The impact of macroeconomic uncertainty on corporate investment the case study of vietnam shareholder

2005, I am based on the proposed empirical model of Gulen and Ion 2015 to examine how corporate capital investment is affected by macroeconomic uncertainty for enterprises of Vietnam in

UNIVERSITY OF ECONOMICS ERASMUS UNVERSITY ROTTERDAM

HO CHI MINH CITY INSTITUTE OF SOCIAL STUDIES

VIETNAM THE NETHERLANDS

VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

“THE IMPACT OF MACROECONOMIC UNCERTAINTY

ON CORPORATE INVESTMENT”

THE CASE STUDY OF VIETNAM

BY

NGUYỄN NGỌC PHƯƠNG LINH

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

HO CHI MINH CITY, DECEMBER 2017

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES

HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS

VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS

“THE IMPACT OF MACROECONOMIC UNCERTAINTY

ON CORPORATE INVESTMENT”

THE CASE STUDY OF VIETNAM

A thesis submitted in partial fulfilment of the requirements for the degree of

MASTER OF ARTS IN DEVELOPMENT ECONOMICS

By

NGUYỄN NGỌC PHƯƠNG LINH

CLASS 22

Academic Supervisor:

DR NGUYỄN THU HIỀN

HO CHI MINH CITY, DECEMBER 2017

ACKNOWLEDGEMENTS

To complete the dissertation, I received a lot of attention, help from the school, lecturers, friends and relatives First of all, I would like to express my gratitude to Dr Nguyen Thu Hien, who gave her heartfelt guidance, specific comments and encouragement throughout my thesis’s implemented process Special thank goes to Mr Nguyen Thanh Vinh for his supports

in analyzing the data Sincerely I appreciate lecturers teaching Vietnam – the Netherlands programme for M.A in Development Economics who have conveyed valuable knowledge, practical experience for me during the study program Finally, it is pleased to thank my friends and family for their support and encouragement throughout the course of my dissertation

Ho Chi Minh City, December 2017

Performer NGUYỄN NGỌC PHƯƠNG LINH

ABSTRACT

Employing proxies of macroeconomic uncertainty of Baum et al (2005), I am based on the proposed empirical model of Gulen and Ion (2015) to examine how corporate capital investment is affected by macroeconomic uncertainty for enterprises of Vietnam in the period

of 2005 and 2015 My estimates present that the research has strongly explained a negative relationship between the volatility of macroeconomic in real GDP, CPI and the activities of capital expenditures in general as well as mergers and acquisitions in particular More importantly, this effect is significantly stronger for firms with a higher growth rate and non – financial constraints Overall, the study contributes to confirming macroeconomic uncertainty

to limit the investment of enterprises and subsequently depress Vietnam economic growth JEL classifications: E20, E22, E44, E60, E63, G30, G32, G34

Key words: corporate investment, mergers and acquisitions, macroeconomic uncertainty, ARCH (GARCH), financial constraints, growth potential

COMMITMENT

I pledge that the contents of this dissertation conducted under the direct guidance of Dr Nguyen Thu Hien All references in the dissertation are clearly quoted in the name of the author, the name of the work, the time and place of publication Any unauthorized copying, violation of training regulations, or fraud, I will take full responsibility

Ho Chi Minh City, December 2017

Performer NGUYỄN NGỌC PHƯƠNG LINH

TABLE OF CONTENTS

ACKNOWLEDGEMENTS i

ABSTRACT ii

COMMITMENT iii

TABLE OF CONTENTS iv

TABLES vi

FIGURES AND ILLUSTRATIONS vii

ABBREVIATIONS viii

CHAPTER 1 INTRODUCTION 1

1.1 Background 1

1.2 Research objectives 8

1.3 Research objects and scopes 9

1.3.1 Research objects 9

1.3.2 Research scopes 9

1.4 Research methodology 9

1.5 Research significance 10

1.6 Research structure 11

CHAPTER 2 LITERATURE REVIEW 12

2.1 The relationship between macroeconomic uncertainty and investment 12

2.1.1 Macroeconomic uncertainty 12

2.1.2 Corporate investment 14

2.1.3 Factors impacting on the investment of enterprises 15

2.1.4 Impact of macroeconomic uncertainty on corporate investment 17

2.1.5 Robustness check-sub-sample categories 19

2.2 Previous researches 19

2.3 Suggested models and hypotheses 23

CHAPTER 3 RESEARCH METHODOLOGY 25

3.1 Analytical framework 25

3.2 Data 26

3.3 Empirical model 26

3.4 Variable measurement 28

3.4.1 Dependent variable 28

3.4.2 Independent variable 28

3.4.3 Controlling variables 28

3.4.4 Variables for categorizing subsamples 28

3.5 Estimation method 29

CHAPTER 4 RESEARCH RESULTS 31

4.1 Measuring macroeconomic uncertainty 31

4.2 The link between macroeconomic uncertainty and corporate investment 33

4.2.1 Summary statistics 33

4.2.2 Correlation matrix 36

4.2.3 Results for all firms 37

4.2.3.1 MU1 – GDP and corporate investment 38

4.2.3.1.1 MU1 – GDP and capital expenditure proxy 38

4.2.3.1.2 MU1 – GDP and mergers and acquisitions proxy 39

4.2.3.2 MU2 – CPI and corporate investment 41

4.2.3.2.1 MU2 – CPI and capital expenditure proxy 41

4.2.3.2.2 MU2 – CPI and mergers and acquisitions proxy 42

4.2.4 Results for firms classification 43

4.2.4.1 MU1 – GDP and capital expenditure regarding growth potential 44

4.2.4.2 MU1 – GDP and capital expenditure regarding financial constraints 45

4.2.4.3 MU2 – CPI and capital expenditure regarding growth potential 47

4.2.4.4 MU2 – CPI and capital expenditure regarding financial constraints 48

4.3 Discussions 49

CHAPTER 5 CONCLUSIONS 51

5.1 Overview outcomes 51

5.2 Research limitations 54

REFERENCES 55

APPENDICES 58

TABLES

Table 2.1: Expectation of the relationship between macroeconomic uncertainty and corporate

investment………… 18

Table 4.1: Augmented Dickey – Fuller Unit Root Test for MU proxies 32

Table 4.2: The time series results of variables representing macroeconomic uncertainty 32

