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

MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY - TU THI KIM THOA FIRMS’ INVESTMENT – CASH FLOW RELATIONSHIP IN THE CONTEXT OF STATE OWNERSHIP AND BANKING SYSTEM REFORM IN VIETNAM Major: Finance - Banking Code: 9340201 SUMMARY OF PH.D THESIS Ho Chi Minh City, 2020 The thesis is carried out at: University of Economics Ho Chi Minh City Academic supervisors: Dr Vu Viet Quang Dr Nguyen Thi Uyen Uyen Reviewer : Reviewer : Reviewer : The thesis will be defended at the Doctorate Thesis Committee of Examiners of the University of Economics Ho Chi Minh City at………… on ……… The thesis can be referred at the library: Chapter 1: INTRODUCTION 1.1 Motivations Relationship between investment and cash flows, especially in the context of financial constraints have attracted interests of many scholars in the field corporate finance Fazzari, Hubbard, Petersen, Blinder, and Poterba (1988) show that financially contrained firms have high investment – cash flow sensitivity because of higher cost of external funds in compared with that of internal funds Different types of the relationhip between investment and cash flow have been found in financial literatures Fazzari et al (1988) find the linear relationship while Cleary, Povel, and Raith (2007) document the non-linear (Ushaped) ones, which have been confirmed by many other studies (Firth, Malatesta, Xin, & Xu, 2012; Guariglia, 2008; Tsai, Chen, Lin, & Hung, 2014) So, there is no consistent relation between investment and cash flows found in the literatures Moreover, this relation has not been under-investigated for Vietnam context The investment – cash flow sensitivity is one of commonly used measures of financial constraint, which is defined as a limit in capital accessibility, either internally or externally Several studies shows evidences that state-ownership does have impact on this sensitivity (Firth et al., 2012; Haider, Liu, Wang, Zhang, & Money, 2018; Tsai et al., 2014) while H.-C M Lin and Bo (2012) shows that state – ownership does not help to reduce financial constraints on investment, even via the state-controlled banking system However, most of the studies conducted in the context of well-developed economies or big transition country like China How about Vietnam, a small and young transition economy? Vietnam used to follow the centrally planned economy which was entirely dominated by state-owned enterprises (SOEs) Althought under the impact of Doi moi policy, the role of private sector in the economy has been increasing, the government still plays an important role in a large number of companies by holding a large percentage of outstanding shares at many equitized SOEs In the literatures, the impact of state ownership on firm performance as well as financial decisions is still controversial Some report a positive impact (R R Chen, El Ghoul, Guedhami, & Nash, 2018; Du & Boateng, 2015; Sun & Tong, 2003) while some other evidence different effects (Allen, Qian, & Qian, 2005; G Chen, Firth, & Xu, 2009) So, whether state ownership has any impact on corporate financial constraint, specifically, investment – cash flow relation of Vietnamese companies is still an unanwered question In Vietnam, due to the underdevelopment of financial market, beside internal cash flows, bank loans have been main financing sources of funds for firm’s investments However, credit market is not a fair play ground for private companies due to some historical reasons1 although Vietnam has done several efforts to improve the situation Nhung and Okuda (2015) show that Vietnamese SOEs have an advantage over privately owned firms in accessing bank loans as well as making a profit, even after economic booms The higher accessibility to bank loans, the less financially constrained the firm is, meaning the lower investment – cash flow sensitivity Therefore, banking system reform is proved to have an impact on investment – cash flow relation (Tsai et al., 2014) In the process of reforming the Vietnam used to be a centrally-planned economy in which state – owned banks mainly served for state-owned enterprises economy as well as intergrating to the world, Vietnam gradually accepts the entry of foreign banks to business in Vietnam The presence of foreign banks on one side would increase competition in credit market, and on the other side put pressures on domestic banks to improve their transparancy, effeciency and profitability to be survival and grow in a integrated market As such, the presence of foreign banks – which can be considered a measure to reform the banking system – may have certain impact on companies accessibility to external funds to finance their investment, or on the other words, firm’s investment – cash flow relation Therefore, this is also another motivation for me to choose this topic The topic of investment – cash flows have been intensively conducted in financial literatures, but most of them use the samples of developed countries like U.S, Canada, or China – a big transitional economy To my best knowledge, the relationship between investment and cash flows, especially in the context of state – ownership and foreign bank entry has still not investigated for the case of a small transition economy like Vietnam Furthermore, in spite of sharing some cutural, social and political similarities with China, Vietnam also has many differences such as size of economy, history of the transformation, openness to the world economy, development of financial market, etc Studying the Vietnamese context is believed to be worthwhile and valuable for international finance literatures because results form the rather specific case of China may not be generalizable for other small emerging markets Therefore, I choose to examine the impact of banking system reform, and state ownership on investment – cash flow sensitivity in Vietnam for my Ph.D thesis 4 The thesis follows the series of essays format which consists of two independent essays: Firm’s investment – cash flow relationship in the context of state ownership in Vietnam; and Firm’s investment – cash flow relationship in the context of banking system reform in Vietnam 1.2 Thesis objectives: The thesis aims to investigate the impact of state ownership and banking system reform on the relationship between firm’s investment and internal cash flows in the context of small transition economy – Vietnam 1.3 Methodology: The study applies quantitative method on non-balanced panel samples of Vietnamese listed firms which are extracted from the Thomson Reuters database and manually collected from companies’ annual reports All the regressions are estimated by Generalized Least Squared (GLS) method to fix the heteroscedasticity problem and robusted by Generalized Method of Moment (GMM) for endogeneitity potential 1.4 Empirical findings The results show that the investment–cash flow relation for both state-owned and non-state-owned firms is U-shaped In addition, state-owned companies have higher cash flow sensitivity of investment, which perhaps is due to their socioeconomic and political responsibilities, poor corporate governance and agency problem Also, presence of foreign banks in Vietnam results in a decrease in investment cash flow sensitivities of Vietnamese companies Although overinvestment of state controlled firms is not reduced but underinvestment problem of non- state -controlled listed firms is mitigated due to better accessibility to bank loans with presence of foreign banks 1.5 Contributions The studies provides evidences on the non-linear relationship between investment and cash flows in Vietnam, which have been under-investigated More importantly, it sheds further light on the implications of financial constraints on investment under the impact of state ownership and banking system reform, especially in a small transitional economy such as Vietnam Therefore, the study results can be helpful reference for policy makers, managers, economic and business lecturers and students Chapter FIRM’S INVESTMENT – CASH FLOW RELATIONSHIP IN THE CONTEXT OF STATE OWNERSHIP CONTROL IN VIETNAM 2.1 Study motivations This chapter presents the first essay: a study on firm’s investment - cash flows relationship under the context of state ownership control in Vietnam The study is motivated by the domination of state ownership in Vietnamese companies while its impact on firm performance as well as financial decisions have still been unconsistent in the literature Otherwise, from our best knowledge, little attention to date has been paid