressive Conditional Heteroscedasticity) to estimate β from equation (1) and
the standard deviation of the residuals from (1) model estimated
Two proxies are systematic risk variable and idiosyncratic risk
variable in (3) model For (3) model, the thesis use GMM
(Generalized method of moments) GMM has two commonly
estimates as Dif-GMM and Sys-GMM, I choice Sys-GMM estimate
Trang 9CHAPTER 3: OVERVIEW OF INVESTMENT, CASH FLOW, SYSTEMATIC RISK, IDIOSYNCRATIC RISK AND STOCK LIQUIDITY OF VIETNAM FIRMS FROM 2007 TO 2013 3.1 Investment of Vietnam firms is overinvestment or underinvestment?
Model identified overinvestment or underinvestment INEW,t = + 1SaleGrt-1 + 2Leveraget-1 + 3Casht-1 + 4Aget +
5Sizet-1 + 6StockReturnst-1 +6INEW,t-1 + Year Indicator +
Industry Indicator + i,t (3.1)
i,t = INEW,t ( + 1SaleGrt-1 + 2Leveraget-1 + 3Casht-1 + 4Aget +
5Sizet-1 + 6StockReturnst-1 + 6INEW,t-1 + Year Indicator +
Industry Indicator) (3.2)
Which, INEW is new investment; SaleGr is the proportion of change in sales; Leverage is debt ratio; Cash is casholding ratio; Age is the number of years since establishment of stock company; Size is scale
of total assets; StockReturns is the stock price return of firm
Investment of Vietnam firms is overinvestment or
underinvestment?
After estimate (3.1) model, I analyze residual of model The residue analysis results have shown that in the year 1235 observers firms, 526 firms have overinvestment, overinvestment rate was 8.36% The number underinvestment firms were 709 firms, and underinvestment rate was 6.20% So, the number of overinvestment firms is less than the number of underinvestment firms, but overinvestment rate is more than underinvestment rate For this result, I note that, whole Viet Nam firms market, firms was overinvestment from 2008 to 2013 This characteristic will explain the research results in chapter 4
Trang 103.2 Characteristics of financially constraint firms
- Operational efficiency of more financially constraint firms by ROE, EPS was lower than mean of sample, and much lower than less financially constraint firms
- More financially constraint firms had low investment rate, weak cash flow, high debt ratio, the percentage revenue growth less
- When the market go down, stock prices of more financially constraint firms decrease more than the ones of less financially constraint firms, leading market value of more financially constraint firms are below their book value
- More financially constraint firms are more idosyncaratic than less financially constraint firms
- More financially constraint firms are overinvesting
3.3 Characteristics of government controlled firms
Compared non-government controlled firms, government controlled firms have characteristics as follows:
- Highly investment, strong cashflow, high sales growth rate, big size, high performance
- Easy to get bank loans, high debt, although internal funds are higher than investment
- When the market goes down, stock prices of government controlled firms decrease a little
- Overinvestment rate is higher
3.4 Volatility of investment, cash flow, systematic risk,
idiosyncratic risk and stock liquidity
- Figure 3.4A has shown that the rate of investment on net fixed assets tends to decrease from 2008 to 2013 as well as the decrease of internal funds However, internal funds are higher than investment It
Trang 11has shown that Vietnamese firms does not have many opportunities
to use all internal funds
- Figure 3.4 B has shown that systematic risk increase at one time but it decease at another time After all, it tends to decrease over time The fluctuation is explained by policy government
- Figure 3.4 C: The flunctuation of idiosyncratic risk every year remain 42.99%
-Figure 3.4 D: Stock liquidity fluctuates during 2008-2013
Trang 12Figure 3.4: Volatility investment, cash flow, systematic risk, idiosyncratic risk and liquidity
Source: Statistics from research data
Trang 13CHAPTER 4: RESEARCH FINDINGS
4.1 The effect of cash flow, systematic risk, idiosyncratic risk and stock liquidity on Vietnamese firms’ investment:
The result (as table 4.3) has shown that:
Cash flow, stock liquidity and idiosyncratic risk have a positive impact on investment Idiosyncratic risk has a negative impact in
invest
