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

Thesis motivations

Firstly,investmentisoneofthemostimportantdecisionsincorporatefinancial decisions The company managers will make all of efforts to conductpositive NPV investment opportunities because these investmens are expected toincrease the firm value.Beside availability ofp o s i t i v e N P V i n v e s t m e n t o p p o r t u n i t i e s , the availability of financing funds (internal or/and external) is another importantfactor affecting the firm’s investments Therefore, relationship between investmentandc a s h f l o w s , e s p e c i a l l y i n t h e c o n t e x t o f f i n a n c i a l c o n s t r a i n t s h a v e a t t r a c t e d interests of many scholars Fazzari, Hubbard, Petersen, Blinder, and Poterba (1988)showthatfinanciallycontrainedfirmshavehighinvestment– cashflowsensitivitiesbecause of higher cost of external funds in compared with that of internal funds.Differenttypesoftherelationhipbetweeninvestmentandcashflowhavebeenfoundin 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 beenconfirmed by many other studies (Firth, Malatesta, Xin, & Xu, 2012; Guariglia, 2008;Tsai,Chen,Lin,&Hung,2014).So,thereisnoconsistentrelationbetweeninvestment and cash flows found in the literatures Moreover, the relation has notbeenunder- investigatedforVietnamcontext.

Secondly, the investment – cash flow sensitivity is one of commonly usedmeasures of financial constraint which is defined as a limit in capital accessibility,either internally or externally In the context of transition economy like China andVietnam,theroleofstateownershiponfinancialconstraintshasbeenunclear.Manystudies shows evidence that state-ownership does have impact on firm financialconstraints,i.e.investment– cashflowrelation(Firthetal.,2012;Haider,Liu,Wang,&Zhang,2018;Tsaietal.,2014)whileH.- C.M.LinandBo(2012)showsthatstate

– ownership does not help to reduce financial constraints on investment even via thestate-controlledbankingsystem.

Vietnam used to follow the centrally-planned economy which was entirelydominated by state-owned enterprises (SOEs) This mechanism led the country intocrisis and backward, which required a broad and in–depth renovation of the wholeeconomy.Acomprehensiveprogramwhichiswell- knownasDoimoiwasintroducedin1986totransformtheeconomyfromasocialisttoama rketoriented.Asoneofthecomponents of theDoi moipolicy, an equitization (privatization per- se) programlaunchedintheearly1990shastransformedanumberofstate- ownedcompaniesintojoint- stockcompaniesbesideforthefirsttimeallowingexistenceofprivatecompanies.Anumbe rofprivatecompanies(bothequitizedandnon-equitized)has been constantly increasing However, the government still plays an important role ina large number of companies by holding a large percentage of outstanding shares atmany equitized SOEs In the literatures, the impact of state ownership on firmperformanceaswellasfinancialdecisionsisstillcontroversial.SunandTong(2003)reportth attheprivatizationprograminChinaimprovedearnings,sales,andworkers’productivityatChineseSO Esbutnotprofitability.DuandBoateng(2015)assertthatshareholder value is significantly affected by state ownership, formal institutionaldistance, and reforms in the foreign currency approval system.

Chen,Firth,andXu(2009)findthatfirmperformanceisenhancedbycertaintypesof stateownership SOEs have slow, even negative growth whereas the rapidly growingprivate sector significantly contributes to economic growth (Allen, Qian, & Qian,2005) It finds that SOEs with a soft budget constraint can easily access externalfinancing, resulting in lower dependence on internal cash flows than is the case atprivately owned firms (Allen et al., 2005; Cull & Xu, 2003) Firth et al (2012) alsoreportthatstateownershiphasanimpactontherelationbetweeninvestmentandcashflow R R. Chen, El Ghoul, Guedhami, and Nash (2018) assert that an increase instate ownership leads to an increase in corporate cash holdings, which means apositive relation between government ownership and corporate cash holdings Morespecifically,SOEshavehigherinvestment– cashflowsensitivitythanprivatelyownedfirms,especiallywhencashflowisnegative. So,whetherstateownershiphasany impact on corporate financial constraint, specifically, investment – cash flowrelationofVietnamesecompaniesisstillanunanweredquestion.

Thirdly, in Vietnam, due to the underdevelopment of financial market, besideinternalcashflows,bankloanshavebeenmainfinancingsourcesoffundsforfirm’sinvestme nts However, credit market is not a fair play ground for private companiesdueto so me h i s t o r ic a l r e a s o n s 1 althoughV ie t n a m hasdone s e v e r a l e ffor tst oi mp ro ve

1 Vietnamusedtobeacentrally-plannedeconomyinwhichstate–ownedbanksmainlyservedforstate-ownedenterprises. thesituation.NhungandOkuda(2015)showthatVietnameseSOEshaveanadvantage over privately owned firms in accessing bank loans as well as making aprofit, even after economic booms The higher accessibility to bank loans, the lessfinanciallyconstrainedthefirmis,meaningthelowerinvestment– cashflowsensitivity.Therefore,bankingsystemreformisprovedtohaveanimpactoninvestme nt–cashflowrelation(Tsaietal.,2014).Intheprocessoftransformingtheeconomy from centrally – planned to market oriented, Vietnam also has conducted anumberoffinancialsystemreformsasacomponentofoveraleconomicreform.Oneof them is to allow the entry of foreign banks to do business in Vietnam This doesnot only come from the reality but from entrance requirements of international freetradeagreementssuchasWTOalso.Thepresenceofforeignbanksononesidewouldincreasecomp etitionincreditmarket,andontheothersideputpressuresondomesticbanks to improve their transparancy, effeciency and profitability to be survival andgrow in a integrated market As such, the presence of foreign banks – which can beconsidered a measure to reform the banking system – may have certain impact oncompanies accessibility to external funds to finance their investment, or on the otherwords, firm’s investment – cash flow relation Therefore, it also motivates me toconductthis thesis.

The topic of investment – cash flows have been intensively conducted infinancial literatures, but most of them use the samples of developed countries likeU.S, Canada, or China – a big transitional economy To my best knowledge, therelationship 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 smalltransition economy like Vietnam Furthermore, in spite of sharing some cutural,social and political similarities with China, Vietnam also has many differences suchas size of economy, history of the transformation, openness to the world economy,developmentoffinancialmarket,etc.StudyingtheVietnamesecontextisbelievedt obeworthwhileandvaluableforinternationalfinanceliteraturesbecauseresultsform the rather specific case of China may not be generalizable for other small emergingmarkets Therefore, I choose to examine the impact of banking system reform, andstateownershiponinvestment– cashflowsensitivityinVietnamformyPh.Dthesis.

Thesisobjectives

The general objective of the research is to investigate the impact of financialconstraints, which are measured by state ownership and banking system reform ontherelationbetweenfirm’sinvestmentandinternalcashflowsinthecontextofsmalltransitional economy – Vietnam The general objective is implemented by the twoessays which are separately presented in the following Sections of 1.3 and Section1.4.

Firm’sinvestment– cashflowrelationshipinthecontextofstateownershipinVietnam

Objectivesandhypotheses

The study examines the effect of state ownership on the relationship betweeninvestment and cash flow in Vietnam, a small transitional economy The studyobjectivesareasfollows:

- Does the investment and cash flow relation of Vietnamese companieshaveU-shape?

- Do state controlled companies have higher investment–cash flowsensitivitythannon-statecontrolledcompanies?

- Does state ownership has a positive impact on a firm’s investment–debtrelations.

Data

The final sample of the study consists 3,366 firm-year observations of non- financial companies listed on the two stock exchanges of Vietnam, HOSE and HNXfortheperiodof2009–

2015 2 BothfinancialandmarketdataareextractedfromtheThomsonReutersdatabase.Observa tionswithmissingdataareomitted,andoutliersthat may influence the results are also excluded by winsorizing 1% of the two tailsforeachvariable.

Methodology

The study applies quantitative method First, the study tests if investment – cashflowinVietnamisU- shapedforVietnamesefirmsingenternal,statecontrolledandstateuncontrolledfirms,employi ngtwodifferentapproaches.Thefirstapproachfollows Cleary et al (2007) which includes square of cash flow method in thestandard investment regression equation developed by Fazzari et al.

(1988), and thesecond approach follows Firth et al (2012) which separates cash flows into positiveand negativecash flows.S e c o n d l y , the impact ofstate ownershiponthe investment

2 TheperiodischosenbecausetherewerejustalimitednumberoflistedequitizedSOEsbefore2008andthestudy wasconductedin2016. controlled,state-uncontrolledsubsamplesaswellashighandlowgrowthopportunities sub-subsamples Thirdly, the investment-leverage relationship is alsoexaminedinthesamemanner.AlltheregressionsareestimatedbyusingGeneralizedLeastSqu ared(GLS)methodonapaneldatasamplestocontrolfortheheteroscedasticityproblemand robustedbyGeneralizedMethodofMoment(GMM)forendogeneititypotential.

Empiricalfindings

The results show that the investment–cash flow relation for both state- ownedand non-state-owned firms is U-shaped In addition, state-owned companies havehighercashflowsensitivityofinvestment,whichperhapsisduetotheirsocioeconomi c and political responsibilities, poor corporate governance and agencyproblem.Moreover,theinvestmentofhigh-growthcompanies,bothwithandwithoutstate ownership, has lower dependence on internal cash flow Additionally, low-growth state-owned companies have higher cash flow sensitivity of investment thanthosewithoutstateownership,suggestinginefficientinvestmentbytheformer.

Contributions

Thefollowingcontributionsareaddedintothecurrentliteraturefromdifferentperspectives First, I shed further light on the implications of financial constraints byinvestigatingtheassociationbetweenstateownershipandcorporateinvestment–cashflow in a small transitional economy such as Vietnam Second, generally previousstudiesexaminingthisimportantissuehavebeenconductedinthecontextofdevelop edcountriesorChina(Clearyetal.,2007;Firthetal.,2012;Tsaietal.,2014).The intensive literature review has indicated that the impact of state ownership oninvestment relations in an emerging and transitional country such as Vietnam haslargelybeenunder-examined.

Firm’sinvestment– cashflowrelationinthecontextofbankingsystemreforminVietnam

Objectivesandhypotheses

The study examines the effect of banking system reform on investment- cashflow relation in a context of a small transition economy The banking system reformis measured by presence of foreign banks or their branches, outlets, representativeofficesatthelocationwherethecompanylocatesitsheadquarter.Followingsarethe studyobjectives:

- Examinei m p a c t o f b a n k i n g s y s t e m r e f o r m o n t h e i n v e s t m e n t – l e v e r a g e relationin general,andforstatecontrolled andnon–statecontrolled firms.

- Examinei m p a c t o f b a n k i n g s y s t e m r e f o r m o n t h e i n v e s t m e n t – l e v e r a g e relationin general,andforstatecontrolled andnon–statecontrolled firms.

- Is there a nonlinear investment – cash flow relation (U-shape) at

- Does banking system reform has a positive impact on firm’s investment –debtrelation?

Data

The final sample of the study consists 2,858 firm-year observations of non- financial companies listed on the two stock exchanges of Vietnam, HOSE and HNXfortheperiodof2009–

Methodology

The study applies quantitative method First, the U-shaped investment – cashflowrelationsinVietnamaretested.Thetestsareconductedforthefullsample,statecontrolled and state uncontrolled subsamples, employing two different approaches.ThefirstapproachfollowsFazzarietal. (1988)andthesecondapproachfollowsFirthet al (2012) Secondly, I investigate the impact of banking system reform on theinvestment relationship for various groups of business such as state controlled, nonstate controlled, high growth opportunity and low growth opportunity, etc.Thevariable proxied for banking system reform is manually collected from companyannual reports Thirdly, I examine the investment- leverage relationship under theimpact of state – ownership All the regressions are estimated by using GeneralizedLeast Squared (GLS) method to fix the heteroscedasticity problem and robusted byGeneralized Methodof Moment(GMM)forendogeneititypotential.

The findings show the U – shape relation between investment and cash flowforVietnamesecompanies.

3 TheperiodischosenbecausetherewerejustalimitednumberoflistedequitizedSOEsbefore2008andthestudy wasconductedin2015. reliant on internal cash flow in the post reform period Although overinvestment ofstate controlled firms is not reduced but underinvestment problem of non- state - controlled listed firms is mitigated due to better accessibility to bank loans.Theinvestigatedrelationbetweeninvestmentandleverageisrobustforthisconclusion.

Contributions

Thisstudycontributesadditionalempiricalevidencetothefinancialliteratureon the topic of impact of banking system reform on investment – cash flow relation,especiallyinacontextofsmalltransitioncountry.Mostof myfindingsaresimilartothe previous study results except that overinvestment problem of state controlledfirms is not mitigated in the post reform period Perhaps, in the post reform periodstate controlled firms are still main customers of state-owned local banks who aredominating the credit market.Moreover, presence and operation of foreign banks inVietnamisstilllimited.

Thesis structure

The remaining of the thesis is structured as follows Chapter 2 presents theoverview on Vietnam’s economic reforms Chapter 3 reviews related investmenttheories and literatures on financial constraints, and its impact on investment – cashflowrelationship.Chapter4andChapter5repectivelypresentstwoimportantstudiesof the thesis:impact of state ownership and banking system reform on the firm’srelationship between investment and cash flows Finally, the thesis is concluded byChapter6.

This chapter presents an overview on Vietnam’s economic reforms which arerepreresented by corporation reform – known as equitization programs, and bankingsystemreform.Aftertheunificicationofthewholecountryin1975,Vietnamfollowed the centrally planned economic mechanism in which the state governmentdominated all of the aspects of the economy Without the competitive motivationstogether with many other reasons, the economy fell deep into recession for manyyears, which forced Vietnam to reform the economy In 1986, Vietnam officiallylaunched the comprehensive economic reform program, which is calledDoi moipolicy, including economic, financial, corporation etc… reforms The policy aims attransformingtheeconomy fromcentrally planned,whichlacksmotivationsfordevelopment,tomarket- orientedwhichallowsthemultipleformsofbusinessorganizations, and openning the door to the world The policy has made a greatimpact on the economy as a whole. Economic structure has significantly changedwiththebirthandincreasingroleof privatesectorintheeconomy,includingforeigninvestors Two – tiered banking system was established, together with an increase inentry and expansion of foreign banks Many legal frameworks have been introducedorrevisedtosupportthetransformationandopennessoftheeconomy.

UndertheDoimoipolicy,thecorporationreformwhichisknownasequitizationorp rivatizationprogramwasthekeycomponentoftheeconomicreform.A large number of state – owed enterprised has been equitized via restructuring,mergerandaquistion,deinvestitures,ownershiptransfer,etc.Theequi tization program have borne a number of joint stock companies, which have been one of thedeterminantsofVietnameseeconomicdevelopmentforthelastfewdecades.Similarly, the transformation from a one-tiered to two-tiered banking system as wellas allowing the entry of foreign banks were the focal issues of the banking systemreformasapartoffinancialreform.Boththereformshavegreatlycontributedtothewell- knownsuccess oftheVietnam’seconomysofar.

Chapter 2 is structured as follow Section 2.1 highlights an overview aboutVietnam’seconomyforthelastmorethan30years.Section2.2presentstheequitizati on program in Vietnam and Section 2.3 describles an overview of theVietnam’sbanking systemreform.TheChapterwillbeconcludedbySection2.4.

Overviewon Vietnam’seconomy

Vietnam’seconomy,aftertheunificationofthecountryin1975,followedthecentrally- planned mechanism, in which all important decisions must be made by thecentralgovernmentalbodies.Theperiodof1976–1985canbedescribedbythelownational income growth rate (3.7 percent), supper high inflation (453.54 percent bythe end of 1986); domestic production could not meet the basic needs for people,leading to reliance on imports; severe budget deficit and foreign debt problems Thefailure of this model led the economy to the edge of economic crisis. Therefore, theSixth Party Congress in December 1986 made an important decision to launch acomprehensiveeconomicreform,shiftingthecentrallyplannedeconomytoasocialist- oriented market economy, which is calledDoi moipolicy TheDoi moipolicy, which cored by economic reform, aiming at implementing the country’sindustrializationandmodernizationobjectives,aswellasopened- door,globalintegration policy and it has brought recognized remarkable achievements Over thepastmorethan30years,sinceDoimoi,Vietnamhasbeenoneofthecountrieswhichhave had the most rapid economic growth and development in the world Figure2.1showsthethegrowthrateofGDPfortheperiodfrom1986to2017.

Since theDoi moiin 1986, Vietnam’s GDP growth rate has notably rocketedfrom2.79percentin1986to7.36percentin1989,andthenreachedthepeakof9.54per cent in 1995 However, under the effect of Asian financial crisis in 1997, itdroppeddowntothelowestpointoverthelast30yearsat4.77%,arelativelyhighincompared with that of many developed countries Since then, the economy hasmaintained a pretty stable growth at around 6 percent annually In 2018, GDP percapita reached about US$ 2,551 per capita a year Economic sectors have beenrestructured toward the development of a market- oriented socialist economy wherebyprivatesectoris freelyestablished and operates in areaslegallyapproved.

Although being an agricultural country, before theDoi moiVietnam had anunderdeveloped andunderproductive agriculture sector, resulting in as e r o u s s h o r t a g e offoods.UndertheDoimoipolicyinagriculture,whichin itiatedbyLandLawin

1987 and the well-known Resolution No 10 (issued on April 5, 1988) 4 Thesepolicies emphasized on fairer equality in land holding, which enhanced farmers’assessibilitytoland;applyingnewandadvancedtechnologyinagriculturalprod uction,diversifyingagriculturalproductsotherthanrice,increasingcompetivitness and efficiency for agriculturat input and output markets, etc As aresult, agricultural productivity was boosted, shifting Vietnam from a food importertooneofmajorexportersinmanyagriculturalproductssuchasrice,peppers,coffee,ca shewnuts, rubber, etc.

One of major success of theDoi moiprogram was the control of seriousinflation problem In the early stage of the reform, Vietnam fell into hyperinflationperiod with the peak was 453.54 percent in 1986, which mainly caused by failure oftheGeneral Adjustment of Price, Wage and Money(1985) policy. Figure 2.2 showstheinflationfluctuationsovertheperiod1986- 2018.Fromthepeakofhyperinflation(453.54%)in1986,theconsumerpriceindex(CPI)sharply droppedtotwodigitandthen1digitnumberin3to5years.Since1990suptonow,Vietnam’sinfla tionrateshavebeenwellcontrolledatfairlystableratesatbelow10percentannually.Inflationof201 8wasonly3.54percent.

4 TheResolutionNo.10referstheofficialagriculturalmanagementrenovationwhichallowedtheimplementationoft he outputcontractsystemtohouseholdfarmersinsteadofonlysigningtheoutputcontractaccordingtodifferenqtstagesofwork inproductionashadbeendone since 1981.

Vietnam used to be considered closed economy in the period before theDoimoi, when goods and services was not freely traded Foreign trade transactions weremainly conducted with former socialist counterparts and did not follow the marketmechanism. Since the reform was launched, Vietnam has been gradually opened itseconomytotheworld.Manymeasureshavebeendonetopushupbothdomesticandinternational tradesuchasremovingunnecessarytradebarriers;engaginginmembershipofAssociatio nofSouthestAsianNations(ASEAN)in1995,theASEAN Free Trade Agreement

(ATFA) in 2001, World Trade Organization

(WTO)in2007;signingmanybilateralandmultilateraleconomicandtradeagreementswithfore ign countries and organization such as with EU (1992), US-Vietnam BilateralTrade Agreement (2001), etc As a result, both exports and imports have beenconstantly increased for the last more than 30 years As shown in the Figure 2.3, thevolume of exports of goods and services as a ratio of gross domestic product

(GDP)rosefromonly6.62%percentin1986to101.59percentin2017,whiletheratioof importsofgoodsandservicestoGDPalsoincreaseto98.79percentin2017fromalowlevel of16.6 percentin1986.

