Factors affecting enterprise fixed asset investment

UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business Huynh Phan Chau Anh FACTORS AFFECTING ENTERPRISE FIXED ASSET INVESTMENT MASTER OF BUSINESS (Honours) Ho Chi Minh City – Year 2014 UNIVERSITY OF ECONOMICS HO CHI MINH CITY International School of Business Huynh Phan Chau Anh FACTORS AFFECTING ENTERPRISE FIXED ASSET INVESTMENT ID: 22110001 MASTER OF BUSINESS (Honours) SUPERVISOR: Dr Pham Quoc Hung Ho Chi Minh City – Year 2014 i ACKNOWLEGMENT This thesis is come out as a result of the conjunction of the effort and inestimable help, in different areas, of several people Their contribution, in a way or another, has allowed me to carry out this work, in which enthusiasm, dedication and, above all, the desires to learn have been the premises prevailing all this time I would like to point out and thank the Supervisor of this thesis, Doctor Pham Quoc Hung for having given me a chance and confidence to elaborate this research work To my supervisor, Doctor Pham Quoc Hung, thank you Thank you for all your support, encouragement and feedback and for believing in me and in what I could To my parents, thank you for long phone call, sympathies and encouragement I am forever grateful that you are always there for me ii ABSTRACT Investment in fixed asset of the enterprise are investment in material facilities , technology which enterprise need to make when starting to form and maintain active and expand production Therefore, the study of factors affecting the investment of fixed asset of the enterprise are carried out in this research There are many studies conducted in many different countries at different periods, research on fixed asset investment of enterprises This research has developed models to study the factors affecting the investment of fixed asset of enterprises Based on the previous studies around the world related to this issue, this research identified the factors affecting the investment of fixed asset of enterprises: Firm size, Firm age, Growth, Debt, Own, Tobin’s Q The data used in the study were collected from the financial statements, annual reports of 85 companies listed on HOSE in the period from 2009 to 2012 with 304 observations Research using SPSS 16 software to conduct Regression to make research results The results indicate the significant relationship between firm size, firm age and fixed asset investment decision of the enterprise Keywords: Firm size, Firm age, Growth, Debt, Own, Tobin’s Q iii TABLE OF CONTENT ACKNOWLEGMENT …………………………………………………… i ABSTRACT ……………………………………………………………… ii TABLE OF CONTENT …………………………………………………… iii LIST OF TABLE ………………………………………………………… v Chapter 1: Introduction …………………………………………………… 1.1 Research background …………………………………………… 1.2 Statement of problem …………………………………………… 1.3 Research objective and research question……………………… 1.4 Scope of the research …………………………………………… 1.5 Research structure ……………………………………………… Chapter 2: Literature review and hypothesis development………………… 2.1 Fixed asset ……………………………………………………… 2.2 Fixed asset investment ………………………………………… 12 2.3 Firm size ………………………………………………………… 14 2.4 Firm age ………………………………………………………… 15 2.5 Revenue growth ………………………………………………… 17 2.6 Debt ratio ………………………………………………………… 18 2.7 Own ……………………………………………………………… 19 2.8 Tobin’s q ………………………………………………………… 21 2.9 All of the hypotheses discussed above are summarize in the following model …………………………………………………………… 22 Chapter 3: Research methodology ………………………………………… 24 3.1 Quantitative method …………………………………………… 24 3.1 Research process ………………………………………………… 24 3.3 Measurement scale ……………………………………………… 26 iv 3.3.1 Dependent variable ………………………………………… 26 3.3.2 Independent variable ……………………………………… 26 3.4 Target population ……………………………………………… 29 3.5 Sample …………………………………………………………… 30 3.6 Method analysis ………………………………………………… 30 3.3.1 Descriptive analysis ……………………………………… 30 3.3.2 Multiple regression strategy ……………………………… 31 Chapter 4: Data analysis and result ………………………………………… 34 4.1 Descriptive statistic ……………………………………………… 34 4.2 Coefficient correlation ………………………………………… 36 4.3 Multiple regression ……………………………………………… 37 4.3.1 Checking regression assumption …………………………… 37 4.2.2 Regression results ………………………………………… 40 Chapter 5: Conclusion and implication …………………………………… 44 5.1 Research finding ………………………………………………… 44 5.2 Managerial implications ………………………………………… 44 5.3 Limitations and future research ………………………………… 45 REFERENCE ……………………………………………………………… 47 APPENDIX ………………………………………………………………… 49 v LIST OF TABLE Table 3.6: number of enterprises in the sample …………………………… 31 Table 4.1: Descriptive statistic variable …………………………………… 34 Table 4.2 Coefficient correlation ………………………………………… 36 Table 4.3 VIF ……………………………………………………………… 37 Table 4.4 Coefficient of determination …………………………………… 38 Table 4.5 Anova …………………………………………………………… 39 Table 4.5 Regression linear results ………………………………………… 40 CHAPTER INTRODUCTION 1.1 Research Background Effective procurement and efficient use of finance lead a