Table 4.3: Summary statistics 34

Table 4.4: Correlation matrix 36

Table 4.5: Results of regression model of MU1GDP on CAPEX 39

Table 4.6: Results of regression model of MU1GDP on M&A 40

Table 4.7: Results of regression model of MU2CPI on CAPEX 42

Table 4.8: Results of regression model of MU2CPI on M&A 43

Table 4.9: Impact of MU1GDP on CAPEX regarding growth potential 45

Table 4.10: Impact of MU1GDP on CAPEX regarding financial constraints 46

Table 4.11: Impact of MU2CPI on CAPEX regarding growth potential 47

Table 4.12: Impact of MU2CPI on CAPEX regarding financial constraints 48

FIGURES AND ILLUSTRATIONS

Figure 1.1: The criterion of Maastricht Treaty of Vietnam 3Figure 1.2: Real GDP growth in Vietnam, advanced economies, emerging and developing economies, and the world 4Figure 1.3: The proportion of inflation and the growth of investment of Vietnam 5Figure 1.4: Mergers and Acquisitions (M&A) of Vietnam 7Figure 3.1: Framework of the relationship between macroeconomic uncertainty and corporate investment…… 25

ABBREVIATIONS

CHAPTER 1 INTRODUCTION

1.1 Background

Stable and long – term sustainable growth is what many domestic and foreign economists recommend and become one of the most strategic objectives that every nation puts so much attempt to move towards In such a purpose, the impact of macroeconomics

is an intense concern that interests a great number of researchers, policymakers, investors and portfolio managers of businesses Volatility of macroeconomics plays important role

to affect most sectors of economy and lead to the adjustments of economic growth as well

as the production process of enterprises More specifically, macroeconomic uncertainty can be attributable to be related to short – term fluctuations in macroeconomic variables such as gross domestic product (GDP), inflation, budget deficits and current accounts In addition to other impacts, the volatility of macroeconomics may undermine long – term

growth potential due to declining confidence and willingness to invest

The notion of macroeconomic uncertainty has not been completely integrated between the studies Thereby macroeconomic instability is understood as a circumstance

of economic malaise where the economy does not seem to have remained stable and where, eventually, something needs to be done for dragging it back on track (Azam, 2001) According to Hausman and Gavin (1996), macroeconomic stabilization requires ensuring three factors in one economy composing growth, investment and labor productivity Other works in the field include the research of Fischer (1993), Bleaney (1996) and Ismihan et al (2002), who all take related approaches that an increasing macroeconomic uncertainty means a rise in one of the indexes that would hold inflation rate, deficit to GNP ratio and foreign debt to GNP ratio Meanwhile, Sameti et al (2012) also argue that macroeconomic uncertainty is assessed by the volatility of a set of macroeconomic variables which are growth, inflation, current balance deficit, foreign exchange reserves and budget deficits In general, it can be primarily unified that macroeconomic uncertainty is a concept that describes the deterioration of important macroeconomic variables in the economy, manifested and monitored over time through a combination of these variables such as growth, inflation, current account deficit, foreign exchange reserves, external debt and budget deficits These aforesaid indexes are serious drivers of economic growth

In terms of the criteria of the Maastricht Treaty (or so – called convergence criteria) by the EU Member States in 1991, macroeconomic stability is measured by five indicators as follows:

The first is a low and stable inflation A high or unstable inflationary effect threatens economic growth and increases the risk premium Since many types of rates are adjusted for inflation, then the volatility of inflation may alter Government revenues and personal debt The highest inflation rate under the Maastricht criteria is 3 percent

The second is to stay a low level of long – term interest rates This indicator reflects a stable inflation expectation in the future Although the current inflation rate is low, high long – term interest rates suggest that inflation may rise in the nearly time Holding low interest rates manifests that the economy is stabilizing and may continue to

be so stable The highest degree of long – term interest rate based on the Maastricht Treaty makes up about 9%

National debt to GDP ratio is the next criteria to adapt thereby the low level displays that the Government has the flexibility to employ tax revenues so as to meet domestic capital needs rather than repay foreign creditors In addition, a low national debt also allows lenient use of fiscal policy in the face of crisis and 60 percent is the highest approval of national debt to GDP ratio according to the convergence criteria

Besides, budget deficit has to be remained low Regarding the criteria of the Treaty of Maastricht, the budget deficit at 3 percent of GDP is acceptable

And finally, currency stabilization is the policy – oriented objective Currency stabilization allows imports and exports to develop in line with long – term strategies and

to minimize exchange rate risk for investors As the criteria of the convergence criteria, the euro has the highest fluctuation band of 2.5%

Figure 1.1: The criterion of Maastricht Treaty of Vietnam

(Source: IMF, Worldbank and General Statistics Office)

Thus, based on the criteria of the Maastricht Treaty, Vietnam economy was facing macroeconomic uncertainty in the considered period of time Inflation was under pressure according to the General Statistics Office The highest inflation rate was marked

in 2008 with 23.1% due to the global crisis In 2011, CPI rose by 18.7% compared to the end of 2010 As can be seen, the rate of inflation has been serious and gradually declined more recently through the management and adjustment of policymakers Interest rates were also high, along with rising exchange rate pressures, high and prolonged budget deficits, high national debt Since 2008, interest rates have been fluctuating with the ups and downs of the economy Basically, interest rates increased sharply between 2009 and

2011 with a peak level of 17% per year owing to high inflation By the end of 2010, the national debt accounted for 48.1% of GDP, increased by 3% compared to 2009 and presented by an upward trend to 2015 at 57.3% of GDP As is shown by the graph, Vietnam has had a continuous budget deficit in the last 11 years with the rate above 5% This deficit is the highest in comparison with other countries in the region of South East Asia All criterion displayed in Figure 1.1 generally exceed the acceptable level of the Maastricht Treaty and then demonstrate a circumstance of macroeconomic uncertainty in Vietnam on the assumed period

