Firms’ investment – cash flow relationship in the context of state ownership and banking system reform in vietnam (tt)

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY --- TU THI KIM THOA FIRMS’ INVESTMENT – CASH FLOW RELATIONSHIP IN THE CONTEXT OF STATE OWNERSHIP AND BANKIN

MINISTRY OF EDUCATION AND TRAINING

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

-

TU THI KIM THOA

FIRMS’ INVESTMENT – CASH FLOW RELATIONSHIP IN THE CONTEXT OF STATE OWNERSHIP AND BANKING SYSTEM REFORM IN VIETNAM

Major: Finance - Banking Code: 9340201

SUMMARY OF PH.D THESIS

Ho Chi Minh City, 2020

The thesis is carried out at:

University of Economics Ho Chi Minh City

Academic supervisors:

Dr Vu Viet Quang

Dr Nguyen Thi Uyen Uyen

Reviewer 1 :

Reviewer 2 :

Reviewer 3 :

The thesis will be defended at the Doctorate Thesis Committee of Examiners of the University of Economics Ho Chi Minh City at………… on ………

The thesis can be referred at the library:

Chapter 1: INTRODUCTION

1.1 Motivations

Relationship between investment and cash flows, especially in the context of financial constraints have attracted interests of many scholars in the field corporate finance Fazzari, Hubbard, Petersen, Blinder, and Poterba (1988) show that financially contrained firms have high investment – cash flow sensitivity because of higher cost of external funds in compared with that of internal funds Different types

of the relationhip between investment and cash flow have been found

in financial literatures Fazzari et al (1988) find the linear relationship while Cleary, Povel, and Raith (2007) document the non-linear (U-shaped) ones, which have been confirmed by many other studies (Firth, Malatesta, Xin, & Xu, 2012; Guariglia, 2008; Tsai, Chen, Lin,

& Hung, 2014) So, there is no consistent relation between investment and cash flows found in the literatures Moreover, this relation has not been under-investigated for Vietnam context

The investment – cash flow sensitivity is one of commonly used measures of financial constraint, which is defined as a limit in capital accessibility, either internally or externally Several studies shows evidences that state-ownership does have impact on this sensitivity (Firth et al., 2012; Haider, Liu, Wang, Zhang, & Money, 2018; Tsai et al., 2014) while H.-C M Lin and Bo (2012) shows that state – ownership does not help to reduce financial constraints on investment, even via the state-controlled banking system However, most of the studies conducted in the context of well-developed economies or big transition country like China How about Vietnam, a small and young transition economy? Vietnam used to follow the centrally planned

economy which was entirely dominated by state-owned enterprises

(SOEs) Althought under the impact of Doi moi policy, the role of

private sector in the economy has been increasing, the government still plays an important role in a large number of companies by holding a large percentage of outstanding shares at many equitized SOEs In the literatures, the impact of state ownership on firm performance as well

as financial decisions is still controversial Some report a positive impact (R R Chen, El Ghoul, Guedhami, & Nash, 2018; Du & Boateng, 2015; Sun & Tong, 2003) while some other evidence different effects (Allen, Qian, & Qian, 2005; G Chen, Firth, & Xu, 2009) So, whether state ownership has any impact on corporate financial constraint, specifically, investment – cash flow relation of Vietnamese companies is still an unanwered question

In Vietnam, due to the underdevelopment of financial market, beside internal cash flows, bank loans have been main financing sources of funds for firm’s investments However, credit market is not

a fair play ground for private companies due to some historical reasons1 although Vietnam has done several efforts to improve the situation Nhung and Okuda (2015) show that Vietnamese SOEs have

an advantage over privately owned firms in accessing bank loans as well as making a profit, even after economic booms The higher accessibility to bank loans, the less financially constrained the firm is, meaning the lower investment – cash flow sensitivity Therefore, banking system reform is proved to have an impact on investment – cash flow relation (Tsai et al., 2014) In the process of reforming the

