The impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraints

The impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraintsThe impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraints

HO CHI MINH CITY UNIVERSITY OF BANKING

BUI NGOC MAI PHUONG

THE IMPACT OF CASH FLOW ON INVESTMENT IN

VIETNAMESE COMPANIES: THE ROLE OF WORKING CAPITAL WITH FINANCIAL CONSTRAINTS

SUMMARY OF THE THESIS

Major: Finance - Banking Code: 9 34 02 01 Scientific Instructor: Assoc Prof Dr DANG VAN DAN

HO CHI MINH CITY - 2024

CHAPTER 1: INTRODUCTION

1.1 Urgency of the research topic

Maximizing the value of the firm is considered the most important goal of financial management To achieve this goal, managers will make decisions related to corporate finance such as investment, financing, distribution or asset management, of which the investment decision is considered the most important (Ross et al., 2022) In an imperfect capital environment, theories related to investment decisions and capital structure have affirmed that: investment decisions of firms are influenced by external factors such as the development of the capital market, the level of economic integration, or internal factors of firms such as the scale of capital sources, the level of access to funding sources, firm lines Especially, in countries with developing financial markets, the level of economic integration is not high, firms face many barriers in mobilizing external funding sources at reasonable costs, along with uncertainty about internal funding sources from internal cash flow (CF), leading to investment decisions having a close relationship with funding decisions (Nicolas, 2022) From the theories between investment decisions and corporate financial characteristics, as well as the trade-off between capital costs and investment opportunities, economists have opened up empirical research directions on the important role of funding sources in investment decisions, aiming to provide the basis for implications to help firms stabilize investment activities in the long term, limiting fluctuations in capital sources on these decisions The study of Fazzari et al (1988) is one of the first publications to address the above issue by measuring the sensitivity of investment to CF After that, the results of many studies conducted worldwide and in Vietnam also supported the argument of Fazzari et al (1988) that: changes in internal CF have an important impact on managers' investment decisions, the more difficulty a firm has in mobilizing external capital at reasonable costs, the greater the impact of CF on investment

Based on this situation, some subsequent studies have been conducted to find ways to reduce the sensitivity of investment to capital sources In addition to studies that address methods to improve access to external financing, the first study by Fazzari & Petersen (1993) demonstrated the role of working capital (WC) in reducing the impact of CF on investment Over the years, Vietnam has achieved many important achievements in economic development thanks to promoting openness, integrating into the world economy, actively participating in the network of free trade agreements, creating conditions to attract foreign

direct investment flows into many domestic fields, including indirect investment flows into the stock market (Nguyen & Tram, 2021) From there, it creates diversification in capital mobilization channels, supporting funding sources for firms to increase investment opportunities (Nguyen et al., 2020)

However, with global systemic risks, the domestic economy and financial market have also suffered many adverse impacts, affecting the ability to access funding sources, production and firm activities and investments of the firm system (Ministry of Planning and Investment, 2023) Since 2019, according to the Provincial Competitiveness Index Report PCI 2022 and

2023 (Edmund J Malesky et al., 2023, 2024), the level of optimism of firms about expanding production and firm in the next two years tends to decrease and access to credit is the biggest problem that firms in Vietnam are facing

Although our country's financial market has shifted in the structure of the financial system,

it still basically relies on banks (Dao Minh Thang, 2023) In addition, the scale of the corporate bond market, although growing continuously over the years, is still quite modest compared to other countries in the region and is not commensurate with its potential, limiting the ability of the corporate system to access the capital market (Vietnam Bond Market Association, 2023)

Thus, it can be concluded that, with many unfavorable factors from the world affecting the domestic economic situation in recent years, Vietnamese firms in general have encountered many difficulties and limitations in finding funding sources from bank credit channels, or through bond and stock channels From there, it significantly affects the investment activities and CF of firms Therefore, like many other economies in the world, researching to find factors that reduce the dependence of investment on internal CF, helps firms to proactively source funding to ensure investment activities are necessary in the current context of Vietnam