proper utilization of the finance by the business concern It is the essential part of the chief financial officer Hence, the chief financial officer must determine the basic objective of financial management Objective of Financial Management may be broadly divided into two parts such as: Profit maximization and wealth maximization In which, wealth maximization is one of the modern approaches, which involves latest innovations and improvement in the field of the business concern The term, wealth means shareholder wealth or the wealth of the persons those who are involved in the business concern Wealth maximization is also known as value maximization or net present worth maximization This objective is a universally accepted concept in the field of business For achieving this objective, chief financial officer (CFO) must carry out important financial decisions CFO is one of the important role player in the field of financial function CFO performs the following major function: forecasting financial requirements, acquiring necessary capital, investment decision, cash management, interrelation with other department The investment decision is a very important and difficult decision to maximize the value of the company as well as to maximize the benefits of shareholders CFO must carefully select best investment alternatives and consider the reasonable and stable return from the investment He or she must be well versed in the field of capital budgeting techniques to determine the effective utilization of investment CFO must concentrate to principles of safety, liquidity and profitability while investing capital In the investment decision, there is an important decision which made the enterprise must carefully considered before make a decision The decision which I mention is the decision of investment in fixed asset Fixed asset investment is investment in physical asset such as machinery, land, buildings, installations, vehicles, or technology Normally, a company balance sheet will state both the amount of expenditure on fixed asset during the quarter or year, and the total value of the stock of fixed asset owned Any enterprise when conducting business, must invest (purchase) to a certain number of labor materials, such as: warehouses, shops, stalls, buildings, vehicles, media measurement, media work This is the necessary technical facilities for the production process Fixed asset is one of the basic parts which make up the infrastructure for the economy in general, and is an important part which determine the survival of enterprises in the production process Fixed asset is a necessary factor to reduce the labor intensity and growing the labor productivity for enterprises In the production process of the enterprise which is in whatever area of manufacturing jobs and the economy, especially in terms of economic science developed as it is today, not take participation of machinery and equipment in the production process of the business Thus, the equipment in particular or fixed asset in general have an indispensable role in the production process, it is the technical infrastructure of the business, reflect the capacity existing production and technological development trend of the business The Fixed asset, especially machinery and equipment manufacturing are important and necessary in the production process of the business 1.2 Statement of Problem The fixed asset investment decision is an important decision in the valuation of the firm Because the importance of the fixed asset, as well as trends of the development of the enterprise require to invest in fixed asset The enterprise must consider very carefully in investing in fixed asset before making In the world, there are a lot of research which have identified different factors which play an important role in the determine of the fixed asset investment of the enterprise and the research made by some of researcher like John.R.Meyer and Edwin Kuh, K.Krishmamurthy and D.U.Sastry, K.L.Krishna, G,D.Mistra… In Vietnam, the number of research of investment decisions in fixed asset is little Comes from that problems, the study "Factors affecting enterprise fixed asset investment" to clarify the issues that businesses encounter when they make decision of investment in fixed asset 1.3 Research objective and research question The main purpose of this research is to identify factors have significant effect to the investment in fixed asset of the enterprise and how their relationship, aim to provide more information to investors in making their decisions This study will be support for businesses in Vietnam in reviewing the situation of investment in fixed asset of the enterprise to make reasonable adjustments It also helps enterprises make the right decision in fixed asset investment The study focuses on answering two questions: What factors affect to the investment in fixed asset of companies listed on HOSE? 36 between the smallest and largest value shows the different policy of debt of companies