1 Vietnam used to be a centrally-planned economy in which state – owned banks mainly served for state-owned enterprises

economy as well as intergrating to the world, Vietnam gradually accepts the entry of foreign banks to do business in Vietnam The presence of foreign banks on one side would increase competition in credit market, and on the other side put pressures on domestic banks

to improve their transparancy, effeciency and profitability to be survival and grow in a integrated market As such, the presence of foreign banks – which can be considered a measure to reform the banking system – may have certain impact on companies accessibility

to external funds to finance their investment, or on the other words, firm’s investment – cash flow relation Therefore, this is also another motivation for me to choose this topic

The topic of investment – cash flows have been intensively conducted in financial literatures, but most of them use the samples of developed countries like U.S, Canada, or China – a big transitional economy To my best knowledge, the relationship between investment and cash flows, especially in the context of state – ownership and foreign bank entry has still not investigated for the case of a small transition economy like Vietnam Furthermore, in spite of sharing some cutural, social and political similarities with China, Vietnam also has many differences such as size of economy, history of the transformation, openness to the world economy, development of financial market, etc Studying the Vietnamese context is believed to

be worthwhile and valuable for international finance literatures because results form the rather specific case of China may not be generalizable for other small emerging markets Therefore, I choose

to examine the impact of banking system reform, and state ownership

on investment – cash flow sensitivity in Vietnam for my Ph.D thesis

The thesis follows the series of essays format which consists of two independent essays: Firm’s investment – cash flow relationship

in the context of state ownership in Vietnam; and Firm’s investment – cash flow relationship in the context of banking system reform in Vietnam

1.2 Thesis objectives:

The thesis aims to investigate the impact of state ownership and banking system reform on the relationship between firm’s investment and internal cash flows in the context of small transition economy – Vietnam

1.3 Methodology:

The study applies quantitative method on non-balanced panel samples of Vietnamese listed firms which are extracted from the Thomson Reuters database and manually collected from companies’ annual reports All the regressions are estimated by Generalized Least Squared (GLS) method to fix the heteroscedasticity problem and robusted by Generalized Method of Moment (GMM) for endogeneitity potential

1.4 Empirical findings

The results show that the investment–cash flow relation for both state-owned and non-state-owned firms is U-shaped In addition, state-owned companies have higher cash flow sensitivity of investment, which perhaps is due to their socioeconomic and political responsibilities, poor corporate governance and agency problem Also, presence of foreign banks in Vietnam results in a decrease in investment cash flow sensitivities of Vietnamese companies Although overinvestment of state controlled firms is not reduced but

underinvestment problem of non- state -controlled listed firms is mitigated due to better accessibility to bank loans with presence of foreign banks

1.5 Contributions

The studies provides evidences on the non-linear relationship between investment and cash flows in Vietnam, which have been under-investigated More importantly, it sheds further light on the implications of financial constraints on investment under the impact

of state ownership and banking system reform, especially in a small transitional economy such as Vietnam Therefore, the study results can

be helpful reference for policy makers, managers, economic and business lecturers and students

Chapter 2

FIRM’S INVESTMENT – CASH FLOW RELATIONSHIP

IN THE CONTEXT OF STATE OWNERSHIP CONTROL

IN VIETNAM 2.1 Study motivations

This chapter presents the first essay: a study on firm’s investment - cash flows relationship under the context of state ownership control in Vietnam The study is motivated by the domination of state ownership in Vietnamese companies while its impact on firm performance as well as financial decisions have still been unconsistent in the literature Otherwise, from our best knowledge, little attention to date has been paid to the impact of state ownership on the investment–cash flow relation, especially in a small transitional economy such as Vietnam

2.2 Literature review and hypothesis development

2.2.1 Relation between investment and cash flow

Fazzari et al (1988) is the first person who show the linear relationship between investment and cash flow by using a sample of