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 0

Economic uncertainty is the state of the economy in which the fiscal and monetary policies of the Government do not work, leading to the fluctuation of indicators

of the economy such as high inflation rate, a rise of unemployment proportion, large trade deficits, and the financial system is facing high risk of instability This makes production stagnant, the purchasing power of the domestic market fall Loayza and Raddatz (2007) argue that besides inadequate economic policies such as monetary policy and fiscal policy, external shocks are the source of macroeconomic uncertainty in the country Accordingly, the authors argue that the shock of foreign trade and the volatility of capital inflows are the sources of macroeconomic uncertainty In addition, according to Clipa and Caraganciu (2009), in the context of an open economy in general, especially in developing economies, the effects of a global crisis can be spread through financial channels, foreign trade and investment

In the period before the end of 2007, Vietnam has always been considered one of the bright spots in the global economic map By joining the World Trade Organization (WTO) in 2007, the real GDP growth rate reached nearly 7.1% and more highly than the growth of advanced economies and the whole world with 5.7% and 2.7%, respectively

The financial crisis in the United States from late 2007 has rapidly spread to major economies, has become a financial crisis, a global recession and a serious impact on economies around the world Vietnam is not outside the impact with the decline of 1.4%

in GDP growth but being still higher than the growth of the rest of world because the nation was not directly affected by the crisis

Figure 1.2: Real GDP growth in Vietnam, advanced economies, emerging and

developing economies, and the world

Real GDP Growth (%per year)

Vietnam Emerging and Developing Economies

Advanced Economies Worldwide

(Source: IMF)

In accord with Paul Krugman, a leading expert on the world economy, the crisis has made demand for durable or capital goods decline primarily in the US in a medium term Hence, countries with capital production advantages will be most affected In other words, the most developed economies, such as Japan and Germany, will bear the long – term consequences Meanwhile, economies that have the advantage of producing consumer goods such as China, Vietnam and developing countries, the outcomes will be less, and the resilience will be faster Despite an unnoticeable effect, the impacts of the world financial crisis also have severely affected the achievement of Vietnam's economic growth target in 2008 The GDP growth rate in 2008 was only 5.7% lower than the aim approved by the National Assembly of 7% GDP growth subsequently slowed down in

2009 and rebounded in 2010

In the integration and opening up of the economy, investment is a major factor in the aggregate demand of the whole economy in general and most enterprises in particular According to World Bank data, investment usually accounts for 24% to 28% of the aggregate demand of all countries in the world Increased investment makes the demand for relevant factors increase, the production of various industries grow, attracts more labor force, reduces unemployment as well as improves social welfare All these effects facilitate economic development

Figure 1.3: The proportion of inflation and the growth of investment of Vietnam

(Source: General Statistics Office)

According to General Statistics Office, the ability to attract foreign direct investment (FDI) in the years of world economic fluctuations has decreased markedly Investment growth was 31.5% in 2007, a significantly high figure after becoming a member of WTO However, the global crisis led to a decline in the volume of FDI inflows, while indirect investment flows from foreign investors were unstable The massive influx of capital puts pressure on money supply, which causes inflation to rise The massive capital inflows poured into the second half of 2007 and the first quarter of

2008 led to a fall in the exchange rate and to stabilize the exchange rate, the State bank of Vietnam implemented interventions in the forex market As a consequence, the amount of circulation in the economy increased rapidly, leading to a sharp increase in the CPI with a peak of 23.1% in the end of 2008 Investment growth in 2008 dropped significantly to half, continued a downward trend in the following years and the average of investment growth is only 13% a year in this period of time

As can be agreed that investment plays a very important role in the formation and development of an enterprise, so requiring investment decisions must be carefully considered The investment decision is made after considering various factors when examining the most influential factor existing in almost enterprises, the factor of economic uncertainty Determining the present value of investment projects, constructing optimum capital budgeting practices and minimizing the cost of capital for firms depend mainly on the estimation of macroeconomic volatility

The sustainable growth is very necessary if enterprises want to survive long – term on the market There are many factors that help firms grow sustainably, depending

on the business context as well as general economic developments in which firms choose the right approach for themselves M&A deals have addressed the growth target to help new enterprises enter the fast – growing market or enterprises are moving to new phase do not want to fall into recession Maney et al (2011) stated that the nature of M&A has developed towards a consolidation tactic so as to comprise strategic growth, expansion and innovation In the economy where the average transaction deal price is well – controlled, implying the price paid for a firm is equal to or above market value In good economic conditions, the volume of deals rises as a favorable means for growth to complement organic expansion M&A is also a type of investment but referring to the formation of self – investment instead In Vietnam, M&A activity has emerged recently and seems to be like the commencement compared to the world

As is illustrated in Figure 1.1, the number of M&A deals in 2005 was only about

28 Particularly since 2007, the number of mergers and acquisitions has increased sharply

in both volume and scale, with 119 deals, attached to the fact that Vietnam joined the WTO on January 11, 2007 M&A activity took place in various fields such as finance, banking, securities, insurance, etc Since 2008, M&A transactions in Vietnam have risen significantly in both volume and value In 2012, there were 364 deals worth 4.2 billion dollar and up to 535 deals by 2015 with 5.3 billion dollar

Figure 1.4: Mergers and Acquisitions (M&A) of Vietnam

(Source: imaa-institute.org)

The most visible feature of M&A activities in Vietnam is that the vast majority

of M&A transactions have foreign elements, accounting for 66% The presence of foreign businesses in Vietnam's M&A deals has depicted the level of attraction of the Vietnamese market and the need for foreign investors to enter the Vietnamese market is through the connection with national partners Similar to FDI attraction, the most important factor of attracting M&A activities is the business investment environment and stable macroeconomic situation

On the other side, macroeconomic uncertainty has different degree of effects on different patterns of firms Most of the empirical evidence shows that firms with the level

of growth rate and financing constraints significantly affect corporate investments Bond

et al (2003) test the impact of financial factors on corporate investments in Belgium, France, Germany and the UK and find significant effects in all nations They report more economically significant results for the UK, suggesting that financial constraints on

0 1 2 3 4 5 6

corporate investments may be relatively more severe in the more market – oriented UK financial system than in the continental European countries, which tend to be bank – based Similar findings were obtained by Hall et al (1999) when investigating whether a firm’s cash flow influences investments and R&D in French, Japanese and U.S high – tech firms They document a significant impact in all nations and a higher sensitivity of investments and R&D in the U.S., which, like the UK, is characterized by a market – based financial system In terms of high growth firms, mainly small and medium sized enterprises, their investment opportunities are more significantly concerned and play important role in making profits as well as increasing firms’ value

As mentioned above, stable and sustainably growth is expected to be important for investments activities of companies Volatility of macroeconomics in different countries will have varying degrees of influence and will depend on the political institutions and the regulations of the countries There are a lot of research articles on this topic but under different research corners This paper is based on a previous study examining the effects of economic uncertainty on corporate financial policies in general or corporate investment of enterprises in particular but approached by a method which has been taken advantage widely and deeply

is regarded as different measures, for instance, the value of cash holdings (see Ki and Mukherjee, 2016; Im, Park and Zhao, 2017) Some of previous studies, to the best of my knowledge, has examined the effects of economic uncertainty on corporate investment by the various channels My study contributes and develops some gaps of past research of An (2017) with evidence from Vietnam More specifically, I employ two different proxies of investment consisting of capital expenditures and M&A instead of choosing only capital expenditure as a proxy and expect that there are negatively strong correlations among these variables

In my analysis, I also investigate the behavior of firms with and without financial constraints to further explore the impact of macroeconomic uncertainty on investments of these enterprises To be more detailed, I expect firms without financial constraints have

more capital for growth and therefore macroeconomic uncertainty will have more serious impact on these firms than on firms with financial constraints Similarly, I also expect that firms with higher growth rate are impacted more seriously by macroeconomic uncertainty than firms with lower growth rate Following past studies, there are some methods using the criteria to distinguish the characteristics of enterprises into different subsamples Fazzari et al (1988) suggested classifying firms ex ante employing dividend payout behaviour and leverage of firms as the proxies My research is based on the study of Phan

et al (2017) in the literature of Shareholder litigation and corporate cash holdings which

use growth rate and financial constraints for dividing subsamples and exploring the impact

of macroeconomic uncertainty on corporate investments Besides, size and payout ratio are the criterion for the divergence of non – financial constraints and financial constraints First, a firm facing higher economic uncertainty may have lower value of investment and the degree of correlation is strong for firms which are more financially unconstrained Second, a firm confronting higher economic uncertainty could have lower value of investment and it is similarly stronger for firms with a higher rate of growth

Furthermore, one more exceptional technique is added to estimate the volatility macroeconomic in my study Following Baum (2005) I fit a generalized ARCH (GARCH) model to produce the conditional variance derived from GARCH model, averaged to annual frequency, which is then used as a measure of macroeconomic uncertainty in my study

1.3 Research objects and scopes

1.3.1 Research objects

The object of research is the relationship and the impact of macroeconomic

uncertainty on the investment of enterprises in the stock market

1.3.2 Research scopes

The research magnitude consists of 732 firms listed on the Ho Chi Minh Stock Exchange (HOSE), Hanoi Stock Exchange (HNX), and Unlisted Public Company Market (UPCOM), as of 31/12/2015 Study duration is considered for the period of 11 years from

2005 to 2015

1.4 Research methodology

The study uses quantitative methods, based on data from 732 firms listed between 2005 and 2015 on the Ho Chi Minh City Stock Exchange, Hanoi Stock Exchange, and Unlisted Public Company Market The two main variables developed to

measure investment are Capital Expenditure (CAPEX) and Mergers and Acquisitions (M&A)

In this paper, two proxies considered as macroeconomic uncertainty are the volatility of real gross domestic product (GDP) and consumer price index (CPI)

The model employs control variables such as operating cash flow, Tobin's Q, sales growth, national election and GDP growth

Thereby the model is based on the research proposed by Gulen and Ion (2015) in

the study of Policy uncertainty and corporate investment and in conjunction with the proposed model by Baum et al (2005) in the study of The impact of macroeconomic

uncertainty on non-financial firms' demand for liquidity

Moreover, my analysis researches the dependence of a binary variable under other independent variables by using the panel probit regression model for M&A binary distortion so as to investigate the impact of macroeconomic uncertainty on M&A activities

The study applies quantitative methods The panel data are required in the analysis I accomplish the regression of two models by three methods including Pooling Regression, Fixed Effect Model, Random Effect Model to determine the robustness of results in comparison with different regression methods Then, it is critical to determine which regression method is the most suitable one by testing the Lagrange Multiplier test (LM test, Breusch and Pagan, 1980) and the Hausman test (Hausman, 1978) The Lagrange Multiplier test method is used to select the appropriate regression model between the Pooling Regression and the Random Effect Model While the Hausman test method is employed to compare the Fixed Effect Model and the Random Effect Model From two test results, I choose the most appropriate regression model

1.5 Research significance

The study is expected to identify the impact of macroeconomic uncertainty on the investment of Vietnam enterprises, namely those listed on the Ho Chi Minh City Stock Exchange, Hanoi Stock Exchange, and Unlisted Public Company Market From that, the author can draw conclusions and assessments of the effect of macroeconomic volatility on corporate investment as well as mergers and acquisitions activities of enterprises in particular

In addition, paper’s outcomes are anticipated to contribute empirical evidence to the national economic management agency with respect to the influence of

macroeconomic volatility on enterprises’ investment, since then intensifying to control uncertainty, promote investment and provide practical observations for who do business in order to better understand the effect of macro uncertainty on investment and M&A activities of Vietnam enterprises

1.6 Research structure

The outline of the paper is proceeded as follows Section 1 shows the general introduction including the basis for the formation of the topic, objectives, problems and scope of the research, research methods, and basic results Section 2 reviews the relevant literatures and develops testable hypotheses, to be more specific, presenting the theoretical basis of the topic, relevant background theories, and research model Section 3 describes the research methods comprising data, sample and variable measurement Section 4 presents the research results referred to analysis and validation of the model, meaning of variables and outcomes, and discussions Section 5 concludes the study by inferring the issue and commenting on the topic, acknowledging the limitations of the investigation and suggesting future research

CHAPTER 2 LITERATURE REVIEW

2.1 The relationship between macroeconomic uncertainty and investment

2.1.1 Macroeconomic uncertainty

Macroeconomics studies the economy at an overall level through general indicators such as national output, inflation rates, the proportion of unemployment The concept of macroeconomic uncertainty is widely mentioned in the policy – oriented literature In the past literatures, however, this concept is almost never really determined, and seems to refer in turn to high inflation, overvalued currency, unstable real exchange rate, balance of payment deficit, or fiscal deficit, etc According to Azam (2001), everything that is going wrong in a country’s macroeconomic condition is often called macroeconomic uncertainty

Based on the two original researches of Baum et al (2005) and Gulen (2015),

my study defines the conditional variances of real GDP and CPI as two proxies of macroeconomic uncertainty

 Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period Thereby, there are three primary methods by which GDP can be determined These three approaches are often termed the expenditure approach, the output (or production) approach and the income approach Accordingly, corporate investment contributes

to GDP growth and economic growth Real gross domestic product (GDP) is the inflation – adjusted measure that reflects the value of all goods and services generated by a nation in a given year, expressed in base – year prices A base year

is the year I choose against which to compare all other years In accord with Riyals, real GDP is also called gross domestic product in constant prices

 Consumer Price Index (CPI) is a percentage measure that reflects the relative change in consumer prices of a basket of consumer goods and services, such as transportation, food and medical care over time The index is based only on one basket representing the entire consumer goods The fluctuation in the CPI is required to assess price changes associated with the cost of living The CPI is one

of the most commonly used indicator for measuring prices and the change in price – inflation or deflation When the index shows positively, it will help enterprises increase investment and promote economic development

The ultimate goal of Government is to stabilize the economy of a nation and from that boost that country’s growth sustainably It is then implicitly entailed that what a country suffering from illnesses ought to do is to implement a stabilization policy Therefore, the Government regulates economic policies to achieve macro regulatory objectives such as efficiency, justice, stability and growth In any economy, fiscal policy and monetary policy are always the most important policies that determine the macroeconomic stability of a country Fiscal policy and monetary policy are operated by the two agencies, the Ministry of Finance and the Central Bank, should be coordinated between fiscal policy and monetary policy to avoid possible uncertainty (see Alesina & Tabelini, 1990; Aurbach, 2004) However, the form and mechanism of coordination will vary widely depending on the stage of development of the institutions and financial markets of each country (see Hasan & Isgut, 2009) Thereby the notions of adjusted macro policies of Government are generally indicated as follows:

 In terms of monetary policy, this is one of the macroeconomic policies in which the central bank adopts its instruments to control and regulate the supply or interest rates in order to achieve macroeconomic targets for prices, output and jobs In particular, monetary stability, moderate inflation control is the basic, long – term and even the sole objective of monetary policy In such a purpose of economic growth, monetary policy only contributes to obtaining this objective in the short term There are three main tools that affect the money supply including compulsory reserve ratio, discount rate, buy and sell of the Government securities Through the impact on interest rates, the monetary policy regulates the behavior of investment and consumption of economic entities Therefore, monetary policy cannot directly impact aggregate demand such as fiscal policy but must act through intermediary targets which are either money supply or market interest rates

 For fiscal policy, this is the Government's decision on taxes and Government spending (investment) As a result, the fiscal policy directly affects the composition of aggregate demand (Government spending G) and impacts on macroeconomic targets that are primarily economic growth When the economy is

in a case of recession, the state can reduce taxes, increase spending (public investment) to fight against Such fiscal policy is called expansionary fiscal policy

On the other hand, when the economy is in a state of inflation and a hot growth phenomenon, the state can raise taxes and reduce its spending to keep the economy from overheating Fiscal policy like this is called contractionary fiscal policy

 Regarding foreign trade policy, impacting on trade balance and payment balance through intervention policies, exchange rates, and import and export taxes Foreign trade policies create favorable conditions for domestic enterprises to penetrate and expand their markets overseas, exploiting thoroughly comparative advantages of the domestic economy In addition, the goal of the policy is to protect the domestic market, creating conditions for domestic enterprises to stand firm and develop in business Foreign trade policy is a part of a country's foreign policy in process of accomplishing growth objectives

2.1.2 Corporate investment

Regarding corporate investment, this is an important activity that greatly influences business value and indirectly affects the interests of business owners, determines the growth of enterprises As can be aware, these activities are use of financial resources, material resources, labor and intellectual resources to produce business in a relatively long time in order to obtain profit and socio – economic benefits Thereby, firms invest long – term capital in the formulation and addition of necessary assets to achieve their business objectives This activity is carried out centrally through the implementation

of investment projects Thus, it can be said that investment is one of the strategic decisions for enterprises This is a long – term financing decision, which has a great impact on the business efficiency of the business Mistakes in the estimation of investment capital can lead to huge capital wastage and even serious consequences for the business

In addition, depending on the classification criterion such as investment objectives, investment owners or the period of time of investment and executing process, there are different types of investment as follows: investment outside the enterprises and investment inside the enterprises; direct investment and indirect investment; short – term investment and long – term investment Moreover, investment activities usually take place

in two stages in which are capital investment and capital recovery

To measure the corporate investment, I use two proxies of investment relied on the study of Phan et al (2017) about the literature of shareholder litigation and corporate cash holdings and these are defined as follows:

 Capital expenditures

Capital expenditure, or denoted as Capex, are funds utilized by the firm to upgrade or purchase new physical assets such as real estate, (for example, buildings, land, etc.), factories for production, or equipment This type of cost is used to develop production and maintain business operations Such costs include everything from roof

repair to building a new factory Capital expenditure is collected from financial statements

of enterprises and decisions of corporate capital expenditure are regarded as an essential item to maximize the market value of firm (see McConnell, 1985)

 Mergers and Acquisitions

M&A has evolved since its origins in the early 1900s This activity has initially been outspread on a domestic scale when firms have bought in their own market in order

to increase their share, productivity and efficiency in their business operations These firms have subsequently consolidated and joined forces within a common industry so as to strengthen size of firms

In Vietnam, legally, according to the provisions of Article 17 of the Competition Law (2004), "Merger means the transfer of all assets, rights, obligations and benefits of one or more enterprises to another enterprise, and to terminate the existence of the merged enterprise Acquisition means the purchase by an enterprise of all or part of the property

of another enterprise sufficient enough to control or dominate the whole or a part of the acquired business"

Generally, Mergers and Acquisitions (M&A) is the activity that takes partial or full control of a business through the consolidation of firms or assets and investors then possess the ownership of a part or all of that business However, the main purpose of M&A is to control enterprise at a certain degree rather than merely own a share of capital

or shares of the business as small and retail investors Therefore, if an investor gains a stake in a business, shares of this person are sufficient enough to participate in making important decisions of the firm then it can be considered as a M&A activity Conversely, when an investor owns a share of capital, shares are insufficient enough to determine important issues of enterprises, this is only regarded as a normal investment activity

2.1.3 Factors impacting on the investment of enterprises

 GDP growth

In practice, it is a measure of the rate of change that a nation's gross domestic product (GDP) goes through from one year to another This measure does not adjust for inflation; it is expressed in nominal terms This is also one of the most important economic indicators used to examine the performance of a nation and compare it with others as well as between different periods From achieved results, economists can evaluate and forecast their future and propose feasible strategies and policies Rapid

growth represents a growing economy that creates more opportunities for firms to increase revenue which are the output of the economy

Investment and economic growth have the positive relationship, in other words, higher the investment is, higher the growth is Dunning (1988) mentions that the attraction

of foreign direct investment depends very much on the factors and characteristics of the host country Although in the short term the relationship between investment and economic growth tends to be low, but in the long run, investment rates are perceived to be closely linked to economic growth By contrast, in times of economic downturn, GDP growth slows down and may be negative This expresses an unstable and difficult situation, investors will limit their investment to expand the scale and production

 National election

Julio et al (2012) examine the impacts of political uncertainty on the behavior of firms regarding corporate investment in the context of national elections and document that the cycles of investment expenditures correspond to years of national elections all over the world Their outcomes also suggest that political uncertainty leads enterprises to restrict their investment expenditures until dealing with the electoral uncertainty According to Gulen (2015), Government elections will lead to changes in management policies and new leaders Elections are seen as factors that influence policy instability and indirectly affect the investment of the business in a good or worse direction from the perspective of the investor

Depending on the perspective of investors, election cycles are seen as factors of policy uncertainty and indirectly affect corporate investment in a positive or negative way The national election takes place every four or five years depending on the policy of each country In fact, an extraordinary session of Congress can also cause market turmoil

 Sales growth

Sales of business are the total revenue achieved when selling goods and services, financial activities and others of enterprises at a given time and this is one of the most prime financial indicators of every business The amount by which the average sales volume of a firm's products or services has risen, typically from one year to the next is called by sales growth Sales growth shows that whether enterprise works well or not, the macro conditions create favorable conditions for business enterprises and stable growth, helping businesses attract more investment capital as well as accumulate more properties

 Tobin’s Q index

Tobin's Q ratio is calculated as the market value of a company divided by the replacement value of the firm's assets James Tobin (1968) who hypothesized that the combined market value of all firms on the stock market would be equal to the replacement costs, installing Tobin's Q ratio A ratio higher than one indicates that a firm is earning a rate higher than its replacement cost and the firm will promote investment; otherwise, if the ratio is less than one, the company will limit investment A low Q implies that the value of a firm's stock is less than the cost to replace its assets and this means that the stock is undervalued In contrast, a high Q shows that the replacement cost of a firm's assets is cheaper than its stock, which means that the stock is overvalued In Tobin's model, the estimation of stock valuation is the driving factor behind investment decisions

It is remarkable that this indicator is influenced by the macroeconomic conditions of Government, agencies and foreign investing enterprises though macro policies and policies of supporting enterprise in an opening economy

 Cash flow

Cash flow is the movement of money into or out of a business, project, or financial products Measurement of cash flow can be used to compute other parameters providing information about the value and the current situation of firm This indicator plays an important role, affecting the economic decisions of enterprises While positive cash flows depict that liquid assets of a firm are rising, allowing debt payments, reinvesting, returning to shareholders, paying costs and accommodating a buffer against its financial challenges in the future Conversely, negative cash flow manifests a fall of liquid assets of a firm Besides, sign of cash flow illustrates how efficient of enterprises are and how the policymakers operate and control the economy From that, there are some adjustments in management and operation so as to support and protect domestic enterprises Net cash flow is related to the investment of enterprises, when the increase of actual net cash flow shows that enterprises have more investment capital to expand their production and business activities

2.1.4 Impact of macroeconomic uncertainty on corporate investment

In this paper, the relationship and effects of macroeconomic uncertainty on the investment of enterprises in the stock market are examined On the other side, it is essential to specify how the level of effects are for firms with a higher and lower degree of growth rate and for firms which are more financially constrained and non – financial constraint

The main variable used to measure an enterprise's investment is Investment which is computed by two ways comprising capital expenditures, and M&A Besides, there are two variables known as proxies that represent macroeconomic uncertainty to measure volatility consisting of real gross domestic product (GDP) and consumer price index (CPI)

In addition, the model uses operating cash flow, Tobin's Q, sales growth, elections, and the rate of gross domestic product growth (GDP growth) as control variables to investigate their impacts in the relation between macroeconomic uncertainty and corporate investment

Based on the previous empirical studies as well as the literature and particularly the theoretical model, it is required to expect the results about the relationship between two variables Thereby, these correlations between dependent variable and independent variable with controlling variables are indicated in the table 2.1 below

Table 2.1: Expectation of the relationship between macroeconomic uncertainty and

corporate investment

Ordinal Sign Independent variables –

Controlling variables Dependent variable Expectation

Macroeconomic uncertainty based on the volatility of real gross domestic product

Negative

Operating cash flows deflated

by total book value of assets at

policy

In terms of firm classification, it is expected that there is a strong negative correlation between the capital investment and macroeconomic uncertainty variables regarding firms with higher growth rate and less or non – financial constraint In the rest

case of firms with lower growth rate and severe financial constraint, the relationships are predicted to be weaker or have no significant impact on each other

2.1.5 Robustness check-sub-sample categories

As mentioned in previous sections, while testing the impacts of macroeconomic uncertainty on corporate investment, I also examine how the direction and degree of effects are changeable concerning various samples In terms of firm categories, I base on growth potential and financial constraints to classify the research sample by which all firms are digested by the following indicators including the rate of growth, size and payout ratio In particular, firms with big size and high payout ratio are denoted as non – financial constraint enterprises and vice versa, ones with small size, low payout ratio are attributed to financial constraints firms To accomplish the formation of growth rate and financial constraints, median value is employed to sort all samples into two different magnitudes apart from payout ratio where value 0 is the criteria to separate subsamples These indexes are collected from financial statement

2.2 Previous researches

Baum et al (2005) research the impact of macroeconomic uncertainty on cash holdings for non – financial firms to investigate the effects of macroeconomic volatility on non – financial firms’ cash holding behavior from the COMPUSTAT database over the

1970 – 2000 period They suggest that a rise in macroeconomic volatility will narrow the cross – sectional distribution of firms’ cash – to – asset ratios when employing an augmented cash buffer – stock model Thereby, four proxies for macroeconomic uncertainty are constructed from conditional variances of GDP, CPI, IP and S&P500 index estimated with a GARCH model

Data of proxies used by month, the real GDP value is the quarterly statistical value, the authors perform Denton technique (Baum, 2001) to transfer data from quarter to month based on IPI index The research associates proxies with independent variables to perform regression for each classified enterprise group The model implemented with control variables which are the three – month LIBOR interest rate and the inflation index

to represent the cost of private funds, making regressions for each proxy for each enterprise group To measure the macroeconomic uncertainty, the model of Baum et al (2005) is proposed as follows:

𝐷𝑖𝑠𝑝𝑡( 𝐶𝑖𝑡

𝑇𝐴𝑖𝑡) = 𝛽0+ 𝛽1𝜏𝑡

Where Dispt(Cit/TAit) is a measure of the cross – sectional dispersion of firms’ cash – to – asset ratio at time t, and 𝜏𝑡2 stands for the measure of macroeconomic uncertainty at time t and denoted as MUj,t in my study Thereby, MUj,t are captured by the conditional variance of real GDP (real GDP) and the conditional variance of consumer price index (CPI) at time t and they are denoted as MU1 and MU2, respectively Ԑt is error term

As a result, there is a clear negative correlation between macroeconomic uncertainty and the variance of the cross – sectional distribution of non – financial firms’ cash – to – asset ratios In particular, large firms with substantial exposure to macro demand conditions reveal greater sensitivity It is found to be quite sensitive to macroeconomic uncertainty for firms experiencing rapid growth, firms considered financially constrained and capital – intensive firms Eventually, firms with sizable dividends payment manifest a lower sensitivity concerning macro impacts whereas capital

– intensive firms’ sensitivity is greater than that of labor – intensive firms to some extent

Based on the work of Gulen and Ion (2015), the authors demonstrate that policy uncertainty negatively relates to investment at firm and industry level and the impact is significant in economic magnitude Thereby the sample is observed from 1987 to 2013 for 10,278 enterprises The empirical model of the authors is designed as the following form:

In the model, the Mt variable represents macroeconomic policy changes, including changes in GDP growth and changes in elections due to changes in the National Assembly or Government Authors are made with dummy variables for the election, the year of the election will be 1 and zero for the remaining years

The PU is based on the BBD index developed by Baker, Bloom and Davis (2013) The authors calculate the BBD based on three components: information on policy uncertainty (statistics counts of the number of keywords related to uncertainty, economy, etc.); the uncertainty about future changes in the tax code will expire in the future; and uncertainty about future fiscal and monetary policy

Quantitative research methodology is employed in the analysis, the study runs regression and tests between independent and dependent variables and between general policy uncertainty and new – based component of the BBD index; model regression with the overall composition of the policy uncertainty and for each component constituting unstable policy variable

Their results illustrate that during the crisis period from 2007 to 2009, approximately two thirds of the 32% drop in corporate investments can be caused by policy uncertainty in observed samples On top of that, the effect of policy uncertainty on capital investment is not uniform in the cross – section of U.S companies Its magnitude varies widely across sector samples indicating for enterprises with a higher degree of investment irreversibility, more financial constraints, and which exist in less competitive industries Besides, policy – related uncertainty is associated with higher cash holdings and lower net debt issuance Generally, their outcomes support the concept that policy uncertainty might depress the growth of economy by a fall of corporate investment This decline is connected with precautionary delays caused by the investment irreversibility

and rises in the external borrowing cost

In line with the above view, Panagiotidis and Printzis (2016) who document that there is a sufficient correlation between macroeconomic uncertainty and investment decisions at firm level in Greece Their data set comprises 9 indices to quantify uncertainty in the Greek framework at three levels: Domestic level, international and EU level and to cover the period 1994M01 to 2015M08 A dynamic investment model employing GMM on aggregate, firm size classified, sector, within sector data is required Their outcomes exhibit a negative link between the macroeconomic volatility and the economic activity and specifically, on the firm investment in Greece In addition, this negative influence is significantly stronger for a high degree of heterogeneity among Greek sectors, the Health, the Real estate sector, the Other Community, Social and Personal Service Activities sector and the Hotels & Restaurants sector Concerning firm size, small firms behave differently compared to large firms by which are more sharply affected by macroeconomic volatility impacts Furthermore, it is outstanding that the

macro – uncertainty impact is significantly more pronounced than the firm – specific uncertainty impacts

Under a different approach of the relations among financial constraints, asset tangibility, and corporate investment; it is found that asset tangibility increases investment – cash flow sensitivities regarding financially constrained firms whereas there are no such influences observed for unconstrained firms In addition to theoretical expectations, firms with more tangible assets are less likely to be financially constrained Moreover, the positive effect of tangibility on constrained cash flow sensitivities is proof for a credit multiplier in U.S corporate investment Besides, due to a highly procyclical debt capacity, then income shocks have especially large impacts on constrained firms with tangible

assets (Almeida and Campello, 2007)

In such an above familiar study of the effects of financial constraints on corporate investment, Fazzari et al (1988) document that corporate investment is affected

by financial factors Their approach express that the characteristics of firms varies the connection between investment and financing constraints Consequently, it is displayed a substantially stronger sensitivity of investment considering cash flow and liquidity in enterprises that retain nearly all of their income and the financial constraints arise with the

capital market imperfection

A new test of the effect of financial constraints on corporate policies is developed through modeling a firm’s demand for liquidity (Almeida, Campello, and Weisbach, 2005) Impacts of financial constraints are revealed through the cash flow sensitivity of cash During the period from 1971 to 2000 for a large sample of manufacturing firms, the authors empirically estimate the cash flow sensitivity of cash and obtain robust support for their theory As a result, they achieve that constrained enterprises reveal substantially positive cash – cash flow sensitivities whereas unconstrained enterprises do not Furthermore, the economists suggest that financially constrained enterprises grow their propensity to retain cash after negative macroeconomic shocks,

whereas unconstrained enterprises do not

Im et al (2017) investigate the relationship between uncertainty measured by stock return volatility and the market value of cash holdings in North America for the period from 1980 to 2015 so as to construct variables based on the information contained

in financial statements and assume that if the vitality magnitudes of uncertainty and the value of cash holdings are greater for financially constrained firms, firms with less agency conflicts, and firms with more growth opportunities To be more detailed, their outcomes

eventually indicate that a firm facing higher uncertainty has a higher value of cash, reducing investments and holding more cash beneficial to shareholders The impacts are referred to the increased value of the option to wait and see as well as the aggravated financial constraints and mitigated agency conflicts Besides, the effects of uncertainty in regard to increasing the value of cash holdings are consistently observed for firm – level,

time – series, and residual uncertainty measures

Based on a sample of 914 cross – border mergers and acquisitions from 1994 to

2011, when testing whether foreign acquisitions reduce financial constraints, enhance investment in research and development (R&D) and productivity of the target firms in China Chen, Hua and Boateng (2016) employ investment to cash – flow sensitivity to estimate financial constraints and their consequences indicate that foreign acquisitions are consistent with a decrease of target firms’ financial constraints, irrespective of the ownership type of the target firm However, compared to state – owned firms, the extent

of financial constraint decrease is pronounced for non state – owned enterprises The research also demonstrates evidence that productivity and investment of Chinese target

firms in R&D are enhanced by foreign acquisitions

Besides, to investigate the effects of political uncertainty on corporate investment, the evidence from China is demonstrated by An, Chen and Zhang (2016) while employing hand – collected data on changes of Government officials in 277 Chinese cities, they examine how corporate investment is affected by political turnover in a transitional economy They document that political turnover leads firms to significantly decline corporate investment, typically when the new official is an outsider appointed by a higher level of Government The impact of political turnover on corporate investment is greater for state – owned enterprises, capital intensive firms, and firms deemed locally important Eventually, they also address that the volatility of corporate investment grows

up with political turnover

2.3 Suggested models and hypotheses

In response to a research question of the impact of macroeconomic uncertainty

on corporate investment, I propose a research model that is based on two previous studies,

to be more detailed, a combination of variables from two models Specifically, I am based

on the study of Baum et al (2005) to estimate two proxies of macroeconomic uncertainty (MU) containing real gross domestic product (GDP), and consumer price index (CPI)

To measure the macroeconomic uncertainty, the model of Baum et al (2005) is proposed as follows:

 Hypothesis 2: There is a strong negative relationship between macroeconomic uncertainty and corporate investment with regard to firms with higher growth rate and firms are less or non – financial constraints

CHAPTER 3 RESEARCH METHODOLOGY

The main variable used to measure an enterprise's investment is Investment which is computed by two types of ways comprising capital expenditures, and mergers and acquisitions Besides, there are two proxies that represent macroeconomic volatility including real gross domestic product (GDP) and consumer price index (CPI)

In addition, the model uses control variables consisting of sales growth, operating cash flow, Tobin's Q, national election, the rate of gross domestic product

growth (GDP growth) to investigate their impacts in the relation between macroeconomic uncertainty and corporate investment

3.2 Data

The collected data come from secondary data and Thompson Reuters Worldscope Database The study uses quantitative methods, based on data from 732 firms listed between 2005 and 2015 on the Ho Chi Minh City Stock Exchange, Hanoi Stock Exchange, and Unlisted Public Company Market

For firm level, variables including total assets, cash flow, sales growth, Tobin’s

Q and national election; these indicators are collected and computed from annual statements and financial statements of listed companies for each year from the official websites such as Cafef.vn, Vietstock.vn and Cophieu68.vn In my analysis, for corporate investment, data comprising Capital Expenditures and M&A are regarded as proxies of dependent variable

In terms of macroeconomic data, there are GDP per quarter, consumer price index (CPI) per month and annualized data of GDP growth in which collected from International Monetary Fund (IMF) For quarterly GDP data, applying Denton techniques converts quarterly data to monthly data in order to match available macro data

With respect to firm categories, I first investigate the behavior of large and small firms based on the growth potential and financial constraints through the differences in firms’ characteristics such as size and payout ratio of enterprises In particular, I categorize firms into high growth and low growth subsamples, thereby a firm’s growth is considered to be high if its value of the average of three consecutive sales growth is above the median value all firms’, and be aware of low growth if its value of the average of three consecutive sales growth is below the median value Similarly, firms are classified into financial constraints and non – financial constraints based on the median value of firm size and the different sign of payout ratio by which these indicators are derived from financial statements

3.3 Empirical model

The research model is developed from the proposed model of Gulen and Ion (2015) in the literature of Policy uncertainty and Corporate Investment in conjunction with the model of Baum et al (2005) with the study of the impact of macroeconomic uncertainty on non – financial firms' demand for liquidity Specifically, the conditional variance derived from GARCH model, averaged to annual frequency, is then used as