Figure2.3 Vietnam’s volumeof importsandexports(%of GDP),1986-2018

In the process of opening the economy, Vietnam also issued the Law onForeign Investment in 1987 and its amendment in 1990 to attract foreign directinvestment (FDI) The law has been revised or issued the new versions for severaltimes 5 sincethentomeetthecurrentstatusoftheworldandtheVietnameseeconomy.With the advantages of cheap, young, skillful and hard working labors force, richnatural resources, openness of investment laws, etc Vietnam has been an emergingdestination for FDI And FDI has also played an important role in the developmentof Vietnamese economy. Figure 2.4 shows the net inflows as percentage of GDP ofFDI into Vietnam since the opening the economy FDI inflows was high during theperiodof1993-

5 The first version of the Law on Foreign Investment was issued in 1987, then amended in 1990 A newversion wasissuedin1996toreplacethe firstversion, and thenamended in2000.

0.00 percentandthendropeddownto8.27percentin1997.UndertheimpactoftheAsianfinancial ciris in

1997, FDI inflows to Vietnam was low at the level of around 4percentofGDPfortheperiodof1998– 2008,andthenslightlyrisedupagainfortheperiodafterward.FDIsectorhasbeenamajorcontributor toVietnam’sGDP,helpingcreating jobs and boosting the developmentofthe manufacturingsector whichsupported for the increase of foreign trade as well as the structural changes inexported products In the late 1980s, about 80 percent of exports were accounted forbyprimarycommodities,suchasrice,coffee,crudeoil,andcoal,butby2005,alongwith the expansion of manufactured exports, that share had declined to about 50percent.

Especially,theHoChi MinhStock Exchange(HOSE)andHanoiStockExchange (HNX) was founded in 2000 and 2005, respectively to establish anotherhelpfulfinancingandinvestingchannelsforcompaniesandinvestors.LawonSecuri tieswasfirstissuedin2006andthenamendedin2010inordertomakeagoodenvironmentforthedevel opmentofstock marketsinVietnam.

Figure2.4:Vietnam’s ForeignDirectInvestment,netinflows(%ofGDP)

In terms of investment, the introduction of Law on Domestic Investment in1998, which aimed to stimulate the investment of domestic investors, set forth theinitial formation of private sector in Vietnam This sector has been expanded andstrengthened by the equitization of state owned enterprises (SOEs) which will bediscussedmoreindetailsinfollowingpart.

Imports of goodsand services (% change)

Exports of goodsand services (% change)

OverviewonequitizationofstateownedenterprisesofVietnam

Vietnam used to be a centrally planned economy entirely dominated by state- ownedenterprises(SOEs)whichhadlargeinefficiencyregardlessofmuchfavourable privilege Vietnam began to transform its economy from a socialist to amarket economy by lauching a comprehensive reform, namelyDoi moi policyin1986, in which corporate restructuring scheme was one of the major components ofthe reform The corporate restructuring scheme aimed to transform state ownedenterprises into the form of multiple owners, in which it is unnecessary for the stateto own 100% capital; to mobilize capital from both domestic and foreign investors;to increase financial capacity; and, to renovate technology and managerial methodsin order to raise the efficiency and competitiveness of the economy (Article 1 ofDecree59).Withthisscheme,thegovernmentwouldaccepttheexistenceofvariousformsof businessorganizationsotherthanSOEsandcollectiveenterprises,andhopeto create a more equal play field for all economic players The heart of the schemewas a so-called SOE equitization (privatization per-se) program which has beentransforming a number of SOEs into joint-stock companies in a slow and gradualmanner.

ApilotSOErestructuringprogram 6 waslaunchedinearly1990s,whichstartedwith profitable but not strategic small and medium size SOEs to be equitized, andthen expanded to larger and more difficult ones. Employees of equitized companiesshould be priorited in purchasing the shares. Besides, the government continued tohold tight control role over some key important industries such as banking, oil andgas, electricity, etc via controlling ownership In these companies, the governmentplays a dual role – regulator and owner These state controlled companies have toperformnotonlybusinessbutalsonon- businessfunctionssuchasbeinginchargeof

6 Thepilotschemewaslaunchedin1992basedonaresolutionofthetenthsessionoftheEighthNationalAssembly and the PrimeMinisterDecision202-CTonequitizationprogramson8 June 1992 ensurings o c i a l s e c u r i t y a n d p o v e r t y alleviation.T h e r e f o r e , s t a t e - o w n e r s h i p d o e s p l a y animportantroleincompany’sfinancialdecisions.

Pilotstage 1992 to 1996 Decision202_CT;Direction84(1993);

Source: Author’s compilation based on statistics ISEAS report (Le Hong Hiep (2017),

Vietnam’sNewWaveofSOEEquitization:DriversandImplications,Perspective,No.57,MinistryofFinance.Ngu yen Van Tan (2018) Equitization and Firm Performance in Vietnam: Theory and Practice,International Research Journal of Finance and EconomicsISSN 1450-2887 Issue 169 September,2018

CTdatedonJune8 th 1992andtheDirection84datedAugust4 th 1993.Inthepilotstageof4years,o nly5SOEs(3centralSOEsand2localSOEs)wereequitized,whichwereTransportationServiceCompa ny,RefrigerationandElectricalEngineeringCompany,HiepAnShoeCompany,AnimalF oodProcessingCompanyandLongAnExportProductProcessing Company After the equitization, state held only 30 percent of totalownership except Transportation Services Company (18 percent) Besises, in thisperiod, 18 general corporations and

64 large comglomeates (special corporations)specializinginvariousindustriesandareaswhicharefullystate- ownedwereformed.

Source: Author’s compilation based on statistics ISEAS report (Le Hong Hiep (2017),

Vietnam’sNewWaveofSOEEquitization:DriversandImplications,Perspective,No.57,MinistryofFinance.Ngu yen Van Tan (2018) Equitization and Firm Performance in Vietnam: Theory and Practice,International Research Journal of Finance and EconomicsISSN 1450-2887 Issue 169 September,2018.

Then, the pilot stage was extended for 2 more years from 1996 to 1998 withthe issuance of Decree No, 28/CP dated May 7 th 1996, which also ended the pilotprogram.ThisDecreegavesystematicguidancestoSOEsonpurposesofequitization ,criteriaofSOEsselection,equitizationmethods,employmentandinvestment incentives for equitized enterprises With this Decree, the governmentofficially allowed non- strategic profitable small and medium sized SOEs into jointstock companies, consequently pushing up the process of equitization with 130companiesSOEsequitizedduringthistwoyears,ofwhichtherewereonly125SOEsbeingeq uitizedin1998.

Theaccelerated stagewhichwerefrom1999to2010wereguidedbyDecreesof44 issued in 1998; 64 issued in 2002; 187 issued in 2004 and 109 issued in 2007.With the opening of the Vietnam Stock Mark in Ho Chi Minh City in 2000 andespectiallyconstantriseinstockmarketindexunderthepositiveexpectationofbeingthe

150 th WTO member in early 2007 truly affected the process of equitizationacceleration The number of equitized SOEs steadily increased from year to yearsince 2002 with 164 to the peak of 813 in 2005 As of 2006, more than 3,433companies having being equitized, in which 3,295 had been equitized since 1999.However, most of equitized companies up to 2006 were still small and medium size.SomelargeSOEswere planedtobeequitizedin2007buttheplanwasslowerduetosome reasons, including the concerns on oversupply in the stock market after theearlier rocketed stage of acceleration As initially planed, 1,500 SOEs should beequitized in the period 2007–2010,in whichmost of subsidiaries of generalcorporationswereplanedtobeequitizedin2008;decreasingtomorethan500SOEslef t.However,therewereonlytwobignames-BaoVietInsuranceandVietcombank

– out of 118 being equitized SOEs in 2007, leaving more than 20 big SOE names tobe implemented in the period 2008 – 2010 The acceleration stage of 10 year periodconcludedwith3,983SOEsbeingequitized,comprising

Vietnam’s process of equitization has been in economic restructuring stage(2012 – now) Under the negative impact of the global financial crisis and the crashof the stock market, speed of equitization has been sharply dropped at early of thisstage(2010–2012).Inaddition,generaleconomicandstockmarketconditionshavenot been in favourable shape for SOEs especially big ones to be equitized Severalpolicies have been made to stimulate the SOE equitization such as Decision 929issued in 2012; decrees of 59 (2011), 189

1232(2017).ThisleadtoasharpincreaseinnumberofequitizedSOEsinthefollowi ng years2012–2015.However,theprocessseemstobeslowdownforthelastcoupleofyears.

Thanks to the equitization program, a number of SOEs has gradually decreasedforthelastmorethan20years,to1,204enterprisesfrommorethan6,000enterprisesin1 995,provingtheeffortof thegovernment incorporate restructuring.

Source:Author’scompilationfrom Nguyen (2017)forperiodof1995 –

2008,Vietnam’s GSO,various years for period of 2009– 2017

Overviewon Vietnam’sbankingsystemreform

Over the past thirty years, as a part of the comprehensive economic reforms,the Government of Vietnam has initiated many banking reforms to improve theefficiencyandcompetitivenessofthenationalbankingsystem.Moreover,thereforms have also been motivated by Vietnam’s commitments in the process ofgrowingp a r t i c i p a t i o n i n i n t e r n a t i o n a l a g r e e m e n t a s w e l l a s a d o p t i n g i n t e r n a t i o n a l standards such as Basel capital framework The primary objectives of the reformswere restructuring banking system, gradually opening doors for foreign investors,partiallyequitizingstateownedbanks,andimprovingcompetitivenessoftheVi etnamesebanks.Themajorbankingsystemreformwastheremovalofthecommercial functions from the State Bank of Vietnam (SBV) in 1990 which havebeen followed by several reforms such as equitizing state owned banks, opening thefinancialmarketforforeignbanks,etc.

Before 1990, the Vietnamese banking system was a one-tier banking system,inwhichtheStateBankofVietnam(SBV)playedbothcentralbankandcommercialba nkfunctions.Therewereneitherprivatenorforeignbankoperatingintheeconomy.

Following the Ordinance on Banks, Credit Cooperatives, and FinancialCompanies issued in early 1990, SBV was reconstructed by removing the commercialfunctions from SBV so that SBV onlygoverned the whole banking system andperformed the traditional role of central banks the such as managing the country’sforeignexchangereserves;formatingofmonetarypolities;licensingandsupervisi ngcreditorganizations,etc.,whilecommercialbankingfunctionssuchasfundsmobilizatio n and lending were delegated to separated commercial banks As such,SBV’sfourfunctionaldepartmentswereseparatedtoestablishfournewstate- ownedcommercialbanks(SOCBs) 7 ,eachtargetingaspecificsectoroftheeconomy.Atthesa me time, a number of joint-stock commercial banks (JSCBs) have been foundedandquickyincreased both inbanknumbersand size.

Intheprocessofinteratingwiththeworld,toopentheeconomyingeneralandfinancialsectori nparticularaswellastomeettherequirementsofmembershipfrominternationaltradeandinvest mentorganizations,Vietnamhasbeengradually

7 Specificallly,thecurrentBankforForeignTradeofVietnam(VCB),VietnamBankforAgricultureandRuralDevelopment (Agribank),Bank for Investment and Development of Vietnam (BIDV) and Vietnam Industrialand Commercial Banks (Vietinbank) were established from the splits of SBV’s formerInternational TradeDepartment; Agricultural Department, Infrastructure Department, and Industrial andCommercial LendingDepartment,respectively. removing barriers to allow the entry of foreign banks in Vietnam In 2008, SBV forthe first time granted the licences for 100% foreigned owned banks to do business inVietnam In April 2014, the cap for a single and total foreign ownership in localcommercialbanksandcreditorganizationswasleveledupto20%and30%,respectivel y.Table2.3presentsVietnam’sstructureofcreditinstitutions(byDecember31,2017)

As shown in the Table 2.3, number of SOCBs is limited in compared withJSCBs but SOCB account for more than 40% of market share, therefore they havestillplayedadominantroleinthecreditmarket.Inaddition,presenceofforeignb anksinVietnamhasbeenslightlyincreasedoverthelastdecade.Foreignbank’sbranches and outlets have been increasing both in quantity and operations for the last decade.By the end of 2017, state –owned banks are at a number of 7, including 3 zero dongbanks 8 , which were repurchased by State Bank of Vietnam, that led to the reductioninnumberofjointstockbanks.

Table2.4presentstheforeingbank’sbranchesinVietnambytheendof2018togerhterwiththeir chartercapitals.

No Name No.& dateof License Charter capital

3 Bankof India HCMC 10/GP-NHNNdatedJuly31, 2015 334.5

4 Bankof CommunicationsHCMC 236/GP-NHNNdated October 22,2010 984.52

5 BangkokBankHaNoi Branch 48/GP-NHNNdated March06, 2009

6 BangkokBankHCMC Branch 03/NH-GPdated April15,1992

12 Busan BankHCMC 48/GP-NHNNdated May27th, 2016 784.46

04/ NH-GP dated February 6, 2002(renewedbyLicenseNo.103/GP- NHNN datedOctober30th,2018)

09/GP-NHNNdatedJanuary12, 2010 (renewedbyLicenseNo.104/GP- NHNNdatedOctober30th,2018) 1,589.7

20 E SUNbank-Dong Naibranch 07/GP-NHNNdated May25, 2015 1,509.66

8 The 3 zero dong banks which were Ocean Bank, GP Bank and CB Bank were the joint stock commercialbankswhichtheirequityfellbelowzeroandcouldnotberestructured,sotheywereforcedtobeboughtbackby theSBV.

21 First Commercial BankHanoi 210/GP-NHNNdated Sep.23, 2010 334.3

22 First Commercial BankHCMC 09/NH-GPdated December9,2002 752.18

25 Industrial BankofKoreaHanoi 276/GP-NHNNdated Sep.16, 2013 1,961.05

04/GP-NHNNdatedJanuary08, 2008 (renewedbyLicenseNo.106/GP- NHNNdatedNovember1st, 2018)

28 KEB– Hana HanoiBranch 298/NH-GP dated August 29,

1998(renewedbyLicenseNo.114/GP- NHNN datedNovember 29th,2018)

29 KEB-Hana HCMC Branch 85/GP-NHNNdatedDecember 12,2014 1,553.83

Branch(Maybank Hanoi) 22/NH-GPdatedAugust 15,1995 165.23

36 Mizuho HCMC 02/GP-NHNNdated March30, 2006 2,550.38

24/NH-GP dated February 17, 1996(renewedbyLicenseNo.109/GP- NHNN datedNovember 9th, 2018)

40 OCBCHCMC 27/NH-GP dated October 30,

1996(renewedbyLicenseNo.51/GP- NHNNdated May9th,2018)

By joining the WTO in early of 2007, Vietnam has implemented a number ofintegration activities which have affected to local bank’s operations Foreign bankscould expand their operations, dealing with not only foreign but also domesticcustomers Georgraphical boundaries of foreign banks has been gradually removedand they directly competed with local banks This would impose the pressure on localbankstoimprovetheirefficiencyaswellasqualityofservices.In2018,someforeignbanks received approval from State Bank of Vietnam (SBV) to open new branches,transaction offices and outlets such as Malaysian’s Public Bank Vietnam Ltd (openthree new branches and two new transaction offices in some big cities), Republic ofKorea’sWooriBankVietnamLtd. (itisallowedtoopenbranchesinsomeprovincesintheNorthandDongNai,andBinhDuong;and atransactionofficeinHoChiMinhCity); Shinhan BankVietnam(four newly established branches and transactionoffices in Ha noi and Ho Chi Minh City) Besides, some banks have increased theirinvestments in their subsidiaries, such as to increase their charter capital (i.e TheBank of China (Hongkong) Ltd – Ho Chi Minh City

Branch; Hanoi Branch ofHongHyupB a n k ) I n a d d i t i o n t o w i d e n t h e n e t w o r k s , f o r e i g n b a n k s h a v e a l s o increasedtheirpresenceviaincreasingoperations(ShinhanBankVie tnamgotapproval to trade some debt instruments); or investment in their subsidiaries inVietnam (i.e Bank of China (Hongkong Ltd – HCM City Branch

(BOC HCM);NongHyupBank);extendingtheirlicences(Singapore- basedDBSBankinHanoiandThailand’s JCB International; or opening the representative offices (i.e Export –ImportBank of Thailand), etc The trend is forcasted to be continue in the futurebecauseby2020,Vietnamwillhavetocompletelyopenitsbankingsector’sdoorstothew orldincompliancewithcommitmentstheWorldTradeOrganization(WTO).

Chaptersummary

ThischaptergivesanoverviewonVietnam’seconomyaswellastwoimportant economic reforms, which are corporate and banking system reforms,forthelast30years.Vietnamusedtofollowthecentrally-plannedeconomywherestate governmentcontrolledallofeconomicandbusinessactivitiesoverthewholeeconomy.Th efailureofthemodelforcedVietnamtotransformitseconomicmechanisim to market-oriented economy which supply and demand are the keydeterminantsofmostofeconomicactivities.Intheprocessofeconomictransformation, Vietnam has conducted several reforms, including corporate andfinancial system reforms One of major corporate reforms is equitization program(privatizationprogramper- se)whichconvertanumberoffullystate-ownedcompanies into partly or fully private ones This has been an efforts to increase adiversificationincorporateownershiptoenhanceefficienciesandprofitabilities.Theequitization has gone through different stages and is going on However, till nowtherehasbeenanumberofcorporationswhichgovernmentisstillholdingcontrollingpercentagesof ownership.Thesefirmsareconsideredstate-ownedcompanies,whichgovernment still have important power over the company Financial system reformhas also been an important reform in which banking system reforms have been theheartofit.Vietnamhasconductedseveralbankingsystemreformssuchasseparatinga mono banking system into 2 tiered system, commercial bank restructuring orallowing presence of foreign banks in

Vietnam, etc., Especially, in accordance withthecommitmentstoWTO,foreignbankshavebeengraduallyintegratedintoVietnam ese economy This means competition in banking markets is increased,which has imposed a high pressure for local banks to improve their efficiencies andservicequalities.

The next chapter, Chapter 3 presents theories investment, literature review onthe impact of financial constraints on corporate investment, especially under thecontextofstate – ownershipandbanking systemreform.

FINANCIAL CONSTRAINTS AND INVESTMENT:ATHEORETICALFRAM

Investmentisoneofthemostimportantfinancialdecisions,andisanattractivetopic of financial studies Under the conditions of perfect capital market, externalfunds can be perfect substitution of internal funds, which means firm’s investmentsare independent with financing decision.

Firm’s investment totally depends on thenetpresentvalueoftheinvestmentopportunities.However,inthecontextoffinancialconstraintwher einternalcapitalmightbemoreexpensivethanexternalone(Modigliani & Miller, 1958), cost of capital is proven to be the only factor affectingfirm’s investment decisions. Especially, since the influencial paper by Fazzari et al.(1988) about impact of financial constraint on corporate investment, a number ofstudieshavebeenconductedtoempriricallytestthedeterminantsofcorporateinvestments in the context of financial constraint Notably, in this context, standardinvestment models assert that neither firm’s current cash flows nor profits haveimpactonfirm’sinvestment.Instead,thesemodelsfocusoninvestmentopportunitiesof a company with arguments that internal capital does not have any signigicantrelation with investment at certain specific point of time If there is a significantrelation,itcanbeusedtoexplainedforthepresenceoffinancialconstraintsonfirm’si nvestment(Kadapakkam,Kumar,&Riddick, 1998).

Inthecontextofimperfectcapitalmarket,internalcapitalandexternalcapitalare no longer be perfect substitute for each other The company cannot be able toseparateinvestmentdecisionfromfinancingdecisionbecausemethodoffinan cing will affect cost of capital, which consequently affect company’s selectability ofinvestment projects Thus, company is considered financially constrained when itscapital spending is reliance on availability of internal capital In addition, a financialconstrained company can be defined as the one which has to bear higher cost ofexternal capital (new debt or new equity) in compared with that of internal capital,leadingthecompanytocapitalrationing.

There has been a widespread debate among scholars on how costs of externalfundsmaydifferfromcostsofinternalfunds.Somestudiesprovethatthedifferencescomefr omtheexistenceoftransitioncosts,taxandfinancialdistresscosts(Myers&Majluf, 1984) Some others demonstrate that the differences come from informationasymmetry betweencompany’sinsiders andoutsideinvestors,highlightingthatmoral hazard and adverse selection lead to higher cost of external funds, consequentlydiscouraging financing company’s investment projects with external capital (Jensen& Meckling, 1976) As a result, companies will prefer to use internal funds becausethey are less expensive and in extreme cases, internal capital may be the only sourceofcapitalavailabletothecompany.

Ingeneral,investmentandfinancialdecisionsarenolongerindependentifthecost of financing source depend on the availability of the funds This means thatinvestmentbehaviorsmightbeindicationsofthefinancialconstraints.Alargenumbers of studies have explored this relationship though investigating the relationbetween company’s capital spendings and its internal cash flows, which its presenceand significance is a measure of firm’s financial constraint, so-called investment –cash flow sensitivitiy Higher the sensitivity the firm has, the more dependence oninternal capital the firm has, and the higher financial constraint the firm faces Inaddition to internal cash flows, many other different proxies have been used infinancial literature to measure firm’s financial constraints such as dividend payoutratios (Almeida & Campello, 2007; Almeida, Campello, &

Weisbach, 2004; Cleary,1999;Cleary etal.,2007;Fazzarietal.,1988;Moyen,2004),Firmsize(Almeida&

Campello,2007;Almeidaetal.,2004;Denis&Sibilkov,2009;Devereux&Schiantarelli, 1990;Erickson&Whited,2000;Gilchrist&Himmelberg,1995;Oliner&Rudebusch,1992),Firm age(Devereux&Schiantarelli,1990;Oliner&Rudebusch, 1992), Bank-firm relationship (Hoshi, Kashyap, & Scharfstein, 1991),Business group member (Hoshi et al., 1991); Bond ratings (Almeida & Campello,2007; Almeida et al., 2004; Denis

& Sibilkov, 2009; Gilchrist & Himmelberg, 1995;Whited, 1992), KZ index (Almeida et al., 2004; Kaplan & Zingales, 1997; Moyen,2004); Ohlson’s probability of default (Bhagat, Moyen, & Suh, 2005); Net loss(Bhagat et al., 2005; John, Lang, & Netter, 1992); Altman’s Z- score (Bhagat et al.,2005;Cleary,1999;Clearyetal.,2007;Moyen,2004);WhiteandWuindex(Whited& Wu,2006);etc

The remaining of Chapter 3 is structured as follow Section 3.1 highlights ansummaryofinvestmenttheories.Section3.2presentstheliteraturereviewonfinancialc onstraints,commonmeasuresoffinancialconstraintsandtheinvestment– cashflowsrelations,aswellasthepreviousstudiesoninvestment–cashflowrelationunder the context of state ownership and banking system reform respectively TheChapterwillbe summarized bySection 3.3.

Theoriesofinvestment

The Modigliani-MillerTheorem (MM)

The Modigliani-Miller theorem (MM) which is also known as IrrelevanceTheoremwasdevelopedwithsomeassumptionswhicharehomogeneousexp ectations;homogeneousbusinessriskclasses;perfectcapitalmarkets(i.e.perfectcompetition;firm sandinvestorscanborrow/ lendatthesamerate;equalaccesstoallrelevantinformation;notransactioncosts,notaxes),assertt hatinvestmentdecisionsareindependentwithfinancingdecisionsbecauseinternalfundsar eaperfectsubstituteforexternalfunds.Therefore,thefirm’savailabilityofretainedearningsis irrelevant to investment, which means that the cost of capital is the only factoraffectingfirm’sinvestments.

Following this seminal theorem, the neoclassical model of investment whichwas developed by D W Jorgenson (1963) and (D Jorgenson & Hall, 1967) alsoimply that when making investment decisions, firm managers need to concern abouttheusercostofcapitalbecausefirmfinancialfactorsdonotaffectfirm’sinvestment.Int h i s w o r l d o f p e r f e c t c a p i t a l market,p r o j e c t ’ s n e t p r e s e n t v a l u e i s t h e o n l y determinant offirm’sinvestment.

Neo-classicalmodel

Neo-classicalmodelwasinitiatedby D.W.Jorgenson(1963),andthenexpanded by D Jorgenson and Hall (1967), in which investment is is described as aprocessofoptimalcapitalstockadjustment.AccordingtoJorgenson’smodel,thekeydeterminants of investment are the user cost of capital or investment required rate ofreturn and output So a company would undertake investments if the return on theinvestmentexceedsinvestmentcost.Inthismodel,thecompanytargetstogetoptimalsource of capital at the current period and expected investment can be measured bychange of optimal capital stocks The author assumes company would reach optimalcapitalstockwithadelay.Someordersofinvestmentgoodswhichareplacedinthe currentperiodwillbedeliveredfollowingperiods.Therefore,investmentisacontinuous process which investment at time t should be sum of current and the pastinvestmentstobedeliveredattimet.Investmentdecisionscanbeeasily,quicklyandeffectivelycha ngedbecausethecapitalstockisinstaneouslyadjustedwithoutincurring any cost.It means that investors do not need to take into account future intheirdecicions,socurrentinvestmentcanbesimplymeasuredbycurrentandprevious period cost of capitals Consequently, the Jogensonian’s investment modelispresentedasfollows:

Where IK presents firm’s investment (capital stock), CK presents firm’s costofcapital,andCF presentsfirm’scashflows – aproxyoffirm’sfinancialconstraint,eiserrorterms.Thechallengingofthemodel istoestimatefirm’scostof capital.

Theneo-classicalmodeliscritizedthatitdoesnottakeintoaccountforward–looking variables(Goergen & Renneboog, 2001), which means that this model doesnothavetheabilitytopredictfuturefirm’sinvestmentopportunities.Itsimplyshowsthefactors affectingtheinvestmentofthecompanies.

Salesacceleratormodel

Another popular model is the Sales Accelerator Model which was introducedby Andrew B Abel and Blanchard (1986) Unlike neo-classical model in whichinvestment is reliant on firm’s capital stock, the authors of sales accelerator modelstates that an increase in sales leads to an increase in investment They introduce aregression model to measure a relationship between firm’s investment and sales Inthis model, firm’s long-term investment is a function of expected future profitabilitywhichi s m e a s u r e d b y s a l e s a c c e l e r a t o r A n i n v e s t m e n t– c a s h f l o w r e l a t i o n i s establishedtomeasurefirm’sfinancialconstraints.Therefore,thesalesacceler atormodelispresentedasfollows:

WhereIKrepresentsfirm’sinvestment,Salesrepresentsfirm’ssaleoroutput,measurin g firm’s future profitability of growth opportunities.CFis measured by netincome plus depreciation, proxied for firm’s financial constraint All variables aredeflatedwithpreciousfirm’scapitalstock (laggednetfixedassets).

This model is used by Laeven (2000) to investigate the impact of financialliberalization (deregulating interest rate, removing entry barrier to banking system)onfinancialconstrainttofirm’sinvestment.Theauthorfindsthatfirm’sinvestments are sensitive to availability of firm’s internal cash flows Beside, they also under thefinancialreformsandliberalization.Bhaduri(2005)alsoappliesthismodelinexaminingtheim pactoffinancialconstraintandfinancialliberalizationoninvestment in the context of a developing country, India The results indicates thatcash flows have significantly positive relation with firm’s investment and a youngand small-sized companies face higher financial constraint than old and big sizedones,showingasupportto thesalesacceleratormodel.

The sales accelerator model faces similar shortcomings of neo-classical model,whichcompany’ssalesdonotreflectexpectationsonfirm’sfuturegrowthopportun ities.

Tobin’sQmodel

To overcome the shortcomings of the both neo-classical and sales acceleratormodels that do not capture firm’s future’s growth opportunities, the Tobin’Q model(socalledtheQmodel)isintroducedbyTobin(1969)andthenexpandedbyHayashi

(1982) The model implies that firm’s future investment and profitability can becaptured by value of Q, which is measured by total market value of equity and debtdevided by replacement cost of firm’s capital stock The model was used by Fazzariet al (1988), who include cash flow into the model to measure effects of financialconstraintonfirm’sinvestmentaswellastocapturemarketimperfections.Themodelassume s that under the context of market imperfection, firm’s investment dependsonlyonQ.Ontheotherword,firm’scashflowsshouldnotaffectfirm’sinvestments,unless there is an existence of market imperfections and in this case firms have tofaceliquidityconstraint.Therefore,theTobin’Qmodelispresentedasfollows:

WhereIKrepresentsfirm’sinvestmentinfixedassetsattheendoftheperiod;Value ofQis used as a proxy for investment opportunities;CFis measured by netincome plus depreciation, proxied for firm’s financial constraint All variables aredeflatedwithbeginningfirm’scapitalstock(laggednetfixedassets).

ThebasicQmodelindicatesthatinvestmentisonlydeterminedbyQwhichisconvenienttoe stimate.Itshowsalinearrelationbetweeninvestmentandtheexpectationofprofitability,w hichcapturesfirm’sinvestmentopportunities.Itcanbecorrectly specified under the perfect market conditions.However, it also has seriousproblem of endogeneity caused by mismeasurement Eberly, Rebelo, and Vincent(2012) states that “the best predictor of current investment at firm level is laggedinvestment”, so the inclusion of the lagged investment would improve capturabilityof investment behaviors of the Q model as well as to control for enforgeneityproblem.Moreover,themodelcannotapplyforunlistedcompaniesduetoun availabilityofmarketvaluewhichisaproxyforinvestmentopportunities.

The Eulermodel

AnotheralternativefortheQmodeltoestimatefirm’sinvestmentsidtheEulerEquation which is introduced by (Andrew B Abel, 1980) and used by (Bond

&Meghir,1994a,1994b).TheEulermodelisoriginatedbytheforward-lookingdynamic model of the first-orfder optimization conditions However, when usingpanel data with short time dimention, the model is estimated with backward termsand future expectations (lead terms), in which company miximizes its value, so it isa function of previous capital stocks. The current investment ratio depends on thelagged investment and marginal output/ revenue product of capital If I assume the 2period model, the company will make investment decisions by comparing marginalbenefits generated by one unit of capital at time t with discounted value of marginalcost of capital stock at time t + 1. The Euler model controls expected effects oninvestment decisions, in which the lagged investment ratios and cash flows playimportantrolestothecurrentinvestment.However,thestandardEulermodelassume snon-existenceoffinancialconstraint Themodel isasfollows:

IKmeasurestheperiousperiodinvestmentwhichexpectstohavepositiverelationwithdependentvar iablebecauseinvestmentcommitmentisassumedirrevocable The squared laggedIKis a proxy for deviation ofoptimal currentinvestmentandactualcurrentcapitalstock.Yisameasureof companyoutputandtotakeintoaccountofeffectofimperfectcompetition.CFmeasuressensiti vitybetweeninvestmentandinternalcashflows.Underfinancialunconstrainedcontext,thecoeffi cientofCFshouldbenegative,whichmeansthathighercashflowswouldleadtolowernetcost,co nsequentlylowerexpectedinvestment.Drepresentsforcompany’sd e b t , w h i c h c a p t u r e s f i n a n c i a l d i s t r e s s c o s t a n d b e n e f i t o f i n t e r e s t t a x shields.A l l v a r i a b l e s a r e d e f l a t e d w i t h b e g i n n i n g f i r m ’ s c a p i t a l s t o c k ( l a g g e d n e t fixedassets).

AlthoughtheEulermodelisalsodynamicmodel,includingthelaggedinvestment,t hisisaratherlimitedonebecauseitstilldoesnotincorporateavariablerepresenting the company's future growth opportunities The Euler model is moresuitable for unlisted companies because it does not require market value The modelThis model can also be more commonly used when estimated over a relatively longtimeperiod,asitcancapturechangesinthefinancialpositionofeachcompanyalongwith fluctuations in the economic environments (Schiantarelli, 1996) Therefore,theEulermodelisnotpopularlyusedtoestimatetheinvestmentmodelsofthecompanyin the literatures (Oliner, Rudebusch, & Sichel, 1996) As a result, most studies haveapplieddifferentvariantsofQmodeltoestimatethecompany'sinvestment.

Financialconstraintsandinvestment:aliteraturereview

Financialconstraintandinvestment

An investment can be financed by two different sources of capital: internalfunds (retained earnings or cash flows) and external funds (new debt or new equity)andfinancialconstraintsisdefinedasalimitincapitalaccessibility, eitherinternallyor externally Under the assumption of capital market perfection, Modigliani andMiller(1958)suggestthatafirm’scapitalstructureisirrelevanttoitsvalue;investment and financing decisions are independent to each other This implies thatinternal capital and external fundings are perfect substitutes, so firm’s investmentlevel is not affected by availability of internal capital As a result, cost of capital istheonlydeterminantoffirm’sinvestment.

However,intheworldofmarketimperfectionwithexistenceoftaxes,transactionc o s t s a n d i n f o r m n a t i o n a s s y m e t r i e s , t h e r e i s a g a p b e t w e e n c o s t s o f internal and external capitals, which make external financing be more costly thanretainedearnings.Highercostofexternalfinacingmaybecausedbyeitherinformatio nasymmetryoragencycosts.MyersandMajluf(1984)assertthatassymetricinformationb etweenthecompanyinsidersandtheexternalfundsproviders would encourage managers to prioritize internal funds then new debt andnew equity As such, company’s capital spending might be dependend on level ofinternalcapital.Thehigherlevelofinternalfundsthecompanyhas,thelessdependent on external funds the company is, so investment is “less constrained” Acompany is defined as financially constrained if they have difficulty in financing theirdesired investment opportunities (Lamont, Polk, & Saá-Requejo, 2001), that mightbe due to either inaccessibility to external funds or inadequacy of internal funds. Itmeansthatsomefirmshavetoselectinvestmentopportunitiesbasedontheiravailability of internal funds, which means level of internal capital could be animportant determinant of firm’s investment Specifically, investment of financiallyconstrainedfirmwouldrise(fall)ifitslevelofretainedearningsincreases(decrease).

According to the agency theory developed by Jensen and Meckling (1976),company managers have incentives to make overinvestments for their own interests,predicting a positive relation between investment and cash flows In order to assesstheeffectsoffinancialconstraintsonfirminvestment,itrequirestoidentifyfinancially constrainedfirms.Importanceoffinancialconstraintsoninvestmenthaveattracted a lot of interest in financial literatures Based on theTheory of Markets forLemons(Akerlof,1970)whichemphasizeoninformationasymmetrybetweeninsiders andoutsiders,MeyerandKuh(1957)developatheoreticalmodelofasymmetric information indicating how corporate investment is financed. Underimperfectcapitalmarketwithpresenceofasymectricinformation,theperfectsubsti tution between internal and external capital is no longer existed, leading tohighercostofexternalcapitalduetosocalledexternalfinancepremium(Greenwald,Stiglitz,

&Weiss,1984;Kiyotaki&Moore,1997;Myers&Majluf,1984;Townsend,

1979) This means that investment opportunities is better financed by internallygeneratedfunds,eitherduetohighercostofexternalcapitalordifficultiesinaccessi ng the capital market, which is the base for the latter Pecking Order Theory(Myers & Majluf, 1984) Therefore, in this world, availability of internal capitalbecomesareally importantdeterminantofcorporateinvestment.Itmeansthatinvestment behaviors of financially constrained firms may be different with that offinanciallyuncontrainedfirms.Uptodate,therehavebeenanumberofproxieshavebeenused asindirect measurements offinancialconstraintsinfinancialliteratures.

Fazzari et al (1988) who are the first authors investigating the relationshipfind the signigicantly positive relation between investment and cash flows in thisseminal paper The paper for the first time incorporates cash flow variable in to Qmodel to directly measure impact of financial constraint on firm’s investment byusing a sample of US manufacturing firms in the period 1970– 1984.Furthermore,theauthorsusesomepriorimeasuresofaccessibilitytofinancialmark etorinformationcostssuchasdividendpayoutratio,firmsize,firmagetosplitthesampletofinancia llyconstrainedandunconstrainedsubsamplesandcomparesensitivitiesofinvestmenttocashflowso f thetwosubsamples.Theresultsshowthatinvestmentoflowdividendpayoutratiocompaniesis moresensitivetoavailabilityofinternalcashflows,whichisinterpretedasanevidenceoffinancialc onstraints.Hoshietal.(1991)support these findings with their research on the relation between capital structureand investment Hoshi et al (1991) also find that investment of a company that doesnot have good relations with banks, implying high financial constraints, has greaterinvestment– cashflowsensitivitythanakeiretsu(atypeofJapanesecorporategroup),whichisconsideredlessfin anciallyconstrained.

Disagreed with the findings of (Fazzari et al., 1988), Kaplan and Zingales(1997) construct a KZ index to measure financial constraints and use it to examineinvestment–cash flow relations They find that cash flow has positive relation withinvestment.B e s i d e s , l e s s f i n a n c i a l l y c o n s t r a i n e d f i r m s h a v e m o r e s e n s i t i v e investment – cash flow relation which is opposite to Fazzari et al (1988). Cleary(1999) uses two samples, one consisting of US firms and the other comprisingCanadian firms, to test the findings of both Fazzari et al (1988) and Kaplan andZingales (1997) Surprisingly, the author find that US sample results support theformer, but the Canadian sample confirms the latter Cleary (1999) investigates theinvestment– cashflowrelationinconsiderationofcompany’sfinancialstatusanditseffect on company’s ability to borrow Cleary (1999) uses several financial ratiossuch as liquidity, leverage, profitability and growth to measure company’s financialstatus and expects that high credit rating company pays lower interest premium forbank loans, implying less financially constrained.

However, Cleary finds that highcreditratingcompaniesdependsmoreoninternalcapitalforfinancingtheirinvestme nts, while low credit rating companies have lower investment – cash flowsensitivities.Clearyexplainsthisfindingfromfreecashflowhypothesisperspective,in which company managers increase capital spendings in response to availability offreecashflows.

Onwership structure could be another factor affecting investment – cash flowrelation Goergen and Renneboog (2001) examine if ownership concentration byclass of shareholders creates or mitigates liquidity constraints and suggest that thepresence a large shareholder would reduce the positive relationship between capitalspending and cash flows A similar finding for institutional investors is found byAttig, Cleary, El Ghoul, and Guedhami (2012) They indicate that dependence ofinvestments on internal capital is decreased when investment horizon of institutionalinvestors increases Also, Firth, Lin, and Wong

(2008) evidence that state- ownedbanksimposelessconstraintsonl e n d i n g tocompanieswhichhavehigherpercentageof state ownership It means that company-bank relations could reduce externalfinancialconstraints.

Bhagat et al (2005) focus the study on the investment – cash flow relation offinancialdistresscompanies– theonescannotmeettheirobligationswithinternal cash flows The results show that the cash flow sensitivity of investment of financialdistress companies depends on how profitable the financial distress companies are.Positive operating profit financial distress companies create a positive sensitivitywhilenegativeoperatingprofitdistresscompanieshavenegativerelation,whichmay be caused by impact of external financing (Bhagat et al., 2005) Specifically, the netoperatinglosscompanywouldfinancetheirinvestmentwithexternalfunds,especially new equity New equity investors are willing to invest in these riskycompany because they may expect that the companies would recover quickly in thefuture when economic condiditions are better, and also because of the nature oflimitedliabilities.

Another approach used by Beck, Demirgỹỗ-Kunt, and Maksimovic (2008),studying factors affecting financial constraints on investments by using a survey onmore than 10,000 companies on 80 countries in the world They find that firm age;firmsizeandownershipstructurehavesignigicantimpactonfinancialconstraintsoninvest ment Small sized companies has higher financial constraints than big sizedones, indicating that big sized companies have less information asymmetry andhigher accessibility to external capital market Besides, the authors also find thatfinancialsystemdevelopmentalsoreduceimpactoffinancialconstraintoninvestmen t.

Using pledgeable assets as a proxy for financial constraint, Almeida andCampello (2007) indicate that investment – cash flow sensitivities of the financiallyconstrainedfirms should berisingin pledgeable assets.

Notably, whether the relation is positive or negative, the common point ofthese studies is under the assumption of linear relation between investment and cashflows whereas it may be nonlinear Cleary et al (2007) find a U-shaped relation,which is caused by cost and revenue effects, between investment and cash flow in asampleo f 8 8 , 5 9 9 o b s e r v a t i o n s f o r t h e p e r i o d 1 9 8 0 –

1 9 9 9 T h e c o s t e f f e c t a r i s e s because when firms invest more, their borrowing cost rises The authors concludethat firm’s investment has a positive relation with internal cash flows when the cashflows are significant high, and a negative relation if cash flows are low Guariglia(2008)dividetheresearchsamplesby levelsofinternalandexternalfinancialconstraint, the author confirms the U-shape relationship between investment andinternalcashflowsfortheformerwhichsupportsClearyetal.

(2007),butamonotonicallypositiverelationwithfirm’sexternalfinancialconstraintforthelatte r.Firth et al (2012) also confirm the U-shaped relationship but further argue that theU-curve may vary with politically oriented investment or a soft budget constraint Inaddition to the confirmation ofthe U-shape relation between investment and cashflow for listed firms in China, Tsai et al.

(2014) assert the flatter U-shaped curveswith the presence of foreign banks, which reduce financial constraints for firms,especially those that are privately owned.

This means that lower investment - cashflowsensitivityreducesunderinvestmentbylistedSOEs.

Type of assets the companies hold may also be an important factor. Almeidaand Campello (2007) noticed that investment in companies with more tangibility ofassets is not affected by change in internal funds Tangible assets does not haveimpact on investment sensitivity of cash flow of financially unconstrained firms, butconstrainedones.Theunderlyingtheorysupportingforthisfindingsiscreditmultiplier which means that the company can increase its accessibility to credits byholding moretangibleasstes.

Differentwithstudiesfocusingonfirmcharacteristics,anotherapproachinvestiga teshowfinancialsystemaffecttheinformationasymmetryandagencycostswhich in turn affect firm’s costs of capital Companies in a bank-based financialsystem should be less constrained because their close relation with banks can reducemoral hazard problem and asymmetric information as well Otherwise, banks cansupervise how efficiently the capital is used the the companies (Petersen &

Rajan,1997).However,asymmetricinformationincreasesinamarket-basedfinancial system,causinganadditionalpremiumforcostofexternalcapital.Thesefindingsareconfirmed by Mizen and Vermeulen (2005), who find that the investment sensitivityof cash flow of British companies is higher than that of Deutch companies becauseof higher information asymmetry in a market-financed system They extend theirprevious study by examining impact of creditworthiness and find a lower sensitivityat companies, which have higher creditworthiness,measured by salesgrowth ratea n d netprofitmargin.Theresultsareconsistentwiththeorythatastrongfinancialhealthc ompaniescanaccesstheexternalcapitalmarketbetter.BeckerandSivadasan(2010)use data of 21

State Ownership andInvestment–Cash FlowRelations

Inthemid-1980s,thecollapseofthesocialistblocforcedthemembercountries to reform and transform their centrally planned economies into marketeconomies. Unlike Russia, which chose shock therapy, China and Vietnam used agradualtransition,inwhichSOEprivatizationwasoneofthekeymethodsofreform.According to a report on the privatization of SOEs in Vietnam in 2011-2015 and thefirst nine months of 2016, 9 by the end of September

2016, a total of 4,508 SOEs hadbeen privatized out of 6,010 restructured-to-be SOEs In many of these enterprises,thestateretainscontrollingrightsbecauseofitshighproportionofownership.Asmycalculati on, about 30 percent of companies listed on the two Vietnamese stockexchanges have at least 50 percent state ownership This demonstrates that althoughVietnamhasopeneditseconomyandthenumberofprivatecompaniesisincreasing,m any companiesarestillunderstatecontrol,whichhasanimpactonvariouscompanyactivities, includingtherelationshipbetweencashflowandinvestment.

As in other transition economies, SOEs in Vietnam have some social andpolitical responsibilities, such as creating jobs and attending to the social welfare ofemployees.Theseobjectives,togetherwithofficials’personalmotivesforpromotion(Liu & Lu,

2007), are the main causes of overinvestment by SOEs (C R Chen, Li,Luo, & Zhang, 2017a; Firth et al.,

2012) In addition, many studies have beenconducted on the impact of soft budget constraints on the relationship between cashflow and investment Early research by Chow and Fung (1998), using a sample of5,325 enterprises in Shanghai in 1989-

1992, finds evidence that investment by privatefirmshashighercashflowsensitivitythanthatbySOEs,implyingthatthelatterfacefewer financial constraints than non-SOEs Héricourt and Poncet (2009), using asample of 1,300 Chinese firms in 2000-

2002, as well as Poncet, Steingress, andVandenbussche(2010),usingabiggersample(morethan20,000Chinesecompanies

9 http://vietstock.vn/2016/12/da-co-phan-hoa-hon-4500-doanh-nghiep-nha-nuoc-746-508480.htm. in 1998–2005), arrive at similar conclusions According to Cleary et al (2007), theless financially constrained a firm is, the flatter its U-shaped curve is, as companyinvestment is less dependent on internal cash flow Guariglia, Liu, and Song (2011),using panel data on 499,001 observations, find that SOEs’ asset growth (not limitedto fixed assets) is not affected by liquidity constraints, while the availability ofinternal funds constrains the growth potential of private companies The soft budgetconstraints at SOEs are due to their social and political responsibilities (Bai, Lu, &Tao, 2006; C R Chen et al., 2017a; J Y Lin & Tan, 1999; Sheshinski & López-Calva, 2003) SOEs can access external capitalmore easily than private firms,reducing their budget constraints (Cull, Li, Sun, & Xu, 2015; Sheshinski & López-Calva, 2003) On the contrary, Firth et al (2012), using a sample of Chinese listedcompaniesin1999- 2008,showthatSOEshaveasteeperU-shapedcurvethanprivatefirms, especially on the left-hand side of the curve.

Moreover, the slope differencealsoexistsatfirmswithfewinvestmentopportunities.Thefindingsappeartocontradict the argument on SOEs’ soft budget constraints The authors argue thatChinese SOEs are induced by the government to use their own cash flows to investmore, so as to achieve multiple government socioeconomic objectives when theyhave abundant internal cash flows and when they face negativeinternal funds.However, althought most of studies find evidence that state ownership does havecertain impact on firm investment – cash flow relation (Firth et al., 2012; Haider etal., 2018; Tsai et al., 2014), H.-C M Lin and Bo (2012) use a sample of Chinese-listed firms during 1999–2008 to examine how state-ownership affects financialconstraints on investment The author find that that state – ownership does not helpto reduce financial constraints which are measured by both investment – cash flowrelation and KZ index on investment,even via the state-controlled banking system.So, it seems that the impact of state – ownership on investment – cash flow relationisnotconsistent.

Bankingsystemreformandinvestment –cashflow relation

A study of Liu and Lu (2007) on China reported that government officials atstate – controlled listed firms often have incentives to achieve social and politicalobjectivestoservefortheirownpromotion,thereforepolitically- orientedinvestments were the main cause of overinvestment situation in these firms Firth etal.(2012)findsimilarevidencesupportingthatpointofview.

Detragiache, Tressel, and Gupta (2008) find evidence that foreign banks areless sensitive to political pressure, and they have less pressure of lending relationpartners, who are capable of breaking relation barriers Political and non- economicmotivations are not top priorities of domestic banks now Therefore, state-ownedcommercialbanksaretransformedfrompolitically– incentiveorganizationtomodern corporate governance – oriented ones Therefore, reforming bank system byallowing foreign banks holding ownership at domestic state-owned banks couldreduce policies favoring politically – oriented investments of state– controlledcompanies.Withpresenceofforeigninvestors,creditgrantingwouldbemorepr udential, in that way careless loans as well as politically-oriented loans could bemitigated With this research, Detragiache et al (2008) use foreign ownership indomestic bank as proxy for banking system reform and this research is supported byBerger,Klapper,Peria,andZaidi(2008).Bergeretal.(2008)reportthatafterreform,foreign ownership in domestic banks, especially state-controlled banks can changetheir lending practice, from politically – oriented to commercially-oriented banks.Nonstate- controlledlistedcompaniesareconsideredmoretransparent,morecommercially- oriented and more efficient than state-controlled listed companies.Therefore,afterreform,non-state- controlledlistedcompanieshavemorechannelstoaccessbankloanandunderinvestmentprobl emofnon-state-controlledlistedcompaniesarereduced.

– cash flow sensitivity measures banking system reform by presence of foreign bankat region where company had headquartered or branches The research finds evidencethatwithpresenceofforeignbanks,politically- orientedinvestmentsatstatecontrolled listed companies are reduced because state- owned banks transform frommore politically – oriented to more commercially – oriented financing Problem ofunderinvestmentatnonstate– controlledlistedcompaniesseemstobemitigateddueto an increase in their bank loan accessibility The study also documents a reductionof distortion of investment in state controlled listed companies as well as reductiononfinancialconstraintsatnonstate–controlledlistedcompanies.

Inthecontextofafinancialsystemwhichisdominatedbybanksandunderdevelope d capital markets, Fohlin and López-Iturriaga (2006) investigate theimpactofbankrelationshiponfinancialconstraintsoncorporateinvestmentinSpain.The authors assert that the close relationship between companies and banks willreducetheinvestment– cashflowsensitivitybecausebankswouldprovidenecessaryliquidity to companies They use two indicators of bank-company relations: thepercentage of bank ownership in the company's capital and the bank debt over totaldebt ratio The former implies that the bank plays both roles of creditor and equityinvestorsinthecompany,andlatermeansthatthehigherratio,thecloserrelationshipbetwee ncompanyandbank.Unexpectedly,theauthorsfindtherelationshiphaslittleimpact on the investment – cash flow sensitivity while it is lower than those of largeblockshareholders,meaningthattherelationshipbetweenbankandcompanycannotperfectly substitute for supervision by major stakeholders and companies face theagencycostproblem.

Financialleverage,growth opportunity andinvestmentrelation

High financial leverage may influence on corporate investment opportunities.Under- investmenti s s u e i n d i c a t e s t h a t h i g h g r o w t h o p p o r t u n i t y c o m p a n i e s o f t e n maintain relatively lower debt level to avoid losing future positive NPV investmentprojects.However,overinvestmentissuepredictsthathighfinancialleverage prevents company managers from abusing free cash flow, especially for businesseswith low growth opportunities Both overinvestment and underinvestment issuesreceivea lotofsupportiveevidencefromempiricalstudies.

Consistentwithunderinvestmentissue,SmithJrandWatts(1992)highgrowthopportunity firms have significantly low levels of debt financing Similarly, Jung,Kim, and Stulz (1996) found that firms with valuable investment opportunities oftenuse equity instead of debt when increasing external funding. (Goyal, Lehn, & Racic,2002) show how changes in growth opportunities affect corporate debt levels whenstudying the US defense industry The authors find evidence that the debt levels ofarmsfactorieswereincreasedsignificantlyasgrowthopportunitiesdecreased,whichoccurred at the end of the Cold War and when defense budgets were cut in the late1980sandearly1990s.

Inaccordancewiththepredictionoftheoverinvestmentissue,Lang,Ofek,andStulz (1996) show a negative relationship between the level of debt used by the firmanditsfuturegrowthopportunity,butthisnegativerelationshipexistsonlyincompanies with low growth opportunities However, financial leverage does notreduce the growth potential for high growth opportunity companies.(Aivazian,

Ge,&Q i u , 2 0 0 5 ) s h o w e d t h a t t h e r e w a s a n e g a t i v e r e l a t i o n s h i p b e t w e e n f i n a n c i a l leverage and investment from a sample of Canadian businesses The negative effectis much stronger in companies with low growth opportunities than those with highgrowthopportunities.

Ahn, Denis, and Denis (2006) also found evidence of the negative impact offinancial leverage on investment in diversified firms In addition, the negative effectis much greater in companies with a high Q-index than companies with a low Q-index,aswellasinnon- coresegments thanincoresegments.

Evidence of capital restructuring through the use of financial leverage alsosupports the theory of overinvestment Denis, Denis, and Economics (1993) alsoshow a significant decrease in capital expenditure following an increase in financialleverage In addition, the decline in investment goes along with significant increasein shareholder wealth in companies restructuring their capital Peyer and Shivdasani(2001)findthatfirmsallocatemorecapitalto sectorsthatgeneratelargercashflows.

Severalpreviousstudiesoffirmvaluealsosupportthetheoriesofoverinvestment and underinvestment McConnell and Servaes (1995) report that theimpact of financial leverage on growth value is negative, arguing that high financialleverage exacerbates underinvestment and reduces corporate value However, theimpact of financial leverage on low-growth businesses is positive, implying that thehigherthefinancialleverage,thelesstheproblemofoverinvestmentandtheincreasein enterprise value This evidence shows the consistency between the theory ofunderinvestmentandoverinvestment.

Chaptersummary

ThischapterpresentsasummaryrelatedinvestmenttheoriessuchasModiglianyand Miller(MM)Theorem,theNeoclassicaltheoryofinvestment,Salesacceletation Model, Tobin’s Q model and Euler Model The chapter also reviewsliteratures on financial constraints and its common measurements, as well as therelationshipbetweeninvestmentandcashflowsundertheimpactoffinancialconstrain ts, especially under the context of state ownership and banking systemreform. These content will be the underlying back ground for the two followingdetailedempiricalstudieswhicharepresentedinChapter4andChapter5below.

The next chapter, Chapter 4, presents one of the main studies of the thesis.Itinvestigates the relationships between firm’s investment and cash flows under thecontextofstate ownership controlinVietnam.

Chapter 3 reviewed the theories and literatures pertaining to main objectives(as discussed in Chapter 1) of the thesis This chapter presents a study on firm’sinvestment - cash flows relationship under the context of state ownership control inVietnam.Section4.1presentsanintroduction ofthestudy.Detailedliteraturereviewand hypothesis development are the contents of Section 4.2 and research is designedin Section 4.3 Section 4.4 discusses the empirical results of the study and thenconcludedbySection 4.5.Section4.6summarizesthechapter.

The study examines the effect of state ownership on the relationship betweeninvestment and cash flow in Vietnam, a small transitional economy Using a sampleofcompanieslistedonVietnam’sstockexchanges,theinvestment– cashflowrelations for both state-owned and non-state-owned firms are found U- shaped Inaddition, state-owned companies have higher cash flow sensitivity of investment,which perhaps is due to their socioeconomic and political responsibilities, poorcorporategovernanceandagencyproblem.Moreover,theinvestmentofhigh- growthcompanies,bothwithandwithoutstateownership,haslowerdependenceoninternalcash flow Additionally, low-growth state-owned companies have higher cash flowsensitivity of investment than those without state ownership, suggesting inefficientinvestmentbytheformer.

INVESTMENT – CASH FLOW RELATIONSHIP INTHECONTEXTOFSTATEOWNERSHIPINVIETNAM

Thestudyintroduction

Vietnam used to be a centrally planned economy entirely dominated by state- owned enterprises (SOEs) It began to transform its economy from a socialist to amarketeconomyin1986,andanequitization(privatizationper-se)programlaunchedin the early 1990s has transformed a number of state-owned companies into joint- stockcompanies.However,thegovernmentstillplaysacontrollingrolebyholdingalarge percentage of outstanding shares at many SOEs In the literature, the impact ofstateownershiponfirmperformanceaswellasfinancialdecisionsisstillcontroversial. Sun and Tong (2003) report that the privatization program in Chinaimprovedearnings,sales,andworkers’productivityatChineseSOEsbutnotprofita bility Du and Boateng (2015) assert that shareholder value is significantlyaffected by state ownership, formal institutional distance, and reforms in the foreigncurrencyapprovalsystem.However,G.Chenetal.(2009)findthatfirmperformanceis enhanced by certain types of state ownership SOEs have slow, even negativegrowthwhereastherapidlygrowingprivatesectorsignificantlycontributestoecono micgrowth(Allenetal.,2005).ItfindsthatSOEswithasoftbudgetconstraintcan easily access external financing, resulting in lower dependence on internal cashflowsthanisthecaseatprivatelyownedfirms (Allenetal.,2005;Cull&Xu,2003).Firth et al (2012) also report that state ownership has an impact on the relationbetweeninvestmentandcashflow.R.R.Chenetal.(2018)assertthatanincreaseinstate ownership leads to an increase in corporate cash holdings This may imply thatSOEs have lower dependence on external financing even though

SOEs are consideredlessfinanciallyconstrainedandpreferentiallyaccessibletocredit(Borisova&Meg ginson,2011;Faccio,2006).NhungandOkuda(2015)alsoevidencethatVietnamese SOEs have an advantage over privately owned firms in accessing bankloansaswellasmakingaprofit,evenaftereconomicbooms.However,tothebestofmy knowledge, little attention to date has been paid to the impact of state ownershipontheinvestment– cashflowrelation,especiallyinasmalltransitionaleconomysuchasVietnam.Myresearchisinte ndedtofillthatgap.

Using a sample of listed firms on Vietnam’s stock exchanges, the Ho Chi MinhStockExchange(HOSE)andtheHanoiStockExchange(HNX),fortheperiod2008–2015, I find that investment–cash flow curves for Vietnamese companies in general,both with and without state ownership, are U-shaped The study also shows that SOEshavehighercashflowsensitivityofinvestmentthannon- SOEs.AtSOEs,highercashflowsensitivityofinvestmentisfoundwithapositivecashflowinco mparationwitha negative cash flow Lower dependence on internal cash flow is also found atcompanies with high growth opportunities, both SOEs and non-SOEs The resultsalso show that privately owned firms engage in more investment, regardless of theircash flow The impact of state ownership on investment–leverage relations is alsoexamined.The resultsshow that previous-period leverage positively affects theinvestmentofSOEs.High-growthSOEshaveasoftbudgetconstraint,butbothhigh-growth privately owned companies and low-growth SOEs are more reliant on internalcashflowstofinancetheirinvestments.

Thefollowingcontributionsareaddedintothecurrentliteraturefromdifferentperspectives First, I shed further light on the implications of financial constraints byinvestigatingtheassociationbetweenstateownershipandcorporateinvestment–cashflow in a small transitional economy such as Vietnam Second, previous studiesexamining this important issue have generally been conducted in the context ofdevelopedcountriesorChina(Clearyetal.,2007;Firthetal.,2012;Tsaietal.,2014).The intensive literature review has indicated that the impact of state ownership oninvestment relations in an emerging and transitional country such as Vietnam haslargelybeenignored.

This study is structured as follows Following this Introduction, the literaturereview and hypotheses development are discussed in the next section, followed bydata description, proxy variable measurement and model specification explanation.Thelasttwosectionsdiscusstheempiricalresultsandconcludingremarks.

Literaturereviewandhypothesisdevelopment

Therelationshipbetweeninvestmentandcashflowhasbeenstudiedformanydecadesand,t hereisthepositiverelationbetweenthefirm’scashflowsandinvestment in general (Allayannis & Mozumdar, 2004; Bhagat et al., 2005; Cleary,1999; Fazzari et al., 1988; Firth et al., 2012; Kaplan & Zingales, 1997), as a supportforthepeckingordertheory.Someempiricalstudiesreportthatfinanciallyconstra ined firms have higher sensitivities (Cleary, 1999; Fazzari et al., 1988; Hoshietal.,1991);somestudiespresenttheoppositefindings(Almeida&Campello,2007;Cleary, 1999; Kaplan & Zingales, 1997); whereas some others report the U-shapecurves for this relationship (Cleary et al., 2007; Firth et al., 2012; Guariglia, 2008;Tsaietal.,2014).

Fazzari et al (1988) use a sample of US manufacturing firms in the period1970–1984 to study the relation between investment and cash flow under financialconstraints The authors use the pay-out ratio as measure of financial constraints, inwhichfirmsthatpaydecreasingdividendsareconsideredmorefinanciallyconstrained. The authors find that the relation between investment and cash flow ismore sensitive at financially constrained firms and less sensitive at non- financiallyconstrained firms Hoshi et al (1991) support these findings with their research onthe relation between capital structure and investment Hoshi et al.

(1991) also findthatinvestmentofacompanythatdoesnothavegoodrelationswithbanks,implyinghighfin ancialc on st ra in ts , hasgr e a te r investment– cashflow s en s itivi ty thanak e ir e t su (atypeofJa pane se c o rp or at e group),whic hisconsideredless financially constrained.

Theo p p o s i t e o p i n i o n i s e x p r e s s e d b y K a p l a n a n d Z i n g a l e s ( 1 9 9 7 ) , w h o constructanindextomeasurefinancialconstraintsanduseittoexamineinves tment– cashf l o w r e l a t i o n s B e s i d e s f i n d i n g t h e p o s i t i v e r e l a t i o n b e t w e e n c a s h f l o w s a n d investmentingeneral,theauthorsalsoindicatelessfinanciallyconstrainedfirmshaveamoresensitive investment–cashflowrelation.Cleary(1999)usestwosamples,oneconsisting of US firms and the other comprising Canadian firms, to test the findingsofbothFazzarietal. (1988)andKaplanandZingales(1997).Surprisingly,theauthorfindthatUSsampleresultssupportt heformer,buttheCanadiansampleconfirmsthelatter Using pledgeable assets as a proxy for financial constraint, Almeida andCampello (2007) indicate that investment – cash flow sensitivities of the financiallyconstrainedfirms should berisingin pledgeable assets.

However, when difference proxies of financial constraint are used, recentstudies find a U-shape relation with different levels of the sensitivity Cleary et al.(2007) find a U-shaped relation between investment and cash flow, which is causedby cost and revenue effects, in a sample of 88,599 observations for the period 1980–1999 The cost effect arises because when firms invest more, their borrowing costrises.Theauthorsconcludethatfirm’sinvestmenthasapositiverelationwithinternalcash flows when the cash flows are significant high, and a negative relation whencashflowsarelow.Guariglia(2008)dividetheresearchsamplesbylevelsofinternalandexter nalfinancialconstraint,theauthorconfirmstheU-shaperelationshipbetween investment and internal cash flows for the former which supports Cleary etal. (2007),butamonotonicallypositiverelationwithfirm’sexternalfinancialconstraintforth elatter.Firthetal.(2012)alsoconfirmtheU-shapedrelationshipbutfurtherarguethattheU- curvemayvarywithpoliticallyorientedinvestmentorasoftbudget constraint In addition to the confirmation ofthe U-shape relation betweeninvestmentandcashflowforlistedfirmsinChina,Tsaietal. (2014)asserttheflatterU- shapedcurveswiththepresenceofforeignbanks,whichreducefinancialconstraintsforfirms, especiallythosethatareprivatelyowned.Thismeansthatlowerinvestment- cashflowsensitivityreducesunderinvestmentbylisted SOEs.

TheU- shapedrelationbetweeninvestmentandcashflowmaybeexplainedasfollows.Thesmallandyoung companiesnormallyhavelowrangeofcashflows,and good investment opportunities, which are well perceived by the market, so thesecompanies are easier to raise external capital from financial market, resulting in anegative investment – cash flow relation However, having no current investments,higher cash flows will not materialize in the future Therefore, it is not a feasiblestrategy to coincide timing investment with high cash flow period (Hovakimian,2009) This argument also supports the argument by Cleary et al.

In summary, investment–cash flow relations that are U-shaped are recentlyfound in many studies, indicating a different relation between investment and cashflow,dependingonthelevelsofcashflowthefirmshave.Companieswithapositivecashflo warewillingtousetheirinternalfundstoinvest morewhilecompanieswitha negative cash flow have to limit their investment because of a lack of funds,resultinginhigherdependenceofinvestmentoncashflows.IexpectthatVietnamesefirms have a similar investment–cash flow relationship, so I posit the followinghypothesis:

H4.1: The investment and cash flow relation at Vietnamese companies is U- shaped.

In the literature, state ownership is evidenced to have an impact on firmfinancialdecisions.EarlierstudiesshowthatSOEshavelessbudgetconstraintthanktoh avingprivilegesoftaxdiscount,favourableaccessibilitytocreditorothersupportforms

(JanosKornai, 1979; Janos Kornai, 1980; Maskin, Kornai, & Roland, 2003),implying that SOEs may have a different investment sensitivity of cash flows R.Chen, El Ghoul, Guedhami, and Wang (2017b) show an evidence that sensitivity ofinvestment – Q is weakened by state ownership due to information asymmetry andagencyproblems,leadingtoanincreaseininvestmentinefficiency.Furthermore,theU- shape relation between investment and cash flows are empirically found at bothSOEsa n d n o n S O E s ( F i r t h e t a l , 2 0 1 2 ; T s a i e t a l , 2 0 1 4 ) H o w e v e r , m o s t o f t h e studies explore China, so it is not clear whether these findings apply to a smalltransition economy, such as Vietnam Therefore, research hypothesis is posited asfollows:

H4.1a: The relation between investment and cash flow at Vietnam’s state- ownedcompaniesisU-shaped.

H4.1b:TherelationbetweeninvestmentandcashflowatVietnam’snon-state- ownedcompaniesisU-shaped.

Inthemid-1980s,thecollapseofthesocialistblocforcedthemembercountries to reform and transform their centrally planned economies into marketeconomies. Unlike Russia, which chose shock therapy, China and Vietnam used agradualtransition,inwhichSOEprivatizationwasoneofthekeymethodsofreform.According to a report on the privatization of SOEs in Vietnam in 2011-2015 and thefirstninemonthsof2016, 10 bytheendofSeptember2016,atotalof4,508SOEshadbeen privatized out of 6,010 restructured-to-be SOEs In many of these enterprises,thestateretainscontrollingrightsbecauseofitshighproportionofownership.Asmycalculati on, about 30 percent of companies listed on the two Vietnamese stockexchanges have at least 50 percent state ownership This demonstrates that althoughVietnamhasopeneditseconomyandthenumberofprivatecompaniesisincreasing,m any companiesarestillunderstatecontrol,whichhasanimpactonvariouscompanyactivities, includingtherelationshipbetweencashflowandinvestment.

As in other transitional economies, SOEs in Vietnam have some social andpolitical responsibilities, such as creating jobs and attending to the social welfare ofemployees.Theseobjectives,togetherwithofficials’personalmotivesforpromotion

10 http://vietstock.vn/2016/12/da-co-phan-hoa-hon-4500-doanh-nghiep-nha-nuoc-746-508480.htm.

(Liu&Lu,2007),arethemaincausesofoverinvestmentbySOEs(C.R.Chenetal.,2017a;Firthetal ,2012).

In addition, many studies have been conducted on the impact of soft budgetconstraints on the relationship between cash flow and investment Early research byChow and Fung (1998), using a sample of 5,325 enterprises in Shanghai in 1989-1992,findsevidencethatinvestmentbyprivatefirmshashighercashflowsensitivitythan that by SOEs, implying that the latter face fewer financial constraints than non-SOEs Héricourt and Poncet (2009), using a sample of 1,300 Chinese firms in 2000-2002, as well as Poncet et al (2010), using a bigger sample (more than 20,000Chinesecompaniesin1998–2005),arriveatsimilarconclusions.AccordingtoClearyet al (2007), the less financially constrained a firm is, the flatter its U-shaped curveis, as company investment is less dependent on internal cash flow Guariglia et al.(2011), using panel data on 499,001 observations, find that SOEs’ asset growth (notlimited to fixed assets) is not affected by liquidity constraints, while the availabilityof internal funds constrains the growth potential of private companies The softbudgetconstraintsatSOEsareduetotheirsocialandpoliticalresponsibilities(Baietal.,2006; C.R.Chenetal.,2017a;J.Y.Lin&Tan,1999;Sheshinski&López-

Calva,2003).SOEscanaccessexternalcapitalmoreeasilythanprivatefirms,reducingtheirbudgetcon straints(Culletal.,2015;Sheshinski&López-Calva,2003).

However, Firth et al (2012), using a sample of Chinese listed companies in1999-2008, by contrast show that SOEs have a steeper U-shaped curve than privatefirms, especially on the left-hand side of the curve Moreover, the slope differencealsoexistsatfirmswithfewinvestmentopportunities.Thefindingsappeartocont radict the argument on SOEs’ soft budget constraints The authors argue thatChinese SOEs are induced by the government to use their own cash flows to investmore, so as to achieve multiple government socioeconomic objectives when theyhaveabundantinternalcashflowsandwhentheyfacenegativeinternalfunds.

InVietnam,SOEsalsohaveresponsibilitiestofulfilgovernmentsocioeconomic and political objectives as the Chinese ones The SOEs, under thegovernmentinfluencesinmanycases,havetoundertakesomeassigned,evennegative net present value (NPV) investments, leading to overinvestment problems.Moreover,unliketheprivatefirms,theVietnameseSOEsdonotassociateinvest mentswithfirm’sfundamentals(O'Toole,Morgenroth,&Ha,2016),indicativeofpoorinvestment efficiency.R.Chenetal.(2017b)alsoreportthatSOEs’investments have lower efficiencies than non SOEs do Lower efficiency may causea higher cost of external financing, which in turn make SOEs have more reliance ontheinternalcapital.Therefore,incaseof Vietnam,thefollowinghypothesisisposited:

Because different companies have different growth opportunities, meaningdifferent investment behaviours (Fazzari et al., 1988), this hypothesis will be testedforhighgrowthopportunityandlowgrowthopportunitysubsamplesseparately.

Debt financing is proven not having any impact on firm value and firm’sinvestment under the context of perfect capital market (Modigliani & Miller, 1958).However, in the world of market imperfection, it is definitely debt and investmenthave a significant relationship, especially in the context of financial constraints If acompany can access debt financing easier, its investment may have less dependenceonitsinternalcashflows.Inliterature,anegativerelationbetweendebtandinv estment are found by many studies (Aivazian et al., 2005; Firth et al.,2008;Jensen,1986;Langetal.,1996;Myers,1977).Ontheotherside,asindicatedinmanystudies(Chow & Fung, 1998; Guariglia et al., 2011; Héricourt & Poncet, 2009; J.Y.Lin&Tan,1999;Poncetetal.,2010),SOEshaveasoftbudgetconstraint,wh ich means they can easily access external financing (Allen et al., 2005; Cull et al., 2015;Cull & Xu, 2003) Nhung and Okuda (2015) also point that Vietnamese SOEs haveeasier accessVietnamese SOEs have easier to access bank loan and to make profitsthan other types of firms, even after an economic boom As such, state ownershipmay have certain impact on the relation between investment and leverage,affectingto firm’s financial constraint status Therefore, I also investigate the impact of stateownershiponinvestment– leveragerelationsbydevelopingthefollowinghypothesis:

Researchdesign

Ino r d e r t o t e s t theU-shape relationship,there haveb e e n t w o c o m m o n approaches being employed in literaturesasfollows:

- First approach: introducing a square of explanatory variable (cash flowsquare –CFKSQRin this study) in the basic linear regression model. Ifcoefficient of this new variable takes a significantly positive sign, the relationwill have a U-shape If it has a significantly negative sign, the relation is aninverseU-shape.

- Second approach: separating the explanatory variable into positiveandnegative variables (CFKPOSandCFKNEGrespectively in this study) byusing a moderatory variable (POSorNEG) A significant change in the signofthecoefficientsofpositiveandnegativevariableshowsanonlinearrelation.A U- shaped curve exists if there is a significantly positive sign for positivevariable and and significantly negative sign for negative variable Inverstly,thereisan inverse-U-shaped curve.

In this study, the two different approaches to examine investment–cash flowrelations are employed, using the basic model of investment developed by Fazzari etal.(1988).

Inthefirstapproach,CFKSQR i,ti s addedintothebasicmodelasemployedbyClearyetal. (2007);Firthetal.(2012),asfollows:

𝐼𝐾 𝑖,𝑡 = 𝛼 0 + 𝛼 1 𝐶𝐹𝐾 𝑖,𝑡 +𝛼 2 𝐶𝐹𝐾𝑆𝑄𝑅 𝑖,𝑡 + 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠 𝑖,𝑡 +𝑣 𝑖 + 𝑣 𝑡 +𝑒 𝑖,𝑡 (4.1) whereiandtarefirmandtime,respectively;v iis thefirm-fixedeffects;v tis theyear- fixedeffects,ande iti s theerrorterm.

IK itis theinvestmentratio,measuredbyI i,tdivided byK i,t-1.Iistheinvestmentin fixed assets in yeart,measured by the book value of net fixed assets at the end ofyeartminus the book value of net fixed assets at the beginning of yeart, plusdepreciationinyeart.K it- sis thetotalfixedassetsoffirmiatthebeginningof yeart.

CFK i,t is the annual internal cash flow ratio, measured by the earnings beforeinterest, tax, depreciation, and amortization (EBITDA) of firmiin yeartdivided bythetotalfixedassetsoffirmiatthebeginningofyeart(K i,t-

1).CFKisthemeasureofinternal cash flow, which is calculated as operating cash flow divided by the totalassets Both linear and U shaped relations between investment and cash flows havebeenfounded.

Controlsis a vector of control variables that potentially affect firm investment,includingthefollowings:

- SG i,t-1is the proportion of change in sales from yeart –2 to yeart –1.LikeTobin’s Q, sale growth (SG) is a common proxy for controlling for the effectofafirm’sgrowthpotential(Clearyetal.,2007;Firthetal.,2012).Vietnam’s stockmarketisstillveryyoungandimmature,soitisaffectedbythe“herdingeffect”.Fluctua tioninstockpricesinmanycasesdoesnotreflectafirm’struepotential.Atthesametime,com paniesnormallyincreaseinvestmentstomeettheirincreasingpotentialsalegrowth,the reforeIbelieveSGismoreappropriate than Tobin’s Q to measure investment opportunity in Vietnam’scontext.

- SIZEisaproxyforfirmsize,measuredasthenaturallogarithmoftotalassetsand for the degree of financial constraints experienced by firms

(Bernanke,Gertler,&Gilchrist,1994;Guariglia,2008;Petersen&Rajan,1993),meas ured by the logarithm of the opening book value of total assets for firmiinyeart.

- LEV i,t-1isthebeginning-of-periodfinancialleverage,measuredbytotalliabilities to total assets for firmiin yeart Investment and leverage have nosignificantrelationinperfectmarketcondition,butinimperfectmarketconditio n Some studies find positive relations (Aivazian et al., 2005) whilesomeothersfindnegativeones(Ahnetal.,2006;Langetal.,1996).

- AGE i,t is the number of years since the company was listed This variable isused to measure information asymmetry (Myers & Majluf, 1984). Youngcompaniesnormallyhavemoreinvestmentopportunities,sotheytendtomakemore investmentstoincreaseitsvalues.

- BETA i,t is the slope coefficient from the market model estimated using dailystock and market returns:R i,t = R m, t i, twhereR i,t is the daily stockreturn of firmi,R m,t is the daily market return for dayt The estimation periodisoneyear.BETAreflectstherelationbetweenuncertaintyandinvestment.

In the second approach, following Firth et al (2012), the cash flow (CFK) inModel (1) is decomposed into positive cash flow (CFKPOS) and negative cash flow(CFKNEG)usingthedummyvariablesPOSandNEG.POStakesavalueof1ifCFK isgreaterthan0,and0otherwise.Similarly,NEGtakesavalueof1ifCFKislessthan0, and0otherwise.

AsignificantchangeinthesignofthecoefficientsofCFKPOSandCFKNEGshowsanon linearrelationbetweeninvestmentandcashflows.AU- shapedcurvehasasignificantlypositivesignforCFKPOSandsignificantlynegativesignfo rCFKNEG.Aninverse-U-shapedcurvehasasignificantlynegativesignforCFKPOSand significantly positive sign forCFKNEG The definitions of proxy variables arethesameasabove.BothmodelsaretestedforthefullsampleandSOEandnon-SOEsubsamples.

4.3.2 Testing the Impact of State Ownership on Investment–Cash

First,SC (= STATE)is a dummy variable that takes a value of 1 if thepercentage of state ownership in firmiin yeartis at least 50% of total voting sharesand0otherwise.Thismethodcomparestheinvestmentbehavioroftwogroups:state- owned(SOEs)andnonstate-owned(non-SOEs)firms.

Second,SC (= GOV)is a continuous variable which is measured by thepercentage of state ownership in firmiin yeart This method measure the extent ofgovernmentindirectinfluenceonfirminvestmentbehaviorthroughcashflows.

The two SC proxies are interacted with positive cash flow(CFKPOS)andnegativecashflow(CFKNEG)tomeasuretheimpactofstateownersh iponinvestment–cashflowrelations.

4.3.3 Testing the Impact of State Ownership on Investment–

Thefollowingmodel(2.4)isusedtotestH2.3byinteractingthetwodifferentproxies for state ownership (SC) described in section 2.3.2 with leverage (LEV) asfollows:

The study first uses a sample of all companies listed on both Ho Chi Minh CityStock Exchange (HOSE) and Hanoi Stock Exchange (HNX) in the period of 2009 -

2015 11 Next, we exclude all financial firms such as banking corporation, financialcompanies,securitiescompanies,insurancecompanies,etc.becausethedeterminantsoff inancialfirminvestmentbehaviourarealsodifferentfromthatofnon-financial

11 TheperiodischoosenbecausetherewerejustalimitednumberoflistedequitizedSOEs before2008andthestudywasconductedin2016. firms.Additionally, their financial statements items/accounts are dissimilar to non- financial firms Both financial and market data are extracted from the ThomsonReuters database Percentage of state ownership are manually collected from thecompany’s annualreports.

All missing value companies are also excluded from the sample, generatinganu n b a l a n c e d p a n e l d a t a o f 3,366o b s e r v a t i o n s O u t l i e r s a r e a l s o e x c l u d e d b y winsorizing1%ofthetwotailsforeachvariable.

Empiricalresults

Table 4.1 describes the research sample This sample is an unbalanced panelof 3,366 firm-year observations of non-financial companies listed on the HOSE andthe HNX in Vietnam for the period 2009–2015 Each firm in the sample is classifiedas a listed SOE or listed non-SOE for each year by its proportion of state ownershipofthecompanythatyear.AnSOEisdefinedasafirmwithstateownershipofatleast50%oft hevotingshares.ThenumberoflistedSOEsisabouthalfthatofnon-SOEs.

Year State-ownedenterprises Non-state-ownedenterprises Total

2015.State- ownedenterprisesarethosewhosepercentageofstateownershipis50%ofthevotingshares.Therestare non- state-owned enterprises.

Table 4.2 presents a summary of the descriptive statistics for all variables intheregressionmodels.Onaverage,themeanandmedianoftheinvestmentratio(IK)forthefull sampleis41.2%and6.1%,respectively.OnaverageSOEsinvestlessthannon-SOEs (38.7% and 42.2% respectively) Listed private companies have highergrowth potential, as indicated by the mean ofSG(35.2%), lower average internal cashflows(2.154),andhighernegativecashflows(0.348),suggestingthattheirinvestment s are more dependent on external financing On average, SOEs have higherleverage (52.5%) than non-SOEs (44.6%) They have almost no difference inAGEandBETA.

Variable Obs Mean Median Obs Mean Median Obs Mean Median

Notes:IKisinvestmentratio.CFKisannualcashflowratio.SGisproportionofchangeinsalesfrom yeart – 2to yeart – 1.SIZEis natural logarithm of total assets.LEVis the beginning-of-periodfinancial leverage,measured by total liabilities to total assets.AGEis the number of years since thecompanylisted.BETAistheslopecoefficientfromthemarketmodelestimatedusingdailystockandmarket returns:R i, t =   +   R m,t +  i,t whereR i,t is the daily stock return of firmi, R m,t is the dailymarket return for dayt.GOVis percentage ofstateownership.

Table 4.3 presents the mean and median of variables in the regression modelsbetween SOEs and non-SOEs As shown by the Table 4.3, although there is nosignificantdifferenceinmeansofinvestment(IK)andinternalcashflows(CFK)buttheir medians do, specially, median of the bothIKandCFKof non SOEs in averagearesignificantlylessthanthatofSOEs However, nonSOEshavehig her average sales growth rate and face higher negative cash flows as indicated by signigicantmeans ofNEGandSG In addition, SOEs generally have bigger size as well as usehigherfinancialleveragethannonSOEs.TherearenosignificantdifferencesintermsofAGEand

Table4.3.Differencesbetweennonstate-ownedand state-ownedenterprises

Meandifference t-test Mediandifference Mann-Whitney

2toyeart–1.SIZEisnaturallogarithmoftotalassets.LEVisthebeginning-of-periodfinancialleverage, measuredby total liabilities to total assets AGE is the number of years since the companylisted.BETAis the slopecoefficient from the market model estimated using daily stock and marketreturns: R i, t =   +   R m,t +  i,t whereR i,t is the daily stock return of firmi,R m,t is the daily marketreturn for day t.GOVis percentage of state ownership **, *** respectively indicate significance at5% and 1%. Source:Author’scomputation

4.4.2.1 Testing Investment–Cash Flow Relations

As discussed in the Research Design section, two different approaches areusedtotesttheinvestment– cashflowrelationshipinVietnam.Irunseparateregressions for the full sample and the two subsamples of SOEs and non-SOEs.Fixed-yearandfixed- industryeffectsareappliedtocontrolfortheheteroskedasticityof error terms as well as time and industry effects.Dynamic estimation (Arellano &Bond, 1991) is also used to ensure the robustness of the results(Brown & Petersen,2009;Guariglia,2008;Guarigliaetal.,2011).

Panel A in Table 4.4 reports the regression results of my first approach, withCFKSQR Columns 1, 3, and 5 present the results on basic linear investment– cashflow relations for the full sample, SOEs, and non-SOEs respectively Columns

2, 4,and6presentsresultsfortheextendedversionofthebasicmodel,withCFKSQR,forthe full sample, SOEs, and non-SOEs, showingsignificantly positive coefficients(0.00001, 0.002, and

0.00001, respectively); therefore, U-shaped investment– cashflowrelationsarefoundineverysampleinVietnam.

The high significantly positive coefficient ofCFKfor the full sample (0.021)suggests a 0.82 percent 12 increase in investment for each 10% increase in cash flow,given that the full sample means ofIKandCFKare 1.611 and 0.412, respectively.This elasticity of investment to cash flow for listed private firms is 1.14 percent 13 However,decrease-

Panel B in Table 4.4 shows the regression results for my second approach, inwhichCFKisdividedintoCFKPOSandCFKNEG.ThesignschangedfrompositiveforCFKP

OScoefficients to negative forCFKNEGcoefficients in both the full sampleandt h e S O E s u b s a m p l e T h e F - t e s t f o r d i f f e r e n c e s i nC F K P O S a n d C F K N E G coefficients are significant at the 1 percent level, implying that investment increaseswithinternalcashflowswhencashflowsareabovezero,butdecreaseswithnegativecash flows—again confirming the U-shaped relationship between investment andcashflowsinVietnam.

CFKNEG,which are shown in columns 2 and 3 in Table 4.4 This suggests a certainimpactof stateownershipontherelationship, which Iinvestigate furtherbelow.

Theprevious- yeargrowthinsales(l.SG)hasanegativeimpactonthelevelofinvestmentinboththefullsampleandt henon-SOEsubsample,asshownbynegativecoefficients (-0.002 and -0.005 respectively), but is insignificant However, it has asignificantly positive impact on the investment level of SOEs, as shown by thecoefficientof0.145atthesignificancelevelof1%.ThenegativecoefficientsofSIZEfor all the samples indicate that smaller firms tend to invest more than bigger firms.NeithercapitalstructureLEVnorAGEhasanimpactoninvestmentinbothsubsamples

, as indicated by insignificant coefficients Higher-risk firms invest less,as shown by the negative coefficients ofBETAat the 1% significance level, exceptthat it is insignificant for SOEs Perhaps risky firms reduce their investment to protectthemselvesfromuncertainty.

In conclusion, the evidence shows that both the full sample and subsamples of SOEsandnon-SOEshaveU-shapedcurvesforinvestment– cashflowrelations.Stateownership has an impact on the company’s investment–cash flow relations, whichIinvestigatefurtherbelow.

Fullsample State-ownedenterprises Non-state-ownedenterprises

Fixedeffect YearandIndustry Year andIndustry Yearand Industry Yearand Industry Yearand Industry Yearand Industry

PanelB:Regressionsseparatingpositivecashflow(CFKPOS)andnegativecashflow(CFKNEG)

Fullsample State-ownedenterprises Non-state-ownedenterprises

FixedEffect Yearand Industry Yearand Industry Yearand Industry

Notes:IKisinvestmentratio.CFKisannualoperatingcashflowratio.CFKPOSisthepositiveoperatingcashflows.CFKNEGisthenegativeoperatingcashflows.SGisproporti onofchangeinsalesfromyeart–2toyeart–1.LEVisthebeginning-of-periodfinancialleverage,measuredbytotalliabilitiesto total assets.SIZEis natural logarithm oftotal assets.AGEis the number of years since the company listed.BETAis the slope coefficient from themarketmodelestimatedusingdailystockandmarketreturns:R i,t =   +   R m,t +   whereR i,t isthedailystockreturnoffirmi,R m,t is thedailymarketreturn for dayt.STATEis a dummy variable which takes value of 1 if state authorities hold at least 50% of company’s outstanding number of sharesinthatyear.GOVistheproportionof sharesstate authoritieshold *,***respectivelyindicatesignificanceat 10% and1%.

4.4.2.2 Testing State Ownershipand Investment–Cash Flow Relations

Table 4.5 presents the regression results on the impact of state ownership oninvestment–cashflowrelationswithnewvariables,CFKPOS_SCandCFKNEG_SC,which are interaction terms betweenCFKPOS(orCFKNEG) with two alternativeproxiesforstateownership(SC=STATEandSC=GOV)asdescribedabove.

Theresultsincolumn1inTable4.5(SC=STATE)showthatthecoefficientsofCFKP

OSandCFKPOS_SCare 0.0234 and 0.048 respectively, and both aresignificantat1%;thecoefficientsofCFKNEGandCFKNEG_SCare0.00005(insignificant) and -0.119 (significant at 1%) respectively Given that the means ofIKandCFKoftheSOEsubsampleare0.308and0.657respectivelyandthoseofthenon-SOE subsample are 0.389 and 4.684 respectively, when cash flow is positive, a10% increase in positive cash flow leads to an increase in investment by SOEs andnon-SOEs of 1.02% and 2.82% respectively However, when negative cash flowincreases, SOEs decrease investment but non-SOEs do the opposite 15 This meansthat SOEs have higher cash flow sensitivity of investment than non-SOEs Theseresultsare consistentwith those byFirth etal.(2012).

The results in column 2 in Table 4.5 (SC = GOV) show that privately ownedfirms increase investment more when they have positive cash flows, as indicated bythe significantly positive coefficients ofCFKPOS(0.028) andCFKNEG(0.002).However, the investment behaviour of SOEs is different. Their higherCFKNEG_SCcompared withCFKPOS_SCshows their higher investment dependence on internalcashflows.ThisagainsupportsH2.

Conclusion

The study investigates the impact of state ownership on the relation betweeninvestmentandcashflowinVietnam,asmalltransitioneconomy.Usinganunbala ncedpanelofcompanieslistedontheHOSEandtheHNXfrom2009to2015,I find evidence of a U- shaped relation between investment and cash flow at firmswith both with and without state ownership, which is similar to findings in previousresearch(Clearyetal., 2007;Firthetal.,2012;Guariglia,2008;Tsaietal.,2014).

The results also show higher cash flow sensitivity of investment at SOEs,implying higher financial contraints, compared with non-SOEs because the formerhave social and political responsibilities At SOEs, sensitivity is higher when cashflows are positive than when cash flows are negative The results also show thatprivately owned companies increase investment more when they have a positiveratherthannegativecashflow,buttheinvestmentbehaviorofstate-ownedcompaniesis the opposite They reduce investment more when they have negative cash flow thanwhen cash flow is positive. Furthermore,the study showsevidencet h a t b i g g e r a s w e l l asriskiercompaniesmakelessinvestmentthansmallerorlessriskyones.

Different investment behaviours are found by companies with high versus lowgrowth opportunity Investment by both SOE and non-SOE high growth companiesis less dependent on internal cash flow.High growth SOEs are more financiallyconstrained than non-SOEs as shown by higher cash flow sensitivity of investment.However, low growth SOEs have higher cash flow sensitivity of investment than non-SOEs, suggesting that the social and political investments by the former may beinefficient.

Moreover, the study shows that previous-period leverage has a positive effecton investments of SOEs High growth SOEs have a soft budget constraint, but bothhighgrowthnon-SOEsandlowgrowthSOEsaremorereliantoninternalcashflowstofinancetheirinvestments.

The study provides additional evidence on the impact of state ownership oncorporate investment–cash flow relations, especially in a small transition economy,which may be a useful reference for future research on a similar topic in a similarcontext However, the research only investigate the impact of the Vietnam’s stateownership among various forms of ownershipas well as does not do it for specificindustries Theseshortcomingscouldbe furtherexploitedinfuturestudies.

Chaptersummary

ThisChapterpresentsastudyinvestigatingtherelationshipofinvestmentandcash flow under financial constraint condition, more specifically state ownershipcontrol in Vietnam This Chapter details the motivation of the study as well asliteraturereviewofthetopic,basedonwhichresearchhypothesesaredeveloped.Theresearchdesign (Section4.5)developsempiricalmodels,measurementsofdependent,explanatoryandc ontrolvariables,aswellasdatasource.Maindatasourceis from Thomson Reuters database Sample procedures are also explained how todetermine final samples Research results are also carefully discussed to withdrawsome implications on the relationship between firm’s investment and cash flows ofbothstatecontrolledanduncontrolledcompanies.Therelationshipbetweeninvestment andleverageisalsoanalysedanddiscussed.

Severalrobustnesstestsareconductedtocheckthestudy’sfindings.Thesetestinvolving using difference - GMM estimation to control the potential of endoneigityproblem; using different criteria to define state controlled companies or high-growthcompanies.

FIRM’S INVESTMENT – CASH FLOWRELATIONSHIP UNDER THE CONTEXT OFBANKINGSYSTEMREFORM INVIETNAM

Chapter 4 presents the study on firm’s investment - cash flows relationshipunder the contexts of state ownership control in Vietnam This chapter presentsanother study on firm’s investment - cash flows relationship under the context ofbanking system reform in Vietnam Section 5.1 presents the study introduction.LiteraturereviewandhypothesisdevelopmentarethecontentsofSection5.2.S ection

5.3 describes the research design and Section 5.4 discusses the empirical results ofthe study The study is then concluded by Section 5.5 Section 5.6 summarizes thechapter.

This study examines the effect of banking system reform which is measuredby foreign bank’s presence on investment-cash flow relation in a context of a smalltransition economy The U – shape relation between investment and cash flow isfound I also find evidence that the presence of foreign banks in Vietnam results indecreasing in dependence on local banks and has changed corporate investmentbehaviors Company investments are less reliant on internal cash flow in the postreformperiod.Althoughoverinvestment 16 ofstatecontrolledfirmsisnotreducedbutunderinve stmentproblem 17 ofnon-state-controlledlistedfirmsismitigateddueto

INVESTMENT – CASH FLOW

TheStutyIntroduction

Bank loans and internal cash flow have been two main financing sources offunds for firm’s investments in Vietnam However, credit market is not a fair playground for private companies due to some historical reasons 18 although Vietnam hasdone several efforts to improve the situation The biggest reform in banking sectorwas the separating commercial banking functions from central bank Prior to 1990,banking system in Vietnam was a 1-tier system in which state bank functioned asboth central bank and commercial bank After 1990, State Bank of Vietnam (SBV)only played the central banking role because its former commercial functions wereseparated and delegated to four newly-established major state-owned commercialbanks(SOCBs) 19 Theonlyfourbanksdominatedthewholecreditmarketwithm orethan70%marketshare.Traditionalcustomersofthesebanksarestate- ownedenterprises, which have been favorable in getting loans at lower cost The entry intointernational trade and investment agreements such as US-Vietnam

Bilateral TradeAgreement(2001),WTO(2007)ofthecountry… allowedpresenceofforeignbankswith the hope that domestic banks would benefit from management technology,business operating skills, professional knowledge and additional capital provided byforeignbanks.Equitisation(privatization)ofstate- ownedcommercialbankswasalsoanothereffort toreformthe sectorbythegovernment.

Thetopicofinvestment– cashflowrelationhasbeenmuchstudiedinfinanceformanydecadesandaU- shaperelationisfound(Allayannis&Mozumdar,2004;

18 Vietnamusedtobeacentrally-plannedeconomy inwhichstate–ownedbanksmainlyservedfor state- owned enterprises.

19FourSOCBsareBankforForeignTradeofVietnam(Vietcombank),VietnamBankforIndustryandTrade (Vietinbank), Vietnam Bank for Agriculture and Rural Development (Agribank) and Bank forInvestmentandDevelopmentofVietnam(BIDV).

Cleary, 1999; Fazzari et al., 1988; Firth et al., 2012; Kaplan & Zingales, 1997).However, the impact of banking system reform on investment – cash flow relationhas not much investigated To my best knowledge, there has been only one study ofthis topic conducted by (Tsai et al., 2014) The study shows that banking sectorreform had a significant impact on Chinese companies’ investment – cash flowrelation, both state-controlled listed and non-state controlled listed firms. AlthoughVietnamsharessomepolitical,cultural,socialandeconomicsimilaritieswithChina ,Vietnamisaverysmallcountryandhasjustopenedtheeconomyforabout30 years,where financial market condition is not developed as that of China Therefore Iconduct this research in a context of small transition economy to provide moreevidence as well as to test the results of the impact of banking system reform oninvestment–cashflowrelation.

Presenceofforeignbanksisconsideredadditionalcreditchanneltocompanies, helping to mitigate firm’s financial constraints It also creates pressuresonlocalbankstoimprovetheircorporategovernancetocompete withexternalrivalswho have stronger capital, higher advanced technologies, better business operatingskills, etc In this study, I use a sample of Vietnamese listed firms from 2009 – 2014to examine impact of presence of foreign banks, which is defined as banking systemreform on firm’s investment – cash flow relation The impact is also investigated forthetwosubsamples:state-controlledfirmsandnon-state- controlledfirmsduetotheirdifferentownershipcharacteristics.Asothertransitioneconomies,Vietn amesestate-owned enterprises also have to do some political responsibilities and of course gotsome favorable privileges in terms of capital, investment opportunities, etc than otherformsofbusinesses,especiallyprivateones.

Ifirstexaminetherelationshipbetweeninvestmentandcashflow IfindaU-shape investment - cash flow relation on both full sample and subsamples of statecontrolledanduncontrolledcompaniesinVietnam,whichisconsistentwithfindingsbyCle aryetal.(2007).Secondly,Iinvestigatethe impact ofbankingsystemreform on investment – cash flow relation With presence of foreign banks, Vietnamesefirm’s investment behaviors are changed in the way that they are less reliant oninternalcashflowinthepostreformperiod.Thereformmakesasignificantreductiononunderinv estmentprobleminnon-state-controlledcompanieswhileoverinvestment problem of state controlled firms is not mitigated Third, investmentanddebtrelationisalsoinvestigatedtoseeifpresenceofforeignbankchangesfirms’acc essibilitytobankloansbecausebankloansaremainsourceoffundsforVietnamese companies’ investments The results shows a significant change fromnegative to positive investment – leverage relation from pre reform period to postreform period for both state and non-state controlled firms This confirms firminvestmentsarelessdependentoninternalfinancinginthepostreformperiod.

Thisstudycontributesadditionalempiricalevidencetothefinancialliteratureon the topic of impact of banking system reform on investment – cash flow relation,especiallyinacontextofsmalltransitioncountry.Mostofmyfindingsaresimilartothe previous study results except that overinvestment problem of state controlledfirms is not mitigated in the post reform period Perhaps, in the post reform periodstate controlled firms are still main customers of state-owned local banks who aredominating the credit market. Moreover, presence and operation of foreign banks inVietnamisstilllimited.

Theremainderofthisresearchisorganizedasfollows.Section2presentsliteraturereview.Section3describesresearchmethodology.Section4reportsresearchresults andSection5isconclusion.

Literaturereview

In financial theory, a company can use two main sources of funds to financeits potential positive NPV projects: internal funds which is the cash flow generatedby company’s operations and external funds which is newly – issued debt/equity.

Inaperfectcapitalmarketwheretransactioncostdoesnotexist,fundsareavailableforallfirms, sotheydonotneedtorelyonavailabilityofinternalcashflows(Modigliani&Miller,1958).How ever,inanimperfectcapitalmarketwithexistenceoftransactioncosts,externalfundsaremore costlythaninternalfunds,sointernalfundsbecomesmainsourceoffinancingforcompanies.

The topic of investment – cash flow relation has been studied for manydecades and still is a controversial one so far Fazzari et al (1988) and AllayannisandMozumdar(2004);Cleary(1999);KaplanandZingales(1997)arereprese ntatives for the two opposite opinions Fazzari et al (1988) use a sample ofUS manufacturing firm in the period of 1970 – 1984 to study firm’s investment andcashflowrelationunderfinancialconstrain.Theauthorsusepayoutratioasmeasureoffina ncialconstraint,inwhichfirmspayingdecreasingdividendconsideredasmorefinancially constrained and vice versa The authors find that the relation betweeninvestment and cash flow is more sensitive for financially constrained firms and lesssensitivefornon- financiallyconstrainedfirms.Hoshietal.(1991)supportFazzarietal (1988) findings with their research on relation between capital structure andinvestment Hoshi et al (1991) also find that an individual company who does nothavegoodrelationwithbanks,implyinghighfinancialconstrainthashigherinvestmen t – cash flow sensitivity than Keiretsu – a type of Japanese group which isconsideredas lessfinanciallyconstrained.

The opposite opinion is represented by Kaplan and Zingales (1997). TheseauthorsbuiltupKZindextomeasurefinancialconstrainandexaminedinvestment – cashflowrelationwithKZindex.Theyfindthatcashflowhaspositiverelationwithinvestment.Bes ides,lessfinanciallyconstrainedfirmshavemoresensitiveinvestment – cash flow relation which is opposite to Fazzari et al (1988). Cleary(1999)uses2samples,oneUSfirmsandtheotherCanadianfirmstotestbothFazzariet al (1988) and Kaplan and Zingales (1997) findings The US sample resultssupported Kaplan and Zingales (1997) that less financially constrained firms hadmore sensitive investment – cash flow relation However, the Canadian samplesupported Fazzari et al (1988) Sheshinski and López-Calva (2003) document thatstate–controlled companies have soft budget constrain because they could accessexternal funds easier than private companies, so less financially constrained Hubbard(1997);andClearyetal.(2007) demonstratethatfinancialconstrain wouldmaketheU-shape curve of investment flatter, meaning that firm’s investment would be lessdependentonitsinternal cash flow.

Clearyetal.(2007)findaU- shaperelationbetweeninvestmentandcashflowwithalargesampleof88,599observationsfort heperiodof1980–

1999,causingbycostandrevenueeffects.Thecosteffectarisesbecausethemoreinvestmentthe firmtakes, the more borrowing cost incurred Accordingly, higher level of investment,more revenue is expected to generate Guariglia (2008) supports Cleary et al (2007)that there is a monotonic relation between investment – cash flow and degree ofinternal or external financial constraints “Internal” financial constraints is measuredbyfirms’cashflowandcoverageratio,and“external”financialconstraintismea sured by firm size, and age Firth et al (2012) also confirmed the U-shape curve but further argue that the curve may vary with politically – oriented investment orsoftbudgetconstraint.Tsaietal.(2014)alsosupportClearyetal.(2007)andFirthetal (2012) with their findings of U-curve shapes of the relation between investmentand cashflowforbothstate-controlled listed andnon-state- controlledlistedfirms in

China The study also shows flatter U-shape curves with presence of foreign bankswhich reduce financial constraint for firms, especially uncontrolled firms It meansthatlesserinvestment- relationsensitivitywouldreduceunderinvestmentproblemofnon-statecontrolledlistedfirms.

A study of Liu and Lu (2007) on China reported that government officials atstate – controlled listed firms often have incentives to achieve social and politicalobjectivestoservefortheirownpromotion,thereforepolitically- orientedinvestments were the main cause of overinvestment situation in these firms Firth etal.(2012)findsimilarevidencesupportingthatpointofview.

Detragiache et al (2008) find evidence that foreign banks are less sensitive topolitical pressure, and they have less pressure of lending relation partners, who arecapableofbreakingrelationbarriers.Politicalandnon-economicmotivationsarenottop priorities of domestic banks now Therefore, state-owned commercial banks aretransformedfrompolitically– incentiveorganizationtomoderncorporategovernance – oriented ones Therefore, reforming bank system by allowing foreignbanksholdingownershipatdomesticstate- ownedbankscouldreducepoliciesfavoring politically – oriented investments of state – controlled companies Withpresence of foreign investors, credit granting would be more prudential, in that waycareless loans as well as politically-oriented loans could be mitigated With thisresearch, Detragiache et al (2008) use foreign ownership in domestic bank as proxyfor banking system reform and this research is supported by Berger et al. (2008).Berger et al (2008) report that after the reform, which means after having foreignownership in domestic banks’ ownership structures, these banks, especially state-controlled banks may change their lending practice, from politically – oriented tocommercially-oriented banks.Non state-controlled listed companies are consideredmoret r a n s p a r e n t , m o r e c o m m e r c i a l l y - o r i e n t e d a n d m o r e e f f i c i e n t t h a n s t a t e - controlledlistedcompanies.Therefore,afterreform,non-state- controlledlistedcompanies have more channels to access bank loan and underinvestment problem ofnon-state-controlledlistedcompaniesarereduced.

Tsai et al (2014) examine the effect of bank system reform on investment – cashflowsensitivitymeasuresbankingsystemreformbypresenceofforeignbankatregion where company had headquartered or branches The research finds evidencethatwithpresenceofforeignbanks,politically- orientedinvestmentsatstatecontrolled listed companies are reduced because state- owned banks transform frommore politically – oriented to more commercially – oriented financing At the sametime, problem of underinvestment at non state – controlled listed companies seemsto be mitigated due to an increase in their bank loan accessibility The study alsodocumentsareductionofdistortionofinvestmentinstatecontrolledlistedcompaniesaswellas reductiononfinancialconstraintsatnonstate–controlledlistedcompanies.

Asdiscussedintheliteraturereview,U-shapecurveofinvestment–cashflowrelation has been documented by many researches (Cleary et al., 2007; Firth et al.,2012), whichmeans that there will be opposite relation for company’s positive ornegativec a s h f l o w P o s i t i v e c a s h f l o w c o m p a n i e s a r e w i l l i n g t o f i n a n c e m a n y investments for growth with retained earnings, while negative cash flow companiesface investment constrain due to lack of capital It means that negative cash flowcompanies have to rely on external funds at higher cost of capital for financing theirinvestment opportunities than positive cash flow companies However, the U shapesarefoundfordevelopedeconomieswithmaturefinancialmarkets.Vietnamisasmall country with imperfect financial market and is in the way of transition to marketeconomy Does this relation still have the U- shape? Therefore I develop followinghypothesis fortheresearch.

 Approach1:FollowingtheClearyetal.(2007)approach,Iincludethesquare of cash flow(CFKSQR)in the basic linear model of investment –cash flowrelationwhich is developedbyFazzarietal.(1988).

- Growth of sales(SaleGrowth)is also a common proxy to measure firm’sgrowth opportunity (Cleary et al., 2007; Firth et al., 2012) I expect thatpreviousyearSaleGrowthhavepositiveimpactonthisyearinvestment.Therefore lagged SaleGrowth is included inthe model.SaleGrowth i,t-1 isproportion ofchangeinsalesfromyeart–2to yeart–1.

- SIZE i,t isfirmsize.Thisvariableisaproxy forthedegreeoffinancialconstraint experienced by firms (Bernanke et al., 1994; Fazzari et al., 1988;Guariglia, 2008; Petersen & Rajan, 1993).SIZEis expected to have positiverelation with firm investment (Gan,

2007).SIZEis measured by logarithm ofbeginning bookvalueoftotalassetsforfirmin iyeart.

- LEV i,t is financial leverage.LEV ismeasured by the total liabilities divided bythe total assets for firmiin yeart LaggedLEVis used Investment andleverageh a v e n o s i g n i f i c a n t r e l a t i o n i n p e r f e c t m a r k e t c o n d i t i o n , b u t i n imperfect market condition Some studies find positive relations (Aivazian etal., 2005) while some others find negative ones (Ahn et al., 2006; Lang et al.,1996).

- AGE i, t is the number of years since the company has been listed (Firth et al.,2012; Tsai et al., 2014) Younger firms are believed to have more investmentopportunity (Firth et al., 2012) as well as higher information asymmetry(Myers&Majluf,1984).Therefore Iexpecta negativecoefficientforAGE.

- BETA i,t :In addition, risk and investment are negatively related In this study,risk is measured byBETA(Firth et al., 2012; Tsai et al., 2014) which is theslope coefficient from the market model estimated using daily stock andmarket returns:R i,t =  R m, t +i,twhereR i,t i s t h e d a i l y s t o c k r e t u r n o f f i r m i,R m,t isthedailymarketreturnfordayt.The estimation periodisoneyear.

The model to test for U-shape relation between investment and cash flows isasfollows:

WhereIK i,t is investment ratio, measured byI i,tdivided by K i,t-1 Iis theinvestmentinfixedassetsinyeart,measuredbybookvalueofnetfixedassetsattheend of yeartminus book value of net fixed asset at beginning of yeart, and plusdepreciation in yeart K it-sis total fixed asset of firm iat the beginning of yeart.CFK i,tis annualcashflowratio,measuredbyearningsbeforeinterest,tax,depreciatio n and amortization (EBITDA) off i r miiny e a rtdivided by total fixed assetof firmiat beginning of yeart(K i,t-1 ).CFKSQRis square ofCFK Regressioncoefficient ofCFKSQRis expected to takes significantly positive sign for a U- shapeorsignificantlynegativesignedforaninverseU-shapecurve.

 Approach 2: Following Firth et al (2012) to replace cash flow

(CFK)oftheModel(1)withpositivecashflow(CFKPOS)ornegativecashflow(CFKNEG)byusing dummyvariablePOSandNEG.POStakesvalueof1ifCFKisgreaterthan0, and 0 otherwise. Similarly,NEGtakes value of 1 ifCFKis less than 0, and 1otherwise:

A significant change in sign of coefficients ofCFKPOSandCFKNEGshowsa nonlinear relation between investment and cash flows A U-shape curve has asignificantly positive sign ofCFKPOSand significantly negative sign ofCFKNEG.AninverseU- shapecurvehassignificantlynegativesignofCFKPOSandsignificantlypositivesignofC

It is common to have problem of “flexible” budget constrain in the centrally- plannedeconomy,whichreferstothefavorablepoliciesforstate-controlledorganizations. Due to being owned by government, these organizations are oftenbailed out by the government if they are in trouble, normally in form of subsidy, taxdeductionorexemption,setlowinputcost,sethighoutputprice,lowcostfinancing,etc.T h e r e f o r e , state–ownedenterprisesinVietnamnormallycanaccessbankcreditmuch easier and normally at lower cost than private ones, that leads to the situationofoverinvestment.Moreover,likeChina,overinvestmentprobleminstate- controlledcompanies are mainly caused by politically- oriented investments (Firth et al., 2012)because officials in these companies also have incentives to achieve social andpoliticalob jec ti ves f o r th ei rp ro mo ti on ( L i u & L u, 20 07 ) M e a n w h i l e , no n- sta te - controlled companies are not favored with these privileges, so they have to rely ontheir own internal cash flow to finance their investment opportunities (Tsai et al.,2014).

With the presence of foreign bank, credit market become more competitiveand transparent State-owned banks may have to change its lending practices frompolitically-orientedtocommercially-oriented,sonon- statecontrolledcompanieshave more chance to access bank financing, so underinvestment problem of thesecompanycouldbereduced.Therefore,followingshypothesesareset:

H5.2: Banking system reform mitigates overinvestment problem at state – controlledcompanies

Impact of banking system reform is measured byBANK BANK i,t is a dummyvariable that takes the value 1 for firms located in a region where foreign banks areallowedtodobusinessinyeartandafterwards,and0otherwise.InteractionvariablesofCFKPOS

BANK(*POS*BANK)andCFKNEGBANK(*NEG*BANK) reflect effect of banking system reform on firm’s investment behavior when it haspositiveornegativecashflow.Definitionsofothervariablesareasthoseofthemodel(5.1).

Empiricalresults

Table 5.1 describes the research sample This sample is unbalanced panel of2.858firm-yearobservationsofnon- financialcompanieslistedonbothHoChiMinhCityStockExchange(HOSE)andHaNoiStockEx change(HNX)inVietnamfortheperiod of 2009 – 2014 This full sample is split into 2 subsamples: state controlledfirms and non-state controlled firms by percentage of state ownership in the company.Each firm in the sample is classified as state – controlled company if the central orlocal government holds at least 50 percent of total voting shares in that company forthatyear,otherwisenonstate-controlledcompanyforthat year.Theaveragenumberofstate–controlledfirmsis aboutahalfof non- statecontrolledfirms.

Year State– controlledfirms Nonstate-controlledfirms Total

Note:Thesampleincludesnon-financialfirmslistedonHOSEandHNXofVietnamovertheperiodof 2009 – 2014 State controlled firms are those that the government held at least 50% of votingshares.The restarenon-state –controlledfirms.

Table 5.2 presents a summary of the descriptive statistics for all variables inthe regression models In average, mean and median of investment ratio (IK) for thefull sample is 17.6% and 4.1% respectively State–controlled firms in average investmore than non-state – controlled listed firms (19% and 17% respectively) Althoughhaving higher growth potential as indicated by mean of SaleGrowth (35.6%), non-state – controlled listed firms has lower average internal cash flows (CFK11%) andhigher negative cash flows (NEG36.9%) This suggests underinvestment in thisgroup.Besidesitseemsthattheyhavetorelymoreonexternalfundstofinancetheirinvestment than state – controlled firms In average, state – controlled firms havehigher leverage (56.3%), implying their higher accessibility to bank loans to non-state – controlled listed firms (49%). AverageBETAandAGEof the two subgroupsarenotmuch different.

Full sample State- controlledlistedfirms Nons t a t e – c o n t r o l l e d listedfirms

Variable Obs Mean Median Obs Mean Median Obs Mean Median

Notes:IKisinvestmentratio.CFKisannualcashflow ratio.SaleGrowthisproportionofchangein sales from yeart–2to yeart–1.TArepresents for firm size, measured by total assets LEVis thebeginning-of-period financial leverage, measured by total liabilities to total assets AGEis thenumber of years since the company listed.BETAis the slope coefficient from the market modelestimated using daily stock and market returns: R i, t =   +   R m,t +  i,t where R i,t is the daily stockreturnof firmi, R m,t is the daily marketreturnfordayt.

Table 5.3 presents correlations among the variables The bottom left trianglereportsPearsoncorrelationsandtheupperrighttriangleisSpearmancorrelations.IKh as high significantly positive correlation withCFKPOS(1%), and insignificantlynegative correlation withCFKNEG This suggests a U-shape curve for investmentand cash flow relation in Vietnam Besides, positive correlations at high significantlevelsbetweenIKandLEVindicatesthatexternalfundsplayimportantroleinfirm’si nvestments.Moreover,firminvestmentisnegativelycorrelatedwithitsrisk.

IK CFKPOS CFKNEG SaleGrowth LEV AGE BETA

Notes:IKis investment ratio.CFKis annual cash flow ratio.CFKPOSis the positive cash flows.CFKNEGis the negative cash flows.SaleGrowthisproportionofchangeinsalesfromyeart–2toyeart–1.L E V isthebeginning-of- periodfinancialleverage,measuredbytotalliabilitiestototalassets.AGEis the number of years since the company listed.BETAis the slope coefficient from the market model estimated using daily stock and marketreturns:R i,t =   +   R m,t +  i,t whereR i,t is the daily stock return of firmi, R m,t is the daily market return for day t *, **, *** respectively indicatesignificanceat10%, 5% and 1%.

5.4.3.1 Examining investment – cash flow relation

AsdiscussintheSection5.5.1.1,twodifferentapproachesareusedtotesttheinvestment - cash flow relationship for a case of small transition economy Theseparate regressions are run for both full sample and the two subsamples Fixed yearand fixed industry is applied to control for heteroskedasticity of error terms as wellastimeandindustryvariantproblems.Dynamicestimation(Arellano&Bond,1991)isalsou sedtorobusttheresearchresults(Brown&Petersen,2009;Guariglia,2008;Guarigliaetal.,2011 ).

Panel A of the Table 5.4 reports the Approach 1 regression results withpresence ofCFKSQRvariable Column (1), (3) and (5) present regression results ofbasiclinearinvestment–cashflowrelationsforfullsample,statecontrolledcompanies and non-state controlled companies respectively Column (2), (4) and (6)presents the extension version of the basic model with presence ofCFKSQRalso forfullsample,statecontrolledandnon- statecontrolledsubsamples.

(0.0016,0.0238and0.0015respectively),U-shapedinvestment–cashflowrelationsare found in a case of small transition country like Vietnam The high significantlypositive coefficient ofCFKfor the full sample (0.0269) suggests a 0.22 percent 21 increase in investment for each 10% increase in cash flow, given full sample meansofIKandCFKare0.176and0.141respectively.Thiselasticityofinvestmenttocashflowis 0.50percent 22 forstatecontrolledlistedfirmsbutonly0.15percent 23 fornon- statec o n t r o l l e d f i r m s T h e y a r e m u c h s m a l l e r a s c o m p a r e d w i t h t h e f u l l s a m p l e

21 According to Guariglia (2008, p.1802), the number 0.22% is calculated by(0.141/0.176)*10%*0.0269 22 According to Guariglia (2008, p.1802), the number 0.50% is calculated by(0.215/0.190)*10%*0.0440 23 AccordingtoGuariglia(2008,p.1802),thenumber0.15%iscalculatedby( 0 1 1 0/ 0 1 7 0 ) * 1 0 % * 0 0 2 2 4

I/KFitted values numbero f 1 1 2 p e r c e n t a s r e p o r t e d b y G u a r i g l i a ( 2 0 0 8 ) i n h i s s t u d y o n B r i t i s h companiesor1.3percentasreportedbyFirthetal.(2012)forChinesecompanies.

Panel B of the Table 5.4 shows the Approach 2 regression results in whichCFKis separated intoCFKPOSandCFKNEG The regressions are also separatelyconducted for full sample and the two subsamples PositiveCFKPOSand negativeCFKNEGcoefficientsathighlevelsofsignificanceforbothfullsampleandsubsa mples are found F-test for differences inCFKPOSandCFKNEGcoefficientsare significant at 1% level shows that investment increases with internal cash flowswhen cash flows are above zero, but decreases in negative cash flows This againconfirms the U-shape relationship between investment and cash flows in Vietnam –asmalltransitioneconomy.

Figure 5.1:Fittedvalueofinvestment(IK)on cash flow(CFK)on afull sampleofVietnameselistedfirmsfortheperiodof2009–2014

For state-controlled firms, coefficients ofCFKPOSandCFKNEGare 0.141and-

0.061respectively,bothsignificant1%level.Thismeansthata10%increaseincashflowleadsto4 3 24 percentincreaseininvestmentwhencashflowispositiveand0.15 25 percent decrease in investment when cash flow is negative For non-statecontrolled firms, a 2.5 percent increase in investment when cash flow is positive buta 0.15 percent decrease in investment when cash flow is negative for every

Figure5.2.Fittedvalueofinvestment(IK)oncashflow(CFK)onasubsampleofVietn ameseStatecontrolledfirmsfortheperiodof2009-2014

24 GivenmeanofIKand CFKwhenCFKispositiveofstate controlledfirmsare0.177and0.545respectivelywhilethe numbersofnonstate controlled firmsare0.197and0.471 respectively.

25 GivenmeanofIKand CFKwhenCFKispositiveofstatecontrolledfirmsare0.159and0.545respectivelywhilethe numbersofnonstate controlled firmsare 0.170 and0.439respectively.

Figure5.3.Fittedvalueofinvestment(IK)oncashflow(CFK)onasubsampleofVietn ameseNon -statecontrolledfirmsfortheperiodof2009-2014

Previous year growth of sales has negative impact on level of investment forboth full sample and non-state controlled firms as shown by significantly negativecoefficients(-0.0015and-0.002respectively)buthavenoimpactoninvestmentlevelof state controlled firm as shown by insignificantly positive coefficient (0.0027).Positive coefficients ofSIZEfor all of samples at 1% significant level indicate thatlarger firms tend to invest more than small firms.LEVhas significantly positivecoefficients, meaning that higher leverage a firm has, more investment the firmmakes.HigherriskfirmsinvestlessasindicatedbyallnegativecoefficientsofBETAat 1% significant level except insignificance for state controlled firms Perhaps riskyfirms reduce their investment to protect themselves from uncertainty.AGEhas noimpactoninvestmentintheregression.

Table5.4:Analysisofinvestment- cashflowrelationPanelA:Regressionwithsquareofcashflo w(CFKSQR)

Full sample State controlled companies N on state controlled companies

YearDummy Yes Yes Yes Yes Yes Yes

Industryfixedeffect Yes Yes Yes Yes Yes Yes

PanelB:Regressionsseparatingpositivecashflow( CFKPOS )andnegative cashflow( CFKNEG)

Notes:Reportedcoefficientsarefixedfirmandyeareffectestimates androbust.IKisinvestmentratio.CFKisannualcashflowratio.CFKSQRisthesquare ofCFK

CFKPOS (*POS)is positive cash flow.CFKNEG (*NEG)is negative cash flow.SaleGrowthis proportion of change insales from yeart– 2to yeart–1.LEVis the beginning-of-period financial leverage, measured by total liabilities to total assets.AGEis the number ofyearssincethecompanylisted BETAisthe slope coefficientfromthemarketmodelestimatedusingdailystockand marketreturns:R i,t =   +  1 R m,t

+  it whereR it is the daily stock return of firmi, R m,t is the daily market return for day t *, **, *** respectively indicate significance at 10%, 5% and1%.Numberinparenthesesis z-statistic Source: Author’s computation companies companies

In conclusion, the evidence shows that U-shape curves for investment – cashflow relation for both full sample and subsamples of state controlled firms and non-state controlled firms are found.I also confirm overinvestment problem at state –controlled listed companies Investment of state controlled listed firms are moresensitivetocashflowsthanthatofnon-statecontrolledfirms.

5.4.3.2 Analysing effect of banking s y s t e m reformon investment – cash flow relation

Model (5.3) which is presented in Section 5.5.1.2 is used to conduct tests oneffect of bankingsystem reform on investment – cash flow relation Table 5.5 reportsregression coefficients of the model for full sample, and both subsamples: state – controlledlisted companiesandnonstate–controlledlistedcompanies.

Presence of foreign bank located in a region where foreign banks are allowedto do business changes company’s investment behaviors In compared with pre-reform period, both state controlled and non-state controlled companies make moreinvestment inpost- reformperiodindicatedbypositivecoefficientofBANK.

Studyconclusion

Along with international integration and WTO’s roadmap, Vietnam has toopen its door to foreign banks Presence of foreign banks puts a pressure to restructureVietnamesebankingsysteminthewaythatmakeslendingpracticemoretransparent, commercially oriented and prudential Consequently, overinvestment problem ofstate-controlled firms and underinvestment problem of non state controlled firmsexpecttobemitigated.

This research focus on investigating investment cash flow sensitivity in acontext of Vietnam as well as if investment behavior of Vietmamese companies isaffected by banking system reform which is measured by presence of foreign banks.Theresearchalsostudiesifbankingsystemreformreducespollitical- orientedinvestmentsofstate- controlledlistedcompanies,aswellasmiltigateunderinvestmentcausedbyfinancialcons traintatnonstate– controlledlistedcompanies.UsinganunbalancedpanelofcompanieslistingonHOSEandHNXf rom2009 and 2014, I find evidence for U-shape relation between investment and cashflows, both state controlled and non state controlled firms Banking system reformmeasuredbypresenceofforeignbankshassignigicantimpactoninvestmentbehav iourofVietnamesecompanies.Underinvestmentproblemofuncontrolledfirmsismitigate dbythereformsduetotheirbetteraccessibilitytoexternalfinancing.Unlike my expectation, overinvestment problem of state controlled firms is almostnotreducedwhichisdifferentwithfindingsbyTsaietal. (2014)Tsai etal.(2014).Itcan be explained that foreign bank presence in Vietnam is still very limited whilestate owned banks are still playing dominating role on the credit market. Besides,bothhighandlowgrowthstatecontrolledfirmsseemdonotchangetheirinvestmentbe haviorm u c h a f t e r t h e r e f o r m H o w e v e r , h i g h g r o w t h u n c o n t r o l l e d f i r m s signigicantlyincreasetheirinvestmentafterthereformswhilelowgrowthuncontrolled firms seems have to more rely on their cash flows in the post reformperiod.Theresultsalsoshowsasignificantchangefromnegativetopositiveinvest ment – leverage relation from pre reform period to post reform period for bothstateandnonstatecontrolledfirms,meaningthatfirminvestmentsarelessdependentoninternalfi nancinginthepostreformperiod.Thisimpactareespeciallysignificantforlowgrowthopportun ityfirms.

As a result, I conclude that banking system reform measured by presence offoreign banks has significant impact on both company’s investment and financingbehaviors The impacts are not the same for different group of companies.

I believethat the governmental authorities should create a better and fair play ground forforeign banks, allow them to do more business in Vietnam Moreover,financialderegulationandliberationshouldbeimprovedsothatfinancialmarkettrulybec omes a efficient financing chanels for corporate investments This will help toallocateassetseffectively,attractmoreprofitableinvestmentsfrombothstatecontrolle dandnonstatecontrolledfirms,consequentlystimulateseconomicdevelopment.

Chaptersummary

ThisChapterpresentsastudyinvestigatingtherelationshipofinvestmentandcash flow under the context of banking system reform in Vietnam This Chapterdetails the motivation of the study as well as literature review of the topic, based onwhich research hypotheses are developed The research methodology (Section 5.5)develops empirical models, measurements of dependent, explanatory and controlvariables, as well as data source Main data source is from Thomson Reuters database.Sample procedures are also explained how to determine final samples.

Researchresultsarealsocarefullydiscussedtowithdrawsomeimplicationsontherelationshipbet weenfirm’sinvestmentandcashflowsofbothstatecontrolledanduncontrolled companies.Therelationshipbetweeninvestmentandleverageisalsoanalyseda nddiscussed.

Severalrobustnesstestsareconductedtocheckthestudy’sfindings.Thesetestinvolving using difference - GMM estimation to control the potential of endoneigityproblem; using different criteria to define state controlled companies or high-growthcompanies.

Introduction

This thesis investigates the firm’s investment – cash flow relationship underthe two different contexts: state ownership and banking system reform in a smalltransitioneconomy–

Vietnam,whicharepresentedintwoseparatestudiesinChapter4 and Chapter 5 respectively. And this final chapter discusses the thesis’ mainfindings, contributions, implications, limitations, and future research directions ofeachstudy.Section6.2andSection6.3reviewthetwostudiesrespectively,andthenSection6.4concludestheChapter.

Firm’sinvestment– cashflowrelationshipinthecontextofstateownershipinVietnam

ThepurposeofthisstutyistotesttheU-shaperelationshipbetweeninvestment and cash flow as well as to investigate if the relationship is affected bystate ownership. Using a sample of listed firms on Vietnam’s stock exchanges, theHo Chi Minh Stock Exchange (HOSE) and the Hanoi Stock Exchange (HNX), forthe period 2008–2015, I evidence that investment–cash flow curves for Vietnamesecompanies in general, both with and without state ownership are U-shaped. TheresultsalsoshowhighercashflowsensitivityofinvestmentatSOEs,implyinghigherfinancial contraints, compared with non-SOEs because the former have social andpolitical responsibilities At SOEs, sensitivity is higher when cash flows are positivethanw h e n c a s h f l o w s a r e n e g a t i v e T h e r e s u l t s a l s o s h o w t h a t p r i v a t e l y o w n e d companies increase investment more when they have a positive rather than negativecash flow, but the investment behavior of state-owned companies is the opposite.They reduce investment more when they have negative cash flow than when cashflow is positive Furthermore, the study results show that bigger as well as riskiercompaniesmakelessinvestmentthansmallerorlessriskyones.

Differentinvestmentbehavioursarefoundincompanieswithhighversuslowgrowthopp ortunities.InvestmentbybothSOEandnon-SOEhighgrowthcompaniesis less dependent on internal cash flow High growth SOEs have higher cash flowsensitivity of investment than non-SOEs However, low growth SOEs have highercash flow sensitivity of investment than non-SOEs, suggesting that the social andpoliticalinvestmentsbytheformermaybeinefficient.

Furthermore,thestudyalsoshowthatprevious-periodleveragehasapositiveeffect on SOEs High growth SOEs have a soft budget constraint, but both highgrowth non-SOEs and low growth SOEs are more reliant on internal cash flows tofinancetheirinvestments.

The study have made following contributions to current literature First, thestudy shed further light on the implications of financial constraints by investigatingthe association between state ownership and corporate investment– cash flow in asmalltransitionaleconomysuchasVietnam.Second,previousstudiesexaminingthisimportant issue have generally been conducted in the context of developed countriesorChina(Clearyetal.,2007;Firthetal.,2012;Tsaietal.,2014).

The results of the study again confirm important roles of government oncorporate investment decisions, especially under the context of financial constraint.Havingthestateownershipwithcertainprivilegesinthecontextoftransition economy, SOEs are expected to be less financially constrained because they havehigher accessibility to the external capital, meaning less dependence on internalcapital However, the findings show the contradict results with higher cash flowsensitivity of investments, especially when they have positive cash flows althoughtheymighthaveeasieraccessibilitytotheexternalcapitalmarket.Itimpliesfollo wings:

- Thereisadifferentdependenceoninternalcashflowsbetweenstatecontrolledand uncontrolled companies State ownership may increase firm’s financialconstraints of SOEs because they may have to implement their political andsocialresponsibilities.

- Although Vietnam has had stock markets where companies can raise fundsfrom issuing new equities But stock markets are still very young, immature,and risky which have not been ideal places for firms to raise funds for lastcoupleofyears.So,themainsourceofexternalcapitalforfirmshasbeenbankloans.How ever,theaveragedebtratioofSOEsisrelativelyhigh,sotheyhaveto rely more on their own internal funds, leading to higher sensitivy to cashfows,especiallywhentheyhavepositivecashflows.

From the above implications, it seems that political and social responsibilitiesimposed on SOEs may become their financial constraints which may affect to firm’sinvestments.Therefore, Iwouldliketo makethefollowingrecommendations:

- Graduallyreducingpercentageofstateownershipinequitizedenterprisesandto accelerate equitization process both in term of quality and quantity Thegovernment should only maintain their controlling ownership in strategicindustriesorcompanieswhicharestrategicallyrelatednationalsecurity,national defense or social security The political and social responsibilityshouldbeimplementedviaindirecttoolssuchastax.

- The government should create certain mechanism in which SOEs can onlyfocus on their business functions, via which improve their efficiency andprofitability.Thepoliticalandsocialresponsibilityshouldbeimplementedviaindirectt oolssuchastax.

The study’s findings can provide some useful impications for academics,managers, investors and policy makers Regarding academics, the study can be usedto be teaching and learning materials for finance students Managers and investorsmay refer the findings to make better financial decisions Policy makers may use thefindings as reference to make relevant policies to improve business environmentwhich have transparency, fair playground for all kinds of businesses as well as toimproveeffectivenessofgovernment stakesincompanies.

This study has several limitations in terms of its timeframe, sample sizes andmethodologyasbelow:

- In term of time period, the study only covers for the period of 2008 – 2015,notlongperiodoftime.Itisbecausethestudywasconductedin2016,soIusedata upto

2015 Otherwise, although the Vietnamese stock markets opened inJuly 2000 but actually its operation has only become vibrant since 2007 witha signigicant increase in number of listed companies, especially equitizedcompanieswithpresenceofstate–ownership.

- In terms of sample sizes, the data used in this study are extracted from financialstatementsoflistedcompanies.Manynon- listedequitizedfirmshavenotbeenincluded in the analysis due to its unavailability of data Otherwise,listedcompaniesa r e c u r r e n t l y co n c e n t r a t e d o n s o m e i n d u s t r i e s s u c h a s constructions, real estates, commerce, plastic and chemicals, food processingandbeverage, etc

- In terms of methodology, the thesis mainly used the quantitative method anddoes not take into account the qualitative factors which may have impact ontheinvestment– cashflowrelationssuchasmanagerialattitudes(e.g.managerialoptimistics/ pessimistics).

With these limitations, I expect that the future studies may have broadersample size, including variety of companies and length of time as well as includingsomequalitativemethod.

6.3 Firm’s investment – cash flow relationship in the context of bankingsystemreformin Vietnam

Along with the world economic integration, according to WTO accessionroadmap, Vietnam has to open the banking sector to foreign banks This study aimsto test whether the investment behaviors of Vietnamese listed companies is affectedbybankingreform,especiallywhetherbankingreformwillhelpreducetheproblemsof political-oriented investment, which are listed by the state-controlled enterprises,andatthesametimeeliminateunder- investmentissuesduetothefinancialconstraintof the listed state-uncontrolled companies? Using an unbalanced panel of companieslistingonHOSEandHNXfrom2009and2014,IfindevidenceforU-shaperelationbetween investment and cash flows, both state controlled and non state controlledfirms.Bankingsystemreformmeasuredbypresenceofforeignbankshassignigicantimpac toninvestmentbehaviourofVietnamesecompanies.Underinvestmentproblemofuncont rolledfirmsismitigatedbythereformsduetotheirbetteraccessibility to external financing Unlike my expectation, overinvestment problemofstatecontrolledfirmsisalmostnotreducedwhichisdifferentwithfindingsbyTsai et al (2014)Tsai et al (2014) It can be explained that foreign bank presence inVietnam is stillvery limited whilestateowned banksares t i l l p l a y i n g d o m i n a t i n g r o l e on the credit market Besides, both high and low growth state controlled firms seemdo not change their investment behavior much after the reform However, highgrowth uncontrolled firms signigicantly increase their investment after the reformswhile low growth uncontrolled firms seems have to more rely on their cash flows inthe post reform period The results also shows a significant change from negative topositive investment – leverage relation from pre reform period to post reform periodfor both state and non state controlled firms, meaning that firm investments are lessdependent on internal financing in the post reform period This impact are especiallysignificant for low growth opportunity firms As a result, it can be concluded thatbankingsystemreformmeasuredbypresenceofforeignbankshassignificantimpactonbothco mpany’sinvestmentandfinancingbehaviors.Theimpactsarenotthesamefordifferentgroupofcom panies.

Therefore, the reform of the banking system has had a positive impact oncorporate governance of Vietnamese listed companies However, different groupshavedifferenteffects.

This study contributes additional empirical evidence to the financial literatureon the topic of impact of banking system reform on investment – cash flow relation,especiallyinacontextofsmalltransitioncountry.Mostof myfindingsaresimilartothe previous study results except that overinvestment problem of state controlledfirms is not mitigated in the post reform period Perhaps, in the post reform periodstate controlled firms are still main customers of state-owned local banks who aredominating the credit market.Moreover, presence and operation of foreign banks inVietnamisstilllimited.

Thestudycontributedtoexistingtheoriesaswellasexpandedpreviousstudieson the impact of banking system reform on the relationship between cash flow andinvestment of listed companies in Vietnam. The study also brought about reallyuseful results for policy makers as well as Vietnamese enterprises in managing anddeveloping the banking system, creating a healthy capital mobilization channel forbusinesses as well as help businesses make financial decisions to add value to thebusiness.

Based on the above research results, I propose a few policy suggestions asfollows:

• Underthecontextofpresentinternationaleconomicintegration,theopeningof the financial system is indispensable, which requires deep and broad reforms inthenationalfinancialsystem.However,inordertocarryoutthereformsproactivelyandeffect ively,itisnecessarytoimprovethecompetitivenessofthebankingsystemthroughthe healthybankingoperationsandstrict managementofbaddebts.

• Stepbystepopeningandliberalizingthefinancialsectortointegratedeeplyandbroadl ywiththeworld,therebymakingitmoretransparentandhealthierforthenational banking system This opening also helps to reduce businesses to accessfundsmoreeffectively,makingbetterinvestmentdecisions.

• Forbusinesses,differentgrowthopportunitiesmayhavedifferentcashflowsensitivity ofinvestmentaswellasleveragesensitivityofinvestment,sowhenthereisagoodinvestmento pportunityinthefuture,businesses maychoosealowleveloffinancial leverage to avoid debt overhang, so that it cannot mobilize additionalfundingforfinancingtheopportunities.

This study has several limitations in terms of its timeframe, sample sizes andmethodologyasbelow:

- Intermoftimeperiod,thestudyonlycoversfortheperiodof2008 –2015,ina relatively short time due to the operation of the foreign banking system inVietnam not long period of time It is because the study was conducted in2015, so I use data upto 2014 and Vietnam has not actually opened its financialsectortotheworlduntilafterjoininttheWTOin2007.

- Intermofsamplesize,thedatausedinthisstudyareextractedfromfinancialstatementsofl istedcompanies.Manynon-listedequitizedfirmshavenotbeenincluded in the analysis due to its unavailability of data Otherwise, listedcompaniesarecurrentlyconcentratedonsomeindustriessuchasconstructions , real estates, commerce, plastic and chemicals, food processingand beverage, etc In addition, the topic has only been studied for businessesingeneral,butthereisnoevaluationforeachspecificindustry.

- In terms of methodology, the thesis mainly used the quantitative method anddoes not take into account the qualitative factors which may have impact ontheinvestment– cashflowrelationssuchasmanagerialattitudes(e.g.managerialoptimistics/ pessimistics).Furthermore,variableproxiesforbanking system reform using foreign bank presence includes branches, outlets,representativeofficesmaynotcovertherealpressuresforlocalbanktoreformtheir operations Accordingly, presence and operations of foreign banks inVietnam are still not widespread yet, mainly located in big cities and mainlyserveforforeignclients.

With these limitations, I expect that the future studies may have broadersample size, including variety of companies and length of time,as well as includingsomequalitative methodandmaybeconductedforsomespecificindustries.

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Results of study 1: Firm’s investment – cash flow relationship in thecontextof state-ownership in Vietnam

State_05 mean p50 min max sd

pwcorrIKCFKCF KNEG C FKPOSS GQSIZE LEV AGE BE TAS tate _05 GO V,star (.01)

IK CFK CFKNEG CFKPOS SG Q SIZE

IK CFK CFKNEG CFKPOS SG Q SIZE LEV AGE BETAS t a t e _ 0 5 GOV

Examiningim pa ct o f s t a t e ownership on in ve st me nt – ca sh fl ow re la ti on sh ip a t d i f f e r e n t investmentoportunities

IK IK IK IK IK IK

IK IK IK IK IK IK

IK IK IK IK IK IK

IK IK IK IK IK IK

Resultsofstudy2:Firm’sinvestment–cashflowrelationshipinthecontext ofbankingsystemreforminVietnam Descriptivestatistics

sumIKCFK T O BI NQ ALEVA GEBE TA

Variable Obs Mean Std.D e v Min Max

IK CFKPOS CFKNEGS a l e G r ~ h LEV AGE BETA

IK CFKPOS CFKNEGS a l e G r ~ h LEV AGE

IK CFKPOS CFKNEGS a l e G r ~ h LEV AGE

IK CFKPOS CFKNEGS a l e G r ~ h LEV AGE BETA

IK CFKPOS CFKNEGS a l e G r ~ h LEV AGE BETA

IK CFKPOS CFKNEGS a l e G r ~ h LEV AGE BETA

R-sq:w i t h i n = 0.0 121 Obsp er gr oup: min= 1 between= 0 0 0 0 1 avg= 3.9 overall= 0 0 0 6 8 max= 5

_cons 2008878 1472872 1.36 0.173 -.0879804 4897559 sigma_u 42371649 sigma_e 6422438 rho 30326317 (fractiono f varianced u e to u_i)

R-sq:w i t h i n = 0 0 13 2 Obsp e rgrou p:mi n = 1 between= 0 0 0 0 2 avg= 3.9 overall= 0 0 0 7 6 max= 5

_cons 2011257 1472434 1.37 0.172 -.0876567 4899081 sigma_u 42364878 sigma_e 64205246 rho 30332155 (fractiono f varianced u e to u_i)

Coefficients:g e n e r a l i z e d l e a s t s q u a r e s Panels: heteroskedasticCorrelation: noa utoc orrelation

Estimatedc o e f f i c i e n t s = 639 Obsp er grou p:mi n = 1 avg= 3.870515 max= 5

IK IK IK IK IK IK

esttabMH1 MH2MH3MH4MH5MH6,star(*0.10**0.05***0.01)

IK IK IK IK IK IK

Impact ofbankingsystem reformonlistedstateuncontrolledcompanies’ investment –cashflowrelation