Own: in the sample of 85 companies had significant differences in the percentage of ownership of the Board The smallest value was and the largest value to 83%, while the average value was only 12.52% Percentage ownership of the Board had great influence in making decision in business as well as investment decisions 4.2 Coefficient correlation Own Size Debt Tobinq Growth Age Own Size -0.36 -0.114 0.181 0.08 -0.103 -0.17 -0.008 -0.209 0.274 Debt -0.12 0.099 0.194 Tobinq Growth -0.065 -0.056 Age -0.045 Table 4.2: Coefficient correlation The quantity r, called the linear correlation coefficient, measures the strength and the direction of a linear relationship between two variables The linear correlation coefficient is sometimes referred to as the Pearson product moment correlation coefficient in honor of its developer Karl Pearson The value of r is such that -1 < r < +1 The + and – signs are used for positive linear correlations and negative linear correlations, respectively Positive correlation: If x and y have a strong positive linear correlation, r is close to +1 An r value of exactly +1 indicates a perfect positive fit Positive value indicate a relationship between x and y variables such that as values for x increases, values for y also increase Negative correlation: If x and y have a strong negative linear correlation, r 37 is close to -1 An r value of exactly -1 indicates a perfect negative fit Negative values indicate a relationship between x and y such that as values for x increase, values for y decrease No correlation: If there is no linear correlation or a weak linear correlation, r is close to A value near zero means that there is a random, nonlinear relationship between the two variables Note that r is a dimensionless quantity; that is, it does not depend on the units employed A perfect correlation of ± occurs only when the data points all lie exactly on straight line If r = +1, the slope of this line is positive If r = -1, the slope of this line is negative A correlation greater than 0.8 is generally described as strong, whereas a correlation less than 0.5 is generally described as weak Table 4.2 showed the correlation between the independent variables was not strong, all the correlation coefficients were lower than 50% 4.3 Multiple regression 4.3.1 Checking regression assumption  Multicollinearity VIF SIZE 1.132 AGE 1.138 GROWTH 1.061 DEBT 1.065 OWN 1.041 TOBINQ 1.054 Table 4.3: VIF In multiple regression, the variance inflation factor (VIF) is used as an indicator of multicollinearity All other things equal, researchers desire lower levels of VIF, as higher levels of VIF are known to affect 38 adversely the results associated with a multiple regression analysis In fact, the utility of VIF, as distinct from tolerance, is that VIF specifically indicates the magnitude of the inflation in the standard errors associated with a particular beta weight that is due to multicollinearity Typically, if the VIF was greater than 10, then multicollinearity phenomenon occurred Looking at the results in table 4.3, and saw VIF variables were smaller than 10 That mean there was not multicollinearity  Coefficient of Determination R R Square Adjusted R Square 0.2491 0.0621 0.04517 Std Error of the Estimate DurbinWatson 11.03537 1.67 Table 4.4: Coefficient of determination The coefficient of determination, r square, is useful because it gives the proportion of the variance (fluctuation) of one variable that is predictable from the other variable It is a measure that allows us to determine how certain one can be in making predictions from a certain model/graph The coefficient of determination is the ratio of the explained variation to the total variation The coefficient of determination is such that < r square < 1, and denotes the strength of the linear association between x and y 39 The coefficient of determination represents the percent of the data that is the closest to the line of best fit The regression results are presented in Table 4.4 showed R square is only 6.21% That showed the level of the explanatory variables in the model is too small, however, in terms of research in the finance field, this value could be accepted  Autocorrelation In statistics, the Durbin–Watson statistic is a test statistic used to detect the presence of autocorrelation (a relationship between values separated from each other by a given time lag) in the residuals (prediction errors) from a regression analysis The value of the Durbin-Watson statistic ranges from to As a general rule of thumb, the residuals are not correlated if the DurbinWatson statistic is approximately 2, and an acceptable range is 1.50 2.50 The Durbin-Watson statistic for this research is 1.67 which falls within the acceptable range  Relationship between the set of independent variables and the dependent variable Regression Residual Total Sum of df Squares 2,683.539 6.000 40,552.522 333.000 43,236.061 339.000 Table 4.5: Anova Mean F Sig Square 447.257 3.673 0.002 121.779 40 The