US manufacturing firms in the period 1970–1984 The authors also evidence find that the relation is more sensitive at financially constrained firms and less sensitive at non-financially constrained firms The linear relationship also supported by Hoshi, Kashyap, and Scharfstein (1991); Kaplan and Zingales (1997); Cleary (1999) and Almeida and Campello (2007)

However, Cleary et al (2007) find a U-shaped relation, which

is caused by cost and revenue effects, between investment and cash flow The cost effect arises because when firms invest more, their borrowing cost rises The authors conclude that firm’s investment has

a positive relation with internal cash flows when the cash flows are significant, and a negative relation if they are low The U-shape is also supported by Guariglia (2008) Additionally, beside comfirming the non-linear curve, Firth et al (2012) further argue that the curve may vary with politically oriented investment or a soft budget constraint Tsai et al (2014) assert the flatter U-shaped curves with the presence

of foreign banks, which reduce financial constraints for firms, especially those that are privately owned This means that lower investment - cash flow sensitivity reduces underinvestment by listed SOEs

The U-shaped relation between investment and cash flow may

be explained as follows The small and young companies normally have low range of cash flows and good investment opportunities,

which are well perceived by the market, so these companies are easier

to raise external capital from financial market, resulting in a negative investment – cash flow relation However, having no current investments, higher cash flows will not materialize in the future Therefore, it is not a feasible strategy to coincide timing investment with high cash flow period (Hovakimian, 2009) This argument also supports the argument by Cleary et al (2007) with cost – revenue effect explanation Therefore I expect that Vietnamese firms have a similar investment–cash flow relationship, so the following hypothesis

is set:

H2.1: The investment and cash flow relation at Vietnamese companies is U-shaped

2.2.2 State Ownership and Investment–Cash Flow Relations

Many studies have been conducted on the impact of soft budget constraints on the relationship between cash flow and investment Early research by Chow and Fung (1998) finds evidence that investment by private firms has higher cash flow sensitivity than that

by SOEs, implying that the latter face fewer financial constraints than non-SOEs Héricourt and Poncet (2009), as well as Poncet, Steingress, and Vandenbussche (2010) arrive at similar conclusions According to Cleary et al (2007), the less financially constrained a firm is, the flatter its U-shaped curve is, as company investment is less dependent on internal cash flow Guariglia, Liu, and Song (2011) find that SOEs’ asset growth is not affected by liquidity constraints, while the availability of internal funds constrains the growth potential of private companies The soft budget constraints at SOEs are due to their social and political responsibilities (Bai, Lu, & Tao, 2006; C R Chen, Li,

Luo, & Zhang, 2017a; J Y Lin & Tan, 1999; Sheshinski & Calva, 2003) On the contrary, Firth et al (2012) show that SOEs have

López-a steeper U-shLópez-aped curve thLópez-an privLópez-ate firms, especiLópez-ally on the hand side of the curve The findings appear to contradict the argument

left-on SOEs’ soft budget cleft-onstraints The authors argue that Chinese SOEs are induced by the government to use their own cash flows to invest more, so as to achieve multiple government socioeconomic objectives when they have abundant internal cash flows and when they face negative internal funds

In Vietnam, SOEs also have responsibilities to fulfil government socioeconomic and political objectives as the Chinese ones The SOEs, under the government influences in many cases, have

to undertake some assigned, even negative net present value (NPV) investments, leading to overinvestment problems However, unlike the private firms, the Vietnamese SOEs do not associate investments with firm’s fundamentals (O'Toole, Morgenroth, & Ha, 2016), indicative of poor investment efficiency R Chen, El Ghoul, Guedhami, and Wang (2017b) also report that SOEs’ investments have lower efficiencies than non SOEs do Lower efficiency may cause a higher cost of external financing, which in turn make SOEs have more reliance on the internal capital Therefore, the following hypothesis is posited:

H2.2: SOEs have higher investment–cash flow sensitivity

2.2.3 State Ownership and Investment–Leverage Relation

In literature, a negative relation between debt and investment are found by many studies (Aivazian, Ge, & Qiu, 2005; Firth, Lin, & Wong, 2008; Jensen, 1986; Lang, Ofek, & Stulz, 1996; Myers, 1977)

On the other side, as indicated in many studies (Chow & Fung, 1998;

Guariglia et al., 2011; Héricourt & Poncet, 2009; J Y Lin & Tan, 1999; Poncet et al., 2010), SOEs have a soft budget constraint, which means they can easily access external financing (Allen et al., 2005; Cull, Li, Sun, & Xu, 2015; Cull & Xu, 2003) Nhung and Okuda (2015) also point that Vietnamese SOEs have easier access than other firms when borrowing funds from banks and making profits, even after

an economic boom As such, state ownership may have certain impact

on the relation between investment and leverage Therefore, the thesis also investigate the impact of state ownership on investment–leverage relations by developing the following hypothesis:

H2.3: State ownership has a positive impact on a firm’s investment–leverage relations

2.3 Research design

2.3.1 Testing Investment–Cash Flow Relation

In order to test the U-shape relationship, in this study, two different approaches to examine investment–cash flow relations, using the basic model of investment developed by Fazzari et al (1988) are employed as follows:

In the first approach, CFKSQR i,t is added into the basic model

as employed by Cleary et al (2007); Firth et al (2012):

𝐼𝐾𝑖,𝑡= 𝛼0+ 𝛼1𝐶𝐹𝐾𝑖,𝑡 + 𝛼2𝐶𝐹𝐾𝑆𝑄𝑅𝑖,𝑡+ 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝑖,𝑡+ 𝑣𝑖+ 𝑣𝑡+ 𝑒𝑖,𝑡 (2.1)

where i and t are firm and time, respectively; v i is the firm-fixed

effects; v t is the year-fixed effects, and e it is the error term IK it is the

investment ratio CFK i,t is the annual internal cash flow ratio Controls

is a vector of control variables that potentially affect firm investment,

including the SG i,t-1 (firm’s sales growth); SIZE (firm size); LEV i, t-1

(financial leverage); AGE i,t (firm age); BETA i,t (beta coefficient)

In the second approach, following Firth et al (2012), the cash

flow (CFK) of the basic model is separated into positive cash flow (CFKPOS) and negative cash flow (CFKNEG) by using the dummy variables POS and NEG POS takes a value of 1 if CFK is greater than

0, and 0 otherwise Similarly, NEG takes a value of 1 if CFK is less

than 0, and 0 otherwise

𝐼𝐾𝑖,𝑡= 𝛼0+ 𝛼1𝐶𝐹𝐾𝑃𝑂𝑆𝑖,𝑡 + 𝛼2𝐶𝐹𝐾𝑁𝐸𝐺𝑖,𝑡+ 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝑖,𝑡+ 𝑣𝑖+ 𝑣𝑡+ 𝑒𝑖,𝑡 (2.2)

A significant change in the sign of the coefficients of CFKPOS and CFKNEG shows a nonlinear relation between investment and cash flows A U-shaped curve has a significantly positive sign for CFKPOS and significantly negative sign for CFKNEG An inverse-U-shaped curve has a significantly negative sign for CFKPOS and significantly positive sign for CFKNEG

2.3.2 Testing the impact of state ownership on investment–cash

Flow Relations

To test the impact of state ownership on investment–cash flow

relations, I use two different proxies for state ownership (SC):

 First, SC (= STATE) is measured by a dummy variable that takes a value of 1 if the percentage of state ownership in firm i in year

t is at least 50% of total voting shares and 0 otherwise This method

compares the investment behavior of two groups: state-owned (SOEs) and non state-owned (non-SOEs) firms

 Second, SC (= GOV) is measured by the percentage of state ownership in firm i in year t This method measures the extent of

government influence on firm investment behavior

The two SC proxies are sequently interacted with CFKPOS and

CFKNEG The regression model is as follows: