(Luận văn) determinants of corporate investment decisions, the case study of vietnam , luận văn thạc sĩ

t to UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM ng hi INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS ep w n VIETNAM- NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS lo ad ju y th yi pl DETERMINANTS OF CORPORATE INVESTMENT DECISIONS: THE CASE STUDY OF VIETNAM n ua al n va fu ll oi m A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS at nh z z By k jm ht vb PHAN THI ANH DONG om l.c PHAN DINH NGUYEN gm Academic Supervisor: an Lu n va re HO CHI MINH CITY, May 2012 t to ng Certification hi ep "I certificate that the substance of the thesis has not already been submitted for any w degree and is not currently submitted for any other degree n lo ad I certify that to the best of my knowledge and help received in preparing the thesis and yi Signature ju y th all sources used have been acknowledged in the thesis." pl n ua al n va ll fu Phan Thi Anh Dong I 2012 oi I m Date: at nh z z k jm ht vb om l.c gm n a Lu n va t re t to Acknowledgements ng hi ep This thesis marks the completion of my Master degree in Development Economics at w Vietnam-Netherlands project n lo I am truly grateful to my supervisor, Dr Phan Dinh Nguyen, for his help and support ad y th over the period of my thesis Without his help in constructive follow-up, insightful and ju helpful comments, I would not have been successful in completing this master thesis yi pl I would like to express my deepest gratitude to all people and organizations that al ua supported, provided assistance and information in order to make this thesis n Furthermore, I deeply appreciate the lecturers and staff of the project, who helped va n improve my knowledge and fulfill the program I am also grateful to my close friends ll fu for their warm encouragement oi m Finally, I further wish to thank my family members who have greatly supported me nh at during my study Their love and support mean a great deal to me I would like to z reserve the pleasure of the graduate for them Thank you very much to all of you! z k jm ht vb om l.c gm n a Lu n va re ii t to Table of Contents ng Certification i hi ep Acknowledgements .ii w Table of Contents : iii n lo List of Tables v ad y th ' List of Abbreviations vi ju Abstract vii yi pl CHAPTER 1: INTRODUCTION al n ua 1.1 Problem statement n va 1.2 Research Objectives ll fu 1.3 Research questions oi m 1.4 Scope and Methodology of Research at nh 1.5 Research structure z CHAPTER 2: LITERATURE REVIEW z ht vb 2.1 Theoretical literature k jm 2.1.1 Irving Fisher's Theory oflnvestment gm 2.1.2 J.M Keynes theory: Marginal Efficiency oflnvestment om l.c 2.1.3 Jorgenson's Optimal Theory 10 2.1.4 James Tobin's q theory oflnvestment 12 an Lu 2.2 Empirical literature · ···· ······················ 13 iii t re 3.1 Data sources 21 n va CHAPTER 3: RESEARCH METHODOLOGY 21 t to 3.2 Variables 21 ng 3.2.1 Dependent variable 22 hi ep 3.2.2 Independent variables 22 w 3.3 Modeling specification 28 n lo 3.4 Methods of estimation 29 ad y th 3.5 Conclusion 32 ju CHAPTER 4: EMPIRICAL RESULTS AND DISCUSSION 33 yi pl 4.1 Descriptive Statistics of dependent and independent variables 33 al n ua 4.2 Correlation analysis 34 n va 4.3 Empirical Results 36 ll fu 4.3.1 Examining the determinants of corporate investment decisions using FEM estimators oi m at nh 4.3.2 Examining the determinants of corporate investment decisions using GMM estimator 42 z CHAPTER 5: CONCLUSION, RECOMMENDATION AND LIMITATION 47 z vb jm ht 5.1 Conclusion 47 5.2 Policy Recommendation 50 k gm 5.3 Limitation ·51 l.c References 52 om Appendix 58 an Lu n va re iv t to List of Tables ng hi ep Table 2.1: Empirical Studies about Determinants of Corporate Investment Decisions 59 w Table 3.1: A Set of Dependent and Independent Variables 23 n lo ad Table 4.1: Basic Statistics of the Key Variables 34 ju y th Table 4.2: Correlation Coefficients ofthe Explanatory Variables 35 Table 4.3: Regression Analysis oflnvestment Equations 36 yi pl Table 4.4: GMM Estimator oflnvestment Equation 42 n ua al n va ll fu oi m at nh z z k jm ht vb om l.c gm an Lu n va re v t to List of Abbreviations ng hi ep Fixed Effects FE Fixed Effects Model w FEM n lo Generalized Method of Moment HET Heteroskedasticity ad GMM ju y th Instrument Variables yi IV pl Larange Multiplier M&M Modigliani and Miller MEl Marginal Efficiency of Investment Pooled OLS Pooled Ordinary Least Square RE Random Effects REM Random Effects Model VAR Vector Auto Regressive WTO World Trade Organization n ua al LM n va ll fu oi m at nh z z k jm ht vb om l.c gm an Lu n va re vi t to Abstract ng hi ep The purpose of this study is to examme the impact of cash flow, investment opportunities, and other financial factors on corporate investment decisions using panel w n data for Vietnamese listed firm from 2006-2010 This research adopts static model lo ad employing Fixed Effects which the most appropriate model in analyzing panel data y th through specification tests The findings indicate that cash flow is a key determinant of ju corporate investment decisions However, investment opportunities are positive and yi pl insignificant related to investment decisions Other financial factors such as fixed ua al capital intensity, business risk, firm size, leverage are all significant in predicting n corporate investment decision Moreover, the study also adopts dynamic model va utilizing Generalized Method of Moments The results confirm that cash flow is a main n ll fu element in making corporate investment decisions Nevertheless, investment oi m opportunities are not significant in determining enterprises investment decisions nh Besides, the lagged level of investment is negative and statistically significant at correlated with investment decisions at firm level Other financial factors, namely fixed z z capital intensity, sales growth, firm size and leverage are all significant in influencing vb k jm ht corporate investment decisions gm om l.c Keywords: Corporate Investment, Cash Flow, Tobin's q, Financial Constraint an Lu n va re vii t to CHAPTER 1: INTRODUCTION ng hi 1.1 Problem statement ep The goal of any enterprises when operating as a business is oriented towards w n maximizing the value of the firm, which in tum increases the return of investment for lo ad shareholders In order to achieve this goal, companies must implement a variety of y th measures, including the selection of an appropriate financial structure This is the most ju important finance function amongst the modem items It implicates decisions to yi commit sources of financing to total assets of the firms Capital expenditure or pl n reasons: ua al investment decision has significant importance to the firm because of the following va n (1) it impacts not only growth of firms in long run but also influences firm's fu ll risks; oi m (2) it involves liability of a large amount of capital; at nh (3) it is unalterable, or alterable at heavy financial loss; and z z k jm ht vb (4) it is one of the most difficult decisions to be taken by the firm Because of its role in the firm value, many researchers have studied this issue For gm instance, Modigliani and Miller theorem (1958) documented that there has been no l.c relation between the financial structure and financial policy for real investment om decisions under certain conditions, because the financial structure would not influence a Lu the investment costs According to the q-theory of Tobin (1969) and extended into a n proposed model by Hayashi (1982), investment demand could be predicted by the ratio opportunities re market assumptions; and its market value could also explain further investment n va of the market value of the firm's capital stock to its replacement cost under perfect t to Nonetheless, the results of previous studies in different countries using the q-theory of ng investment are mixed In particular, Hall et al (1998) studied the key factors which hi ep affect investment in scientific firms for the United States, France and Japan during the period 1979-1989, and found that the profit, sales, cash flow and investment have w n connections, but differs for each country Aquino (2000) found contrary results that lo ad there was no significant relationship between investment rate and q He also showed ju y th that there is an insignificant relationship between the investment rate and cash flow yi The Vietnamese government has implemented a series of policies aimed at improving pl the business environment for enterprises in the country This comes in the wake of al n ua Vietnam's joining of the WTO in 2007, and since then, a variety of companies have va invested in multi-sectors businesses and spread-out, in order to become conglomerates n This has conversely created a trend These businesses have been investing in several fu ll projects which not relate directly to their strong main sectors such as real estate and m oi stocks, while the management capacity and inexperience of enterprises, the nh government's institutions, and infrastructure have not developed as fast as the multi- at z sector and spreading investments z vb ht Instead of investing directly in foundational material such as machinery, construction managem~nt so as to develop their businesses, they have chased the trend of gm resource k jm and renovation of factories, research and development (R&D), and improving human l.c the multi-sector and spread investment so that they can obtain benefits immediately As om a consequence, the efficiency in investment of corporate businesses lowers, and may even be at the level of a loss Because of this, it can cause stagnant equity, and a Lu influence the financial situation of the firms This could ultimately lead to bankruptcy; n n va as in the cases ofVINASHIN and EVN2 • VINASHIN is a Vietnam Shipbuilding Industry Group This Group involved in many projects in several different fields of economics beside its main business - shipbuilding; for instance, sea transport, ports, steels, re t to Kalatzis (2006), Adelegan and Ariyo (2008), Jangili and Kumar (20 10), Li et al ng (2010), Nair (2011), Ruiz-Porras and Lopez-Mateo (2011) hi ep Secondly, Tobin's q is mostly positive and statistically insignificant related to w investment decision across specifications, namely FEM with robust standard errors and n lo GMM This result reveals that Tobin's q or investment opportunity does not stimulate ad investment activities of listed firms in the Vietnamese stock market y th ju Thirdly, fixed capital intensity is absolutely positive and statistically significant yi associated with corporate investment decision across all estimators It indicates that pl ua al fixed capital intensity helps investment activities be intensive The finding also affirms n that fixed capital intensity is a major determinant of investment decisions for va improving product quality and productivity n fu ll Fourthly, sales growth and investment have a positive and statistically insignificant m oi relationship across FEM, FEM with robust standard errors, and GMM regressions It at nh reveals that sales growth does not help stimulate investment activities of firms This z result can be explained as follows: because this growth is small and potential z vb profitability is not as expected; hence, the firms will be careful in making investment k jm ht decisions Fifthly, business risk is almost negative and statistically significant associated with gm investment decisions across estimation methodologies, namely FEM and FEM with om l.c robust standard errors This result implies that business risk is the main determinant of corporate investment decisions The reason is that during this period, firms are a Lu influenced by crises (financial crisis and debt crisis) in the world and difficulties of n Nevertheless, in the GMM technique, business risk variable becomes less significant in n va Vietnamese economy Thus, they are afraid of investment in risk projects re statistics 48 t to Sixthly, the connection between firm size and investment decision is definitely ng negative and significant in statistics across estimators It demonstrates that firm size is hi ep a key element in making investment decisions at the firm level Besides, it implies that the larger the firms are, the less investment they will make due to weak at management w n and leadership capacity in large firms This result is consistent with the finding by lo ad Ninh L.K et al (2007), Bokpin and Onumah (2009) y th Seventhly, the relationship between leverage and investment decision is truly positive ju yi but mixed in statistics across estimation methodologies Particularly, this insignificant pl association is pointed out in FEM However, the link between investment and leverage al n ua is statistically significant in FEM with robust standard errors and GMM It portrays va that although this is a difficult period, banks still believe in performance of firms with a n good credit history; and management board has a faith in potential profitability to fu ll service obligation This helps firms be incentive investment decisions This result is m oi persistent with the finding by Azzoni and Kalatzis (2006), Ninh L.K et al (2007), nh Adelegan and Ariyo (2008), Jangili and Kumar (2010), and Nair (2011) at z z Next, the combination between leverage and concentration ownership is absolutely vb negative and statistically significant correlated with investment activities across ht k jm estimators except FEM It implies that despite state-owned firms might be easier to l.c combination in stimulating investment decisions gm access capital markets than non-state owned ones; this interaction is a substitute om Finally, the first lag of investment is also an element which influences investment n findings of Carpenter and Guariglia (2008), and Bokpin and Onumah (2009) a Lu decisions at the firm level in the GMM technique This result is consistent with n va re 49 t to 5.2 Policy Recommendation ng hi On the basis of the empirical results, few suggestions on the improvement of ep investment decisions at the firm level are given as follows: w Firstly, the firms need capital to finance for their investments in order to eliminate n lo outdated technology and develop the scale The capital sources can be from two ad channels such as internal and external funds Therefore, for internal fund, enterprises y th ju themselves must have transparent information and financial statements with the yi efficient businesses to create the confidence for shareholders to invest continuously pl ua al and more In other words, all kinds of firms (state-controlled or non-state owned enterprises, small or large firms) must be required to publish annual reports audited by n ll fu capital for investment n va independent and reputable accounting firms From that, the firms can mobilize more oi m For external fund, it is necessary to enhance borrowing capacity of the firms, especially at nh in non-state owned enterprises Despite the Vietnamese government usually states its commitment to support the non-state owned enterprises, in fact the state-controlled z z firms keep receiving many advantages, especially in capital; whilst the non-state vb k jm ht owned firms continue to suffer from the harassment of government officials, especially in taxation and customs areas The government must make good the unbiases by gm ensuring that resources are allocated to those who can utilize them most efficiently om l.c Furthermore, it is essential to remove aversion loans to non-state enterprises of the banking system In order to this, a legal, which is related to these firms, need to be a Lu established and strengthened to limit the risks to financial and credit system lending to n these enterprises Besides that, banks need to improve processes and procedures to n va facilitate easier for businesses in the mortgage assets for loans re 50 t to Finally, the government, especially in banking, should help the enterprises maintain a ng proper system of standard books, make proper business planning and business strategy hi ep From that, it can improve the exchange of information between enterprises and banks w 5.3 Limitation n lo Within this research, the limitations will be highlighted with a short description ad y th First of all, the scope of the thesis is limited due to time and resource limitation; hence, ju this research employs data of listed firms on Vietnamese stock market Although their yi pl financial statements published to the public are audited independently, but it is not sure ua al that these reports are accuracy, transparency, clearance without being dominated by a n person or a benefit group in reality Therefore, the values of the variables in the model va calculated from these reports are unavoidable bias n fu ll Added to this, using the period of years (2006-20 10) is too short whilst several firms m oi have operated very long before this period This cannot reveal all the nature of the nh issue of investment decisions, especially in this sensitive period of financial crisis at z Furthermore, firm size variable measured by the natural log of the total employees is z vb more appropriate and exactly than by the natural log of the total of revenues However, k jm ht the thesis cannot obtain the number of employees in some companies; thus, the results of this variable might be unavoidable bias gm l.c Furthermore, the recommendations of this thesis are mainly relied upon data analysis results, academic literatures, suggestions of academic scholar and my best knowledge om The findings, therefore, can be aware of limitation a Lu n Finally, due to time and resource limitation, the research cannot collect information va about management capability of the enterprises, educational level of staff, and macro n limitations will be overcome in the further research 51 re variables which perhaps affect corporate investment decisions Therefore, with these t 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