In addition, Vietnamese firms operate in the same financial market conditions and are governed by the same economy However, with different management and support policies from functional units for each type of firm operating in different firm sectors or operating areas, firms also have their opportunities, advantages and challenges when seeking external funding sources to implement investment decisions (Edmund J Malesky et al., 2023, 2024) Therefore, in addition to studying the impact of capital sources on investment, considering the influence of financial constraints (FC) and the level of access to funding sources on this relationship in different groups of firms also brings certain meanings, and is necessary in a country with many limited financial markets like Vietnam

On a global scale, in regions with developed or developing financial markets, including Vietnam, although there have been many studies mentioning factors that help firms increase their ability to access external funding sources, reduce the sensitivity of investment to internal capital sources, only a few studies have mentioned the role of internal factors of WC in improving the impact of CF on investment in groups of firms with different levels of FC According to the author's summary, there is currently no study that fully focuses on the regulatory role of WC in the relationship between investment and CF in firms with different levels of FC Therefore, the issue of the regulatory role of WC in reducing the dependence of investment on CF is the gap that the author wants to consider in the thesis That is the reason

for the author to carry out the thesis: "The impact of cash flow on investment in Vietnamese companies: The role of working capital with financial constraints"

The thesis sets out the following specific objectives to be addressed:

- Assessing the impact of CF on investment and WC at firms with FC

- Assessing the impact of WC on investment at firms with FC

- Assessing the role of WC on the impact of CF on investment in firms with FC

- Proposing policy implications to minimize the impact of CF and FC on investment decisions, contributing to increasing the stability of investment activities in firms

1.3 Research questions

- How does CF affect investment and WC in firms with different levels of FC?

- How does WC affect investment in firms with different levels of FC?

- What role does WC play in the impact of CF on investment in firms with different levels of FC?

- What policy implications are proposed to minimize the impact of CF and FC on investment decisions, contributing to increasing the stability of investment activities in firms?

1.4 Research object and scope

- Research object: is the impact of CF, WC on investment, and at the same time analyze

the role of WC on the impact of CF on investment at firms with FC

- Scope of space and period: includes non-financial firms listed on the Vietnamese stock

market at HOSE and HNX that have published annual audited financial statements in the period of 11 years, from 2012 to 2022

- Scope of content: the thesis studies the one-way impact of CF on investment and WC,

the one-way impact of WC on investment, the one-way interaction impact of WC management policy on CF of firms with FC, thereby analyzing the role of WC on the impact

of CF on investment of firms with FC; the thesis uses the cash dividend payout ratio to classify the level of financial limitations of firms and limits the investment category during the period

of a firm to changes in tangible fixed assets arising during the period such as property, plant and equipment

1.5 Research methods and data

1.5.1 Research methods

The thesis uses quantitative research methods to handle research problems, by running multivariate regression models on panel data sets using the system generalized moment estimation method (SGMM)

1.5.2 Research data

The research data used are secondary data of firms collected from Fiinpro and data related

to macroeconomics taken from World Development Indicators (WDI)

1.6 Research contributions

- Scientific contributions: the thesis has added evidence on the importance of internal

capital in implementing investment decisions and demonstrated the role of WC on the impact

of CF on investment, through the results of testing the moderating role of WC on the impact

of CF on investment of Vietnamese firms in the period 2012 to 2022 the thesis also provides evidence confirming the difference in the impact of CF on investment and the moderating

role of WC on this relationship between firms with different levels of FC

- Practical contributions: the contribution of the thesis is the basis for policymakers to

propose reform directions and develop the capital market in Vietnam, thereby improving access to capital for firms, especially for firms facing FC At the same time, it proposes implications for administrators on the combination of WC management policies, financing decisions and investment decisions to improve the level of FC, minimize the influence of

internal capital sources, and contribute to maintaining and increasing investment in firms 1.8 Thesis structure

The thesis is presented in 5 chapters, with the main contents as follows:

- Chapter 1: Introduction

- Chapter 2: Theoretical overview and Literature review

- Chapter 3: Research methods

- Chapter 4: Research results and discussion

- Chapter 5: Conclusions and policy implications

2.1.1.2 Theories of investment decisions

- Accelerator Investment Theory

- MM's Investment Theory

- Neoclassical Investment Theory

- Uncertainty and Real Options Investment Theory

- Investment Theory of Jame Tobin

2.1.2 Cash flow

2.1.2.1 Definition of cash flow

CF in this thesis is considered as internal capital used to finance investment activities of firms, is a measure of liquidity and ability to access funding sources of firms in the financial market When CF is deficient, production and firm activities will be interrupted, firms may fall into financial difficulties and lead to bankruptcy

2.1.2.2 Measurement of cash flow

According to the studies of Largay & Stickney (1980); Bowen et al (1986), CF can be determined from (i) Net income plus depreciation and amortization, (ii) WC from operations, (iii) Capital from operations, (iv) CF after investment, (v) Changes in cash

2.1.3 Working capital

2.1.3.1 Definition of working capital

WC in this thesis is considered as a source of capital, meeting short-term financial requirements during the operation of the firm, calculated by the difference between short-term assets and short-term liabilities

2.1.3.2 The role of working capital

Establishing and managing WC plays an important role in profitability and risk as well as shareholder value In addition to ensuring the ability to pay short-term debts and daily operating expenses, WC is also a necessary financial source for firms to expand their operations, create competitive advantages and stabilize investment activities

2.1.4 Financial constraints

2.1.4.1 Definition of financial constraints

FC in this study reflects the difficulties that a firm encounters when raising external capital

to finance future investment decisions, resulting in the firm having to bear higher costs of raising external funding sources than internal funding sources, affecting investment decisions

At the same time, as the difficulties from these barriers increase, the firm has a greater level

of FC which seriously affects the existence of the firm

2.1.4.2 Measurement of financial constraints

The measures of the level of FC of firms can be divided into two groups as follows:

- Group of single indicators: cash dividend payout ratio, size, listing time, CF, financial leverage, bank credit ratio, credit rating, commercial paper rating, bonds, financial shortfall, interest coverage ratio

- Group of dual indicators: Z-score of Altman (1968), KZ of Kaplan & Zingales (1997), ZFC of Cleary (1999), Indexw of Whited & Wu (2006), HP of Hadlock & Pierce (2010)

2.1.5 Theoretical basic of the impact of cash flow on investment with financial constraints

2.1.5.1 Asymmetric information theory

In corporate finance, Myers & Majluf (1984) and Myers (1984) provided the first arguments for the application of the concept of information asymmetry in the financing decision They stated that: the capital structure of a firm is designed to minimize inefficiencies

in investment decisions caused by information asymmetry among stakeholders Information imperfections can lead to credit allocation in competitive capital markets, and thus investment decisions depend on the availability of funds, not their cost (Greenwald et al., 1984) In an imperfect capital market, when there is information asymmetry, outside investors will undervalue risky securities issued by firms to raise capital, increasing the cost of external financing, causing the cost of capital between internal and external sources to differ Therefore, a firm with available internal capital can be more proactive in investment activities Thus, according to this theory, the problem of information asymmetry has a significant impact on the implementation of investment decisions of firms through financing decisions

2.1.5.2 Agency Theory

Agency Theory was published by Jensen and Meckling in 1976 and focuses on the relationship between the principal and the agent When the interests of the principal and the agent are different, the agency problem will arise and cause costs A joint stock company can have many relationships between the principal and the agent such as shareholders and managers through the authorization to operate the firm, creditors with shareholders and managers through the authorization to use capital or between employers and employees Thus, managers are the ones who have the right to make financing and investment decisions for the firm and they are relatively more likely to use internal funds to invest than external capital Bernanke & Gertler (1986) also demonstrated that: agency costs of free CF lead to conflicts of interest between shareholders and managers, making investment sensitive

to CF, showing the existence of agency theory in explaining the relationship between FC and ICFS When information problems appear, the cost and liquidity of funding sources have a direct impact on investment decisions and future income streams of the firm (Jensen, 1986)

2.1.5.3 Signaling Theory

According to Watts & Zimmerman (1986), signaling theory discusses how firms provide information to shareholders Managers having more information about the financial situation and future development prospects of firms creates information asymmetry between them and investors, which encourages managers to provide more information related to financial statements outside firms (Taleb, 2019) According to this theory, when information asymmetry exists, a firm's decision to increase dividend payout ratio or investment expenditure will be a positive signal containing good information about the firm's prospects, helping a firm to have easier access to external capital, reducing FC and investment dependence on internal capital (Taleb, 2019)

2.1.5.4 Pecking Order Theory

Myers & Majluf (1984) proposed the pecking order theory to explain the financing decisions of firms from a behavioral perspective based on the assumption of asymmetric information From there, the order of choosing funding sources for firms will be prioritized

in the direction of minimizing the cost of capital, limiting the costs related to information asymmetry and contributing to maximizing the benefits of existing shareholders Internal capital is the priority source of funding, followed by external capital sources such as short-term debt, and long-term debt and the final choice is new equity This theory supports that: with the shortage of internal capital and the cost of external funding, firms are likely to reject investment opportunities with positive NPV, to avoid losses related to existing owners and firm value Thus, based on the goal of maximizing the value of the firm, this theory has demonstrated the close relationship between internal capital and investment of the firm in an environment with potential problems of information asymmetry as well as agency problems

2.1.5.5 Trade-off Theory

The trade-off theory considers that determining the optimal capital structure is beneficial

to the firms by balancing the marginal costs and benefits associated with increasing debt (Bradley et al., 1984) The benefits of using financial leverage are associated with tax savings related to interest rates as well as improved CF (Jensen, 1986) In addition, if financial leverage is increased, the firms must bear agency costs, financial distress costs and bankruptcy costs when it has difficulty or is unable to pay interest and principal Therefore, according to this theory, firms should consider a reasonable debt ratio and strive to achieve this goal in the long run because it benefits from many sources of cheap funding (Jensen & Meckling, 1976) This theory is inappropriate when financially constrained firms, the associated costs such as agency costs, financial distress costs, and bankruptcy costs overwhelm the tax shield benefits

of increasing debt (Ithai, 2021) and investment becomes CF sensitive

The theories have focused on explaining the reasons why external financing is more costly than internal financing It shows that investment decisions depend on the availability of internal funds The specific characteristics of each enterprise imply that: Investment of financially constrained firms is more influenced by the availability of internal funds

2.1.5.6 Q investment model theory

The Q model theory states that: investment expenditure of a firm is mainly determined by expectations about future profit opportunities and is usually estimated by the ratio of the

market value of assets to their replacement value (Q index) (Tobin, 1969; Abel, 1980; Hayashi, 1982; Abel & Blanchard, 1983)

Later, Fazzari et al (1988) argued that: firms will have different levels of FC, some firms have unlimited access to external capital and have low levels of FC Therefore, this group of authors proposed a model according to equation (2.22) showing the influence of both q index and internal CF factors on the investment expenditure of firms

Ii,t/Ki,t -1 = β0 + β1Qi,t + β2(CFi,t/Ki,t -1) + εit (2.22) I: represents investment in period t, CF: CF in period t, K: capital expenditure at the beginning of period t, Q: Q index at the beginning of period t, 𝜺 random error

2.1.5.7 Euler investment model theory

Based on the Euler model first proposed by Abel (1980), Abel & Blanchard (1983), based

on considering the structure of investment behavior combined with adjustment costs while the investment level reaches the optimal capital level of Bond & Meghir (1994a, 1994b), the authors Love (2003), Laeven (2003) built a model reflecting the relationship between investment and CF of firms in the condition of FC as follows:

Ii,t/Ki,t -1 = β1(Ii,t-1/Ki,t-2) + β2(Si,t/Ki,t -1) + β3(CFi,t/Ki,t -1) + εit (2.28) S/Kis the marginal return on capital

Besides the Q investment model, the Euler investment model is also used by many authors

in studies on firm investment with many advantages Depending on the research objectives, characteristics of the observation sample, specific space and time, the two investment model theories Q and Euler are applied to make comments on the relationship between investment and CF with FC Within the scope of the thesis, the author uses both Q and Euler models for the following reasons: (i) the research subjects of the thesis are listed non-financial firms, so the thesis has enough reliable data to calculate the Q index; (ii) Vietnam's stock market is on the watch list for consideration of classification as a secondary emerging market (FTSE Russell, 2023), so there is a possibility that stock prices may not accurately reflect the growth opportunities and value of the firm, so in addition to the Q index, the author uses the profit margin (S) indicator in the Euler investment model to consider investment opportunities and potential growth from within the firm

2.1.6 Theoretical basis of the impact of working capital on investment with FC

Economist Keynes (1937) pointed out that: WC is an important part of the capital of a firm emphasizing its role in the production process in addition to fixed capital In particular, for a highly Financially limited firm, WC plays a dual role as a potential source of liquidity that

can be easily converted into cash to supplement the need for temporary capital shortages in the short term, and as a source of input for production activities (Fazzari & Petersen, 1990)

In an imperfect capital environment, according to the Euler investment model theory, a firm with a decrease in CF will balance its marginal return on assets by cutting back on investments in fixed capital and WC However, managers should not cut back on fixed capital and WC by the same proportion, because WC is relatively liquid and can be easily reversed Therefore, based on the goal of maximizing the value of the firm, the firm will minimize adjustment costs and losses when the project is canceled by choosing to cut back on WC more than on fixed investment to absorb most of the CF fluctuations (Altaf & Shah, 2018b) Research by Sari & Leon (2020), Rashid et al (2020) have also demonstrated that: WC is very important for financially constrained firms, helping them maintain high and smooth fixed investment levels Managers are willing to trade off excess short-term investment in

WC to increase investment in fixed assets when firms face FC (Banerjee & Deb, 2023) Thus,

it is convenient for firms to alleviate FC by using WC to temporarily absorb CF shortages The theories of information asymmetry, signaling, agency, pecking order, and trade-off all support the argument that in the presence of information asymmetry, signaling, and agency problems, the cost of external capital is often higher than internal Therefore, managers often prioritize using internal capital from internal CF to maintain investment activities However, when internal CF declines and faces limited access to external capital, firms will cut both investment spending and WC According to the investment theory of uncertainty and the argument of the Q and Euler investment model theory, fixed adjustment costs are often higher than WC, to minimize adjustment costs and losses, managers should try to maintain fixed investment activities by choosing to cut WC funding sources more than funding sources for fixed investment At this time, items of short-term assets are considered to have relatively high liquidity, can be returned to the firm, and can be converted into capital flows, temporary supplement to other sources of funding to maintain stable firm investment

2.1.7 Theoretical basis of the role of working capital on the impact of cash flow on investment with financial constraints

The thesis is based on theories on the relationship between CF, WC and investment with

FC, together with theories and empirical research results on the relationship between WC management policies and the performance of firms to argue for a positive relationship between effective WC management policies and CF From there, it provides a basis to prove the existence of a role in reducing the level of FC and reducing the impact of CF on investment

of WC At the same time, the regulatory influence of WC on the impact of CF on investment depends on the size of WC and the level of FC of each firm

The pecking order theory of Myers & Majluf (1984) asserts that: firms often prioritize the use of internal capital sources instead of external capital sources to finance the firm's operations to reduce problems that negatively affect the profitability, CF and firm value In addition, the trade-off theory also participates in explaining the relationship between policies related to WC and the profitability or profit of the firm when acknowledging the point of view: there exists an optimal level of WC that helps maximize the value of the firm, at which the difference between the benefits and marginal costs of maintaining the amount of WC is the largest This theory implies an inverse trade-off relationship between the liquidity of assets and the ability to generate profits for the firm

In addition to its important role in the production and firm process, WC is considered a liquid resource that is easy to recover, so maintaining a reasonable amount of WC will help firms be more proactive in investing in fixed assets Effective management of WC will reduce the dependence of firms on external funding sources, improving the level of financial limitations From there, firms can use highly liquid assets in WC to maintain investment when necessary, improving financial capacity (Baños-Caballero et al., 2020)