probability of the F statistic for the overall regression relationship was 0.002, less than the level of significance of 0.05 We rejected the null hypothesis that there is no relationship between the set of independent variables and the dependent variable (R² = 0) We supported the research hypothesis that there is a statistically significant relationship between the set of independent variables and the dependent variable We supported the research hypothesis that there is a statistically significant relationship between the set of independent variables and the dependent variable 4.4 Regression result Model (Constant) Size Age Growth Debt Tobinq Own Unstandardized Coefficients B Std Error -12.080 3.875 0.713 0.208 3.144 1.043 0.004 0.017 0.077 0.030 0.042 1.197 -0.024 0.038 Standardized Coefficients Beta 0.193 0.171 0.014 0.142 0.002 -0.035 t Sig -3.118 3.422 3.014 0.255 2.587 0.035 -0.636 0.002 0.001 0.003 0.799 0.010 0.972 0.525 Table 4.6: Regression linear results The results in Table 4.6 showed that the affecting of these factors to the investment of fixed asset as follows: + Firm size: from the results of the research model presented in Table 4.6, the b coefficient is 0.001 which was less than the level of significance of 0.05 We conclude that there was a statistically significant relationship 41 between size and investment The b coefficient associated with Size (0.713) was positive, indicating a same relationship in which higher numeric values for size were associated with higher numeric values for investing in fixed asset Therefore, the positive value of b implies that research respondent’s firm size was correlated in the same direction with fixed asset investment of enterprises This showed that the first hypothesis (H1: Size has significant positive effect on fixed asset investment of enterprise.) was accepted A positive correlation showed advantage of the big size enterprises, the ability to access capital markets would be easier when they need capital to invest in fixed asset Enterprises with large asset, the ability to ensure payment commitments was higher Company size increase was reflected in the increase of total asset, the increasing value of fixed asset accounted for a high proportion of the total increase in the value of asset The result was consistent with previous studies of Schiantarelli Devereux (1990), Volchkova (2001), Denis & Sibilkov (2011), Mustapha and Chyi (2012) + Firm age: according to the second hypothesis (H2) has been mentioned in Chapter 2, The number of operating year of enterprise has a significant positive effect on the fixed asset investment of enterprise Results from the model were accepted second hypothesis (3.144) The b coefficient was 0.003 which was less than the level of significance of 0.05 We conclude that there was a statistically significant relationship between age and investment The b coefficient associated with Age (3.144) was positive, indicating a same relationship in which higher numeric values for Age was associated with higher numeric values for investing in fixed asset 42 Therefore, the positive value of b implies that research respondents firm Age is correlated in the same direction with fixed asset investment of enterprises The result match fit with the research results of Schiantarelli Devereux (1990) Age increases, businesses increasingly had fewer investment restrictions, age of enterprise increases, and the ability of fixed asset investment of enterprises also tended to increase + Growth: the probability for the test of relationship between “Growth” and "Fixed asset investment" was 0.255, which was greater than the level of significance of 0.05 and not statistically significant + Debt: For the independent variable Debt, the probability for the b coefficient was 0.010 which was less than the level of significance of 0.05 We concluded that there was a statistically significant relationship between Debt and Fixed asset investment Research results from the model (0.077) was given in Table 4.4 rejected the fourth hypothesis (H4: Debt ratio has significant negative effect on fixed asset investment of enterprise.).At present, in the capital structure of many companies, short-term debt accounted for a large proportion of the total business debt, long-term debt accounted for only a very low rate Fixed asset are long-term asset So that they are invested by long -term capital When investment in fixed asset, the funding was raised from equity, loans from banks or issue bonds Most businesses will take advantage of financial leverage, debt is chosen to use But long-term loans from banks is very difficult for the company, not all the investment projects of fixed asset are financed by long-term capital from banks In addition, the issuance of bonds to fund long-term investment is 43 very difficult, there are very few companies have the ability to meet the conditions for issuing bonds Raising long-term funds to invest is very difficult So debt does not reflect the impact of it on investment on fixed asset + Own: the probability for the test of relationship between “Own” and "Fixed asset investment" was 0.526, which was greater than the level of significance of 0.05 and not statistically significant + Tobin’s q: according to research result of the model, sig was 0.971 So that, it was not statistically significant It does not support for my hypothesis 44 CHAPTER CONCLUSION AND IMPLICATION 5.1 Research Finding Through empirical study of companies listed on HOSE, the research gives conclusions: After reviewing the theory of fixed asset investment and the empirical research on factors affecting investment in fixed asset of enterprises, studying in this area for the Vietnam market are needed to better understand the policy as well as the level of investment of fixed asset of enterprises Study has examined the effect of these factors: the firm size, age, growth, debt ratio, the percentage of ownership of the board, Tobin's Q to fixed asset investment Based on the results of the regression model, thesis found the significantly impact factors: firm size, firm age to the investment of fixed asset It should be noted here that the factor: growth, the percentage of ownership of the board, Tobin’s q is not statistically significant They not support for my hypothesis… 5.2 Managerial Implications Review and reassess the situation of fixed asset investment by businesses to take reasonably adjusted to achieve optimum performance from the investment in fixed asset Being careful in using debt Today, there are some companies in Vietnam are using short-term debt to finance long-term investment projects This creates the potential risks for companies in the future 45 Based on the situation of current manufacturing business, and business strategies to build appropriate investment strategies to maximize the value of the company According to financial statement, there are a lot of companies have proportion of short-term debt is higher than long-term debt in total debt structure That shows that the accessing long-term funding of the business to cater for longterm investment is very difficult, especially investmen.t in fixed asset So, the government should develop policies to support enterprises can access long-term funding to finance long-term investments of businesses, especially investment in fixed asset Investment in fixed asset is an investing activity brings greater efficiency of short-term investments, contribute to improving value for enterprises in particular and the society economy in general The government should establish rules of honesty, clarity and transparency in the financial statements, annual reports as well as information on market There watchdog to protecting investors in the market and attract investment The government should create a more perfect competitive market to enhance the competitiveness of enterprises in business process, contribute to improving the quality and value of the business on the market, creating value to the economy 5.3 Limitations and Future Research Besides the results achieved, research subject have the following limitations: 46 The study on factors affecting investment in fixed asset of enterprises in the period from 2009-2012, observations at this stage was not big enough and the study period was short R square in the research model is too small, needs to identify additional factors affecting fixed asset investment to have more complete model There are still gaps in the information disclosure in the financial statements make the sample collection get difficulties The assessment of the impact of these factors on the fixed asset investment in this thesis may not reflect all the affecting factors Besides, the number of company in the sample was affected by Ownership factor So, the number of selected companies was limited and research time not long These issues need to be improved in the future 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(1976) Theory of the firm: Managerial behavior, agency costs, and ownership structure Journal of Financial Economics, 28 (2), 305-360 Lang, L and ctg (1996).Leverage, investment, and firm growth Journal of Financial Economics, (3), 3-29 48 Myers, S.C., (1977) Determinants of corporate borrowing Journal of Financial Economics, (2), 147-175 49 APPENDIX Descriptive Statistics Model summary Anova 50 Coefficients Coefficients correlations ... different periods, research on fixed asset investment of enterprises This research has developed models to study the factors affecting the investment of fixed asset of enterprises Based on the previous... investment in fixed asset, enterprises can restructure their capital structure Enterprises can restructure by the way that they finance investment in fixed asset by debt or equity When fixed asset investment. .. Classification of fixed asset based on ownership Based on this classification of fixed asset are divided into three categories: 11  Fixed asset of the business: fixed asset of the enterprise procurement