Determinants of corporate investment decisions the case study of vietnam

UNIVERSITY OF ECONOMICS HO CHI MINH CIT VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS DETERMINANTS OF CORPORATE INVESTMENT DECISIONS: THE CASE STUDY OF VIETNAM BY PHAN THI ANH DONG MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, May 2012 UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM INSTITUTE OF SOCIAL STUDIES THE HAGUE THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS DETERMINANTS OF CORPORATE INVESTMENT DECISIONS: THE CASE STUDY OF VIETNAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By PHAN THI ANH DONG Academic Supervisor: PHAN DINH NGUYEN HO CHI MINH CITY, May 2012 Certification “I certificate that the substance of the thesis has not already been submitted for any degree and is not currently submitted for any other degree I certify that to the best of my knowledge and help received in preparing the thesis and all sources used have been acknowledged in the thesis.” Signature Phan Thi Anh Dong Date: / / 2012 i Acknowledgements This thesis marks the completion of my Master degree in Development Economics at Vietnam-Netherlands project I am truly grateful to my supervisor, Dr Phan Dinh Nguyen, for his help and support over the period of my thesis Without his help in constructive follow-up, insightful and helpful comments, I would not have been successful in completing this master thesis I would like to express my deepest gratitude to all people and organizations that supported, provided assistance and information in order to make this thesis Furthermore, I deeply appreciate the lecturers and staff of the project, who helped improve my knowledge and fulfill the program I am also grateful to my close friends for their warm encouragement Finally, I further wish to thank my family members who have greatly supported me during my study Their love and support mean a great deal to me I would like to reserve the pleasure of the graduate for them Thank you very much to all of you! ii Table of Contents Certification i Acknowledgements ii Table of Contents iii List of Tables v List of Abbreviations vi Abstract vii CHAPTER 1: INTRODUCTION 1.1 Problem statement 1.2 Research Objectives 1.3 Research questions 1.4 Scope and Methodology of Research 1.5 Research structure CHAPTER 2: LITERATURE REVIEW 2.1 Theoretical literature 2.1.1 Irving Fisher’s Theory of Investment 2.1.2 J.M Keynes theory: Marginal Efficiency of Investment 2.1.3 Jorgenson’s Optimal Theory 10 2.1.4 James Tobin’s q theory of Investment 12 2.2 Empirical literature 13 CHAPTER 3: RESEARCH METHODOLOGY 21 3.1 Data sources 21 iii 3.2 Variables 21 3.2.1 Dependent variable 22 3.2.2 Independent variables 22 3.3 Modeling specification 28 3.4 Methods of estimation 29 3.5 Conclusion 32 CHAPTER 4: EMPIRICAL RESULTS AND DISCUSSION 33 4.1 Descriptive Statistics of dependent and independent variables 33 4.2 Correlation analysis 34 4.3 Empirical Results 36 4.3.1 Examining the determinants of corporate investment decisions using FEM estimators 37 4.3.2 Examining the determinants of corporate investment decisions using GMM estimator 42 CHAPTER 5: CONCLUSION, RECOMMENDATION AND LIMITATION 47 5.1 Conclusion 47 5.2 Policy Recommendation 50 5.3 Limitation 51 References 52 Appendix 58 iv List of Tables Table 2.1: Empirical Studies about Determinants of Corporate Investment Decisions 59 Table 3.1: A Set of Dependent and Independent Variables .23 Table 4.1: Basic Statistics of the Key Variables 34 Table 4.2: Correlation Coefficients of the Explanatory Variables 35 Table 4.3: Regression Analysis of Investment Equations 36 Table 4.4: GMM Estimator of Investment Equation 42 v List of Abbreviations FE Fixed Effects FEM Fixed Effects Model GMM Generalized Method of Moment HET Heteroskedasticity IV Instrument Variables LM Larange Multiplier M&M Modigliani and Miller MEI 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 vi Abstract The purpose of this study is to examine the impact of cash flow, investment opportunities, and other financial factors on corporate investment decisions using panel data for Vietnamese listed firm from 2006-2010 This research adopts static model employing Fixed Effects which the most appropriate model in analyzing panel data through specification tests The findings indicate that cash flow is a key determinant of corporate investment decisions However, investment opportunities are positive and insignificant related to investment decisions Other financial factors such as fixed capital intensity, business risk, firm size, leverage are all significant in predicting corporate investment decision Moreover, the study also adopts dynamic model utilizing Generalized Method of Moments The results confirm that cash flow is a main element in making corporate investment decisions Nevertheless, investment opportunities are not significant in determining enterprises investment decisions Besides, the lagged level of investment is negative and statistically significant correlated with investment decisions at firm level Other financial factors, namely fixed capital intensity, sales growth, firm size and leverage are all significant in influencing corporate investment decisions Keywords: Corporate Investment, Cash Flow, Tobin’s q, Financial Constraint vii CHAPTER 1: INTRODUCTION 1.1 Problem statement The goal of any enterprises when operating as a business is oriented towards maximizing the value of the firm, which in turn increases the return of investment for shareholders In order to achieve this goal, companies must implement a variety of measures, including the selection of an appropriate financial structure This is the most important finance function amongst the modern items It implicates decisions to commit sources of financing to total assets of the firms Capital expenditure or investment decision has significant importance to the firm because of the following reasons: (1) it impacts not only growth of firms in long run but also influences firm’s risks; (2) it involves liability of a large amount of capital; (3) it is unalterable, or alterable at heavy financial loss; and (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 instance, Modigliani and Miller theorem (1958) documented that there has been no relation between the financial structure and financial policy for real investment decisions under certain conditions, because the financial structure would not influence the investment costs According to the q-theory of Tobin (1969) and extended into a proposed model by Hayashi (1982), investment demand could be predicted by the ratio of the market value of the firm’s capital stock to its replacement cost under perfect market assumptions; and its market value could also explain further investment opportunities Kalatzis (2006), Adelegan and Ariyo (2008), Jangili and Kumar (2010), Li et al (2010), Nair (2011), Ruiz-Porras and Lopez-Mateo (2011) Secondly, Tobin’s q is mostly positive and statistically insignificant related to investment decision across specifications, namely FEM with robust standard errors and GMM This result reveals that Tobin’s q or investment opportunity does not stimulate investment activities of listed firms in the Vietnamese stock market Thirdly, fixed capital intensity is absolutely positive and statistically significant associated with corporate investment decision across all estimators It indicates that fixed capital intensity helps investment activities be intensive The finding also affirms that fixed capital intensity is a major determinant of investment decisions for improving product quality and productivity Fourthly, sales growth and investment have a positive and statistically insignificant relationship across FEM, FEM with robust standard errors, and GMM regressions It reveals that sales growth does not help stimulate investment activities of firms This result can be explained as follows: because this growth is small and potential profitability is not as expected; hence, the firms will be careful in making investment decisions Fifthly, business risk is almost negative and statistically significant associated with investment decisions across estimation methodologies, namely FEM and FEM with 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 influenced by crises (financial crisis and debt crisis) in the world and difficulties of Vietnamese economy Thus, they are afraid of investment in risk projects Nevertheless, in the GMM technique, business risk variable becomes less significant in statistics 48 Sixthly, the connection between firm size and investment decision is definitely negative and significant in statistics across estimators It demonstrates that firm size is 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 and leadership capacity in large firms This result is consistent with the finding by Ninh L.K et al (2007), Bokpin and Onumah (2009) Seventhly, the relationship between leverage and investment decision is truly positive but mixed in statistics across estimation methodologies Particularly, this insignificant association is pointed out in FEM However, the link between investment and leverage is statistically significant in FEM with robust standard errors and GMM It portrays that although this is a difficult period, banks still believe in performance of firms with a good credit history; and management board has a faith in potential profitability to service obligation This helps firms be incentive investment decisions This result is persistent with the finding by Azzoni and Kalatzis (2006), Ninh L.K et al (2007), Adelegan and Ariyo (2008), Jangili and Kumar (2010), and Nair (2011) Next, the combination between leverage and concentration ownership is absolutely negative and statistically significant correlated with investment activities across estimators except FEM It implies that despite state-owned firms might be easier to access capital markets than non-state owned ones; this interaction is a substitute combination in stimulating investment decisions Finally, the first lag of investment is also an element which influences investment decisions at the firm level in the GMM technique This result is consistent with findings of Carpenter and Guariglia (2008), and Bokpin and Onumah (2009) 49 5.2 Policy Recommendation On the basis of the empirical results, few suggestions on the improvement of investment decisions at the firm level are given as follows: Firstly, the firms need capital to finance for their investments in order to eliminate outdated technology and develop the scale The capital sources can be from two channels such as internal and external funds Therefore, for internal fund, enterprises themselves must have transparent information and financial statements with the efficient businesses to create the confidence for shareholders to invest continuously 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 independent and reputable accounting firms From that, the firms can mobilize more capital for investment For external fund, it is necessary to enhance borrowing capacity of the firms, especially 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 firms keep receiving many advantages, especially in capital; whilst the non-state 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 ensuring that resources are allocated to those who can utilize them most efficiently 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 established and strengthened to limit the risks to financial and credit system lending to these enterprises Besides that, banks need to improve processes and procedures to facilitate easier for businesses in the mortgage assets for loans 50 Finally, the government, especially in banking, should help the enterprises maintain a proper system of standard books, make proper business planning and business strategy From that, it can improve the exchange of information between enterprises and banks 5.3 Limitation Within this research, the limitations will be highlighted with a short description First of all, the scope of the thesis is limited due to time and resource limitation; hence, this research employs data of listed firms on Vietnamese stock market Although their financial statements published to the public are audited independently, but it is not sure that these reports are accuracy, transparency, clearance without being dominated by a person or a benefit group in reality Therefore, the values of the variables in the model calculated from these reports are unavoidable bias Added to this, using the period of years (2006-2010) is too short whilst several firms have operated very long before this period This cannot reveal all the nature of the issue of investment decisions, especially in this sensitive period of financial crisis Furthermore, firm size variable measured by the natural log of the total employees is more appropriate and exactly than by the natural log of the total of revenues However, the thesis cannot obtain the number of employees in some companies; thus, the results of this variable might be unavoidable bias Furthermore, the recommendations of this thesis are mainly relied upon data analysis results, academic literatures, suggestions of academic scholar and my best knowledge The findings, therefore, can be aware of limitation Finally, due to time and resource limitation, the research cannot collect information about management capability of the enterprises, educational level of staff, and macro variables which perhaps affect corporate investment decisions Therefore, with these limitations will be overcome in the further research 51 References [1] Adelegan, O J and A Ariyo, (2008), “Capital Market Imperfections and Corporate Investment Behavior: A Switching Regression Approach Using Panel Data for Nigerian Manufacturing firms”, Journal of Money, Investment and Banking, Issue 2, pp 16-38 [2] Aivazian, V.A, Ge J., and J Qiu, (2005), “The Impact of Leverage on Firm Investment: Canadian 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Money, Credit, and Banking, Vol 1, pp 15-29 57 Appendix Table 2.1: Empirical Studies about Determinants of Corporate Investment Decisions Authors (Year) Fazzari et al (1988) Bond & Meghir (1994) Hall et Al (1998) Hu & Schiantarelli Approach Q, neoclassical and accelerator models Euler Investment Equation, Pecking Order Theory Euler Investment Equation, Agency Theory Econometric Model Specification Static Regression Dynamic regression VAR Dependent Variable Explained variables Estimation Hypothesis/ Results OLS The effects of financing constraints on investment are significant Investment rate Sales, Cash flow, dividend payment and q (Tobin-q and tax-adjust q) USA Panel data (1975-1985) Investment rate Lagged investment rate, output-capital ratio, CF-capital ratio and debt ratio UK Panel data (1974-1986) Investment rate Cashflow, sales, lagged investment rate, year dummies USA, France, Japan Panel data (1979-1989) USA Panel data (1978-1987) ML Significant impact of capital market imperfections on investment, depending on characteristics of firms USA Panel data OLS There had no evidence that cash flow belongs in the q model Switching regression Investment rate Market value-capital ratio, CF-capital ratio q model Static and Dynamic Investment rate Marginal q, CF (1998) Erickson & Country/ Data 58 GMM GMM Relationship between investment and the availability of internal fund sources is positive Investment is more highly sensitive to CF and sales in the US than in France and Japan Whited (1992-1995) GMM (2000) Gomes q model Static Regression Investment rate Tobin’s q, CF, sales (2001) Saquido q model Static Regression Investment rate Tobin’s q, cash flow USA Panel data (1979-1988) OLS Philippines Panel data (1989-2002) OLS (2003) Hanousek & Filer (2004) Carpenter and Guariglia GLS Credit Rationing Theory, Soft Budget Constraints Theory q Theory Static Regression Dynamic Regression Investment rate Investment rate (2008) Bokpin & Onumah (2009) q Theory Dynamic Regression Investment rate Profit-capital ratio, output-capital ratio Czech Republic Panel data (1993-1998) Tobin’s q, CF, sales, employees, contracted capital expenditure UK panel data (1980-2000) Lagged investment rate, leverage, dividend payout ratio 34 Emerging market firms Panel data (1992-2007) 59 OLS IV OLS GMM GMM investment-q regression, whether or not firms face financial constraints CF only impacts on investment if ignoring q despite of presence or absence of financial frictions The significant determinants of firm level investment were the investment opportunities and CF Positive relationship between profit and investment indicates no credit rationing but the better investment opportunities CF only influence on investment for small firms, not for large firms Macroeconomic and financial market development’s impact on corporate investment decisions was mixed Li et al q Theory (2010) Multi-linear regression Investment rate Lagged investment rate, debt ratio, cashflow, q, net asset yield, firm size OLS Debt and investment is a negative correlation with high-growth and low-growth opportunities However, there is a positive relationship between investment and debt with mid-growth opportunities GMM All variables are positive and statistically significant associated with investment decision OLS Firm size, cash-flow, and investment opportunities are significant and positive correlated with investment decisions China Panel data (2006-2008) India Nair Accelerator Dynamic Regression Investment rate (2011) Lagged investment rate, sales, cash-flow, leverage Panel data (1993-2004) Ruiz-Porras and Lopez-Mateo Agency Theory Log-linear Regression (2011) CF GLS GMM VAR ML OLS IV Investment rate Market concentration, operating-expense ratio, asset-utilization ratio, cash-flow, size, investment opportunities : Cash-flow : Generalized Least Squares : Generalized Method of Moments : Vector of Autoregressive Equations : Maximum Likelihood : Ordinary Least Squares : Instrument Variables Estimator 60 Mexico Cross-section data The Durbin-Wu Hausman test results: Test result of Cash-flow: Tests of endogeneity of: cf H0: Regressor is exogenous Wu-Hausman F test: 0.00000 F(1,646) P-value = 0.99999 Durbin-Wu-Hausman chi-sq test: 0.00000 Chi-sq(1) P-value = 0.99999 Because p-value is 0.99999, suggesting that null hypothesis is accepted or cash-flow is an exogenous variable Test result of Tobin’s q: Tests of endogeneity of: q H0: Regressor is exogenous Wu-Hausman F test: 0.00000 F(1,646) P-value = 0.99954 Durbin-Wu-Hausman chi-sq test: 0.00000 Chi-sq(1) P-value = 0.99954 Because p-value is 0.99954, suggesting that null hypothesis is accepted or Tobin’s q is an exogenous variable Test result of Fixed capital intensity: Tests of endogeneity of: fci H0: Regressor is exogenous Wu-Hausman F test: 51.06396 F(1,646) P-value = 0.00000 Durbin-Wu-Hausman chi-sq test: 48.12904 Chi-sq(1) P-value = 0.00000 Because p-value is 0.000, suggesting that null hypothesis is rejected or fixed capital intensity is an endogenous variable Test result of Sales growth: Tests of endogeneity of: gro H0: Regressor is exogenous Wu-Hausman F test: -0.00000 61 F(1,646) P-value = 1.00000 Durbin-Wu-Hausman chi-sq test: -0.00000 Chi-sq(1) P-value = 1.00000 Because p-value is 1.0000, suggesting that null hypothesis is accepted or sales growth is an exogenous variable Test result of Sales growth: Tests of endogeneity of: sizer H0: Regressor is exogenous Wu-Hausman F test: 31.87584 F(1,646) P-value = 0.00000 Durbin-Wu-Hausman chi-sq test: 30.89419 Chi-sq(1) P-value = 0.00000 Because p-value is 0.000, suggesting that null hypothesis is rejected or sales growth is an endogenous variable Test result of Business risk: Tests of endogeneity of: risk H0: Regressor is exogenous Wu-Hausman F test: -0.00000 F(1,646) P-value = 1.00000 Durbin-Wu-Hausman chi-sq test: -0.00000 Chi-sq(1) P-value = 1.00000 Because p-value is 1.0000, suggesting that null hypothesis is accepted or business risk is an exogenous variable Test result of Leverage: Tests of endogeneity of: lev H0: Regressor is exogenous Wu-Hausman F test: 4.77194 F(1,645) P-value = 0.02929 Durbin-Wu-Hausman chi-sq test: 4.81768 Chi-sq(1) P-value = 0.02817 Because p-value is 0.02817, suggesting that null hypothesis is rejected or leverage is an endogenous variable 62 ... 2.1.4 James Tobin’s q theory of Investment Tobin’s q theory of investment was presented in 1969 This theory resolved the problem of Jorgensen’s theory of investment, undetermined investment rate It... DETERMINANTS OF CORPORATE INVESTMENT DECISIONS: THE CASE STUDY OF VIETNAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By... 36 4.3.1 Examining the determinants of corporate investment decisions using FEM estimators 37 4.3.2 Examining the determinants of corporate investment decisions using GMM estimator