It is clear that the pecking order theory and the trade-off theory participate in explaining the positive relationship between effective WC management policies and the firm's CF Accordingly, managers need to establish a reasonable amount of WC, apply appropriate WC management policies, flexibly combine investment decisions and financing decisions to ensure and utilize asset liquidity, while balancing profits and risks In addition, for firms operating in developing economies and financially constrained environments, firms should prioritize the use of internal capital in maintaining high levels of cash and assets to minimize costs when mobilizing new sources of funding Based on taking advantage of the benefits of maintaining a sufficiently large amount of WC, the profit obtained from using this amount of

WC is greater than the incurred costs, which will contribute to increasing operating efficiency and profitability, improving profits and CF generated annually, helping firms to be highly appreciated by market investors, reducing financial limitations, increasing access to external capital sources at reasonable costs (Amponsah-Kwatiah & Asiamah, 2020) From there, it proves the existence of a regulatory role of WC on the impact of CF on investment; At the same time, when managers know how to apply a reasonable WC management policy based

on maintaining a higher level of WC, WC will play an increasingly clear role in reducing ICFS and the level of FC

2.2 LITERATURE REVIEW

2.2.1.Research on the impact of cash flow on investment with financial constraints 2.2.2.Research on the impact of working capital on investment with financial constraints 2.3 RESEARCH GAPS

The author finds that there are still research gaps that need to be exploited such as:

- First, although there are many studies examining the impact of CF on investment in an environment where FC exists However, depending on the characteristics of the financial system in each country, the specific characteristics of each firm and the level of FC, the results are given with many conflicting opinions In addition to the positive and negative impacts of

CF on investment, in countries with developed economies, there is also evidence of a significant decline and almost no existence of ICFS in the firm system However, in countries with developing or emerging financial markets, CF is still one of the decisive factors for investment expenditure From this, it can be seen that it is necessary to conduct research to reduce the dependence of investment on CF, especially in countries with developing economies, including Vietnam Many different factors have been proposed, and the WC tool

is one of the factors considered with the aim of reducing FC and stabilizing investment of each firm

- Next, previous studies have concluded how managers adjust between investment expenditure and additional WC expenditure when CF changes, to suit the financial situation

of each firm However, according to the author's observation, these studies have only provided results on the different levels of impact of WC on investment based on classifying data samples according to the magnitude of WC (by setting dummy variables or running regressions based on independent classification samples), without directly considering the regulatory role of WC on the impact of CF on investment, through the impact of WC management policies on the performance of firms The author finds this a gap that needs to

be clarified when studying the impact of CF on investment When considering more factors affecting investment decisions, as well as the level of interaction between independent factors,

it will reduce the omission of variables, making the research results more reliable and accurate From there, specific and appropriate solution recommendations are proposed for each group of firms with different levels of FC

Based on these gaps, combined with the practical context, the thesis will examine the impact of CF and WC on investment, and at the same time fully exploit the regulatory role of

WC on this impact at Vietnamese firms in an environment where FC exists at the firm level

SUMMARY OF CHAPTER 2

The content of Chapter 2 presents the theoretical basis of CF, investment, WC, FC and the theoretical framework related to the relationship between these factors and investment

thereby pointing out research gaps

CHƯƠNG 3 RESEARCH METHODS 3.1 RESEARCH MODEL

3.1.1 Analytical framework

3.1.2 Research hypotheses

The thesis proposes 08 hypotheses to clarify the research questions as follows:

- Hypothesis H1: CF has a positive impact on firm investment

- Hypothesis H2: The sensitivity of investment to CF increases with FC

- Hypothesis H3: CF has a positive impact on firm WC

- Hypothesis H4: The sensitivity of WC to CF increases with FC

- Hypothesis H5: WC has an impact on reducing ICFS

- Hypothesis H6: The impact of WC on ICFS increases with FC

- Hypothesis H7: WC has a role in improving the impact of CF on investment

- Hypothesis H8: The role of WC in improving the impact of CF on investment increases with FC

3.1.3 Research model

To answer the research questions, the thesis builds the following research models