to the impact of state ownership on the investment–cash flow relation, especially in a small transitional economy such as Vietnam 6 2.2 Literature review and hypothesis development 2.2.1 Relation between investment and cash flow Fazzari et al (1988) is the first person who show the linear relationship between investment and cash flow by using a sample of US manufacturing firms in the period 1970–1984 The authors also evidence find that the relation is more sensitive at financially constrained firms and less sensitive at non-financially constrained firms The linear relationship also supported by Hoshi, Kashyap, and Scharfstein (1991); Kaplan and Zingales (1997); Cleary (1999) and Almeida and Campello (2007) However, Cleary et al (2007) find a U-shaped relation, which is caused by cost and revenue effects, between investment and cash flow The cost effect arises because when firms invest more, their borrowing cost rises The authors conclude that firm’s investment has a positive relation with internal cash flows when the cash flows are significant, and a negative relation if they are low The U-shape is also supported by Guariglia (2008) Additionally, beside comfirming the non-linear curve, Firth et al (2012) further argue that the curve may vary with politically oriented investment or a soft budget constraint Tsai et al (2014) assert the flatter U-shaped curves with the presence of foreign banks, which reduce financial constraints for firms, especially those that are privately owned This means that lower investment - cash flow sensitivity reduces underinvestment by listed SOEs The U-shaped relation between investment and cash flow may be explained as follows The small and young companies normally have low range of cash flows and good investment opportunities, which are well perceived by the market, so these companies are easier to raise external capital from financial market, resulting in a negative investment – cash flow relation However, having no current investments, higher cash flows will not materialize in the future Therefore, it is not a feasible strategy to coincide timing investment with high cash flow period (Hovakimian, 2009) This argument also supports the argument by Cleary et al (2007) with cost – revenue effect explanation Therefore I expect that Vietnamese firms have a similar investment–cash flow relationship, so the following hypothesis is set: H2.1: The investment and cash flow relation at Vietnamese companies is U-shaped 2.2.2 State Ownership and Investment–Cash Flow Relations Many studies have been conducted on the impact of soft budget constraints on the relationship between cash flow and investment Early research by Chow and Fung (1998) finds evidence that investment by private firms has higher cash flow sensitivity than that by SOEs, implying that the latter face fewer financial constraints than non-SOEs Héricourt and Poncet (2009), as well as Poncet, Steingress, and Vandenbussche (2010) arrive at similar conclusions According to Cleary et al (2007), the less financially constrained a firm is, the flatter its U-shaped curve is, as company investment is less dependent on internal cash flow Guariglia, Liu, and Song (2011) find that SOEs’ asset growth is not affected by liquidity constraints, while the availability of internal funds constrains the growth potential of private companies The soft budget constraints at SOEs are due to their social and political responsibilities (Bai, Lu, & Tao, 2006; C R Chen, Li, Luo, & Zhang, 2017a; J Y Lin & Tan, 1999; Sheshinski & LópezCalva, 2003) On the contrary, Firth et al (2012) show that SOEs have a steeper U-shaped curve than private firms, especially on the lefthand side of the curve The findings appear to contradict the argument on SOEs’ soft budget constraints The authors argue that Chinese SOEs are induced by the government to use their own cash flows to invest more, so as to achieve multiple government socioeconomic objectives when they have abundant internal cash flows and when they face negative internal funds In Vietnam, SOEs also have responsibilities to fulfil government socioeconomic and political objectives as the Chinese ones The SOEs, under the government influences in many cases, have to undertake some assigned, even negative net present value (NPV) investments, leading to overinvestment problems However, unlike the private firms, the Vietnamese SOEs not associate investments with firm’s fundamentals (O'Toole, Morgenroth, & Ha, 2016), indicative of poor investment efficiency R Chen, El Ghoul, Guedhami, and Wang (2017b) also report that SOEs’ investments have lower efficiencies than non SOEs Lower efficiency may cause a higher cost of external financing, which in turn make SOEs have more reliance on the internal capital Therefore, the following hypothesis is posited: H2.2: SOEs have higher investment–cash flow sensitivity 2.2.3 State Ownership and Investment–Leverage Relation In literature, a negative relation between debt and investment are found by many studies (Aivazian, Ge, & Qiu, 2005; Firth, Lin, & Wong, 2008; Jensen, 1986; Lang, Ofek, & Stulz, 1996; Myers, 1977) On the other side, as indicated in many studies (Chow & Fung, 1998; Guariglia et al., 2011; Héricourt & Poncet, 2009; J Y Lin & Tan, 1999; Poncet et al., 2010), SOEs have a soft budget constraint, which means they can easily access external financing (Allen et al., 2005; Cull, Li, Sun, & Xu, 2015; Cull & Xu, 2003) Nhung and Okuda (2015) also point that Vietnamese SOEs have easier access than other firms when borrowing funds from banks and making profits, even after an economic boom As such, state ownership may have certain impact on the relation between investment and leverage Therefore, the thesis also investigate the impact of state ownership on investment–leverage relations by developing the following hypothesis: H2.3: State ownership has a positive impact on a firm’s investment–leverage relations 2.3 Research design 2.3.1 Testing Investment–Cash Flow Relation In order to test the U-shape relationship, in this study, two different approaches to examine investment–cash flow relations, using the basic model of investment developed by Fazzari et al (1988) are employed as follows: In the first approach, CFKSQRi,t is added into the basic model as employed by Cleary et al (2007); Firth et al (2012): 𝐼𝐾𝑖,𝑡 = 𝛼0 + 𝛼1 𝐶𝐹𝐾𝑖,𝑡 + 𝛼2 𝐶𝐹𝐾𝑆𝑄𝑅𝑖,𝑡 + 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝑖,𝑡 + 𝑣𝑖 + 𝑣𝑡 + 𝑒𝑖,𝑡 (2.1) where i and t are firm and time, respectively; vi is the firm-fixed effects; vt is the year-fixed effects, and eit is the error term IKit is the investment ratio CFKi,t is the annual internal cash flow ratio Controls is a vector of control variables that potentially affect firm investment, including the SGi,t-1 (firm’s sales growth); SIZE (firm size); LEVi, t-1 (financial leverage); AGEi,t (firm age); BETAi,t (beta coefficient) 10 In the second approach, following Firth et al (2012), the cash flow (CFK) of the basic model is separated into positive cash flow (CFKPOS) and negative cash flow (CFKNEG) by using the dummy variables POS and NEG POS takes a value of if CFK is greater than 0, and otherwise Similarly, NEG takes a value of if CFK is less than 0, and otherwise 𝐼𝐾𝑖,𝑡 = 𝛼0 + 𝛼1 𝐶𝐹𝐾𝑃𝑂𝑆𝑖,𝑡 + 𝛼2 𝐶𝐹𝐾𝑁𝐸𝐺𝑖,𝑡 + 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝑖,𝑡 + 𝑣𝑖 + 𝑣𝑡 + 𝑒𝑖,𝑡 (2.2) A significant change in the sign of the coefficients of CFKPOS and CFKNEG shows a nonlinear relation between investment and cash flows A U-shaped curve has a significantly positive sign for CFKPOS and significantly negative sign for CFKNEG An inverse-U-shaped curve has a significantly negative sign for CFKPOS and significantly positive sign for CFKNEG 2.3.2 Testing the impact of state ownership on investment–cash Flow Relations To test the impact of state ownership on investment–cash flow relations, I use two different proxies for state ownership (SC):  First, SC (= STATE) is measured by a dummy variable that takes a value of if the percentage of state ownership in firm i in year t is at least 50% of total voting shares and otherwise This method compares the investment behavior of two groups: state-owned (SOEs) and non state-owned (non-SOEs) firms  Second, SC (= GOV) is measured by the percentage of state ownership in firm i in year t This method measures the extent of government influence on firm investment behavior The two SC proxies are sequently interacted with CFKPOS and CFKNEG The regression model is as follows: 11 𝐼𝐾𝑖,𝑡 = 𝛼0 + 𝛼1 𝐶𝐹𝐾𝑃𝑂𝑆𝐼,𝑡 + 𝛼2 𝐶𝐹𝐾𝑁𝐸𝐺𝐼,𝑡 + 𝛼3 𝐶𝐹𝐾𝑃𝑂𝑆_𝑆𝐶𝐼,𝑡 + 𝛼4 𝐶𝐹𝐾𝑁𝐸𝐺_𝑆𝐶𝐼,𝑡 + 𝛼5