Model 1: Assessing the impact of CF on investment and WC at firms with FC

The author proposes research models 1A, 1B, 1C and 1D based on the original model built

by Fazzari et al (1988), Fazzari & Petersen (1993) based on the theory of Q investment model and Euler investment model theory, applied in many other studies to examine the impact of

CF on investment and WC, the latest is the study of the author groups Gül & Taştan (2020), Machokoto et al (2021), Mohamed (2021), Sun et al (2022) to examine the impact of CF

on investment and WC at firms with FC

- Research models 1A and 1B: Assessing the impact of CF on investment in firms with FC

Model 1A: I i,t = 𝛽0 + 𝛽1 I i,t-1 + 𝛽2 CF i,t + 𝛽3 Q i,t-1 + 𝜎j X i,t + 𝛼i + 𝜗t + 𝜀it (3.1.1)

Model 1B: I i,t = 𝛽0 + 𝛽1 I i,t-1 + 𝛽2 CF i,t + 𝛽3 S i,t + 𝜎j X i,t + 𝛼i + 𝜗t + 𝜀it (3.1.2)

- Research models 1C and 1D: Assessing the impact of CF on WC at firms with FC

Model 1C: W i,t = 𝛽0 + 𝛽1 W i,t-1 + 𝛽2 CF i,t + 𝛽3 Q i,t-1 + 𝜎j X i,t + 𝛼i + 𝜗t + 𝜀it (3.2.1)

Model 1D: W i,t = 𝛽0 + 𝛽1 W i,t-1 + 𝛽2 CF i,t + 𝛽3 S i,t + 𝜎j X i,t + 𝛼i + 𝜗t + 𝜀it (3.2.2)

- Ii,t, Wi,t: dependent variables representing investment and WC in year t of firm i

- Ii,t-1, Wi,t-1: lagged dependent variable

- CFi,t:CF ratio, representing the internal capital generated from the activities of the firm

- Qi,t-1 and Si,t are variables reflecting the growth opportunities of the firm assessed from the market and internally by the firm in the Q investment model and the Euler investment model, respectively

- Set of variables Xi,t, represents the characteristics of the firm including financial leverage, revenue growth, firm size, listing time and economic growth rate variable GDP represents the macroeconomic year t αi are unobservable individual effects due to the characteristics of each firm, ϑt is the specific influence over time of economic factors that affect the investment of the firm but cannot be controlled and εit is the error of the model

Model 2: Assessing the impact of WC on investment in firms with FC

Based on the models testing the impact of CF and WC on investment built by authors Fazzari & Petersen (1990, 1993), Riaz et al (2016), Altaf & Shah (2018), Sari & Leon (2020), Rashid et al (2020) based on the theory of Q and Euler investment models, the author proposes research models 2A and 2B to answer hypotheses H5 and H6

In research models 2A and 2B, the variable representing WC (W) is the independent variable that directly explains the dependent variable investment (I)

- Model 2A: I i,t = 𝛽0 + 𝛽1 I i,t-1 + 𝛽2 CF i,t + 𝛽3 W i,t + 𝛽4 Q i,t-1 + 𝜎X i,t + 𝛼i + 𝜗t + 𝜀it (3.3.1)

- Model 2B: I i,t = 𝛽0 + 𝛽1 I i,t-1 + 𝛽2 CF i,t + 𝛽3 W i,t + 𝛽4 S i,t + 𝜎X i,t + 𝛼i + 𝜗t + 𝜀it (3.3.2)

Model 3: Assessing the impact of WC on investment in firms with FC

To examine the role of WC on the impact of CF on investment in firms with FC, the author proposes research model (3A) based on Q investment model and model (3B) based on the Euler investment model to answer hypotheses H7 and H8:

- Model 3A:

I i,t = 𝛽0 + 𝛽1 I i,t-1 + 𝛽2 CF i,t + 𝛽3 W i,t + 𝛽4 CF i,t W i,t + 𝛽5 Q i,t-1 + 𝜎j X i,t + 𝛼i + 𝜗t + 𝜀it (3.4.1)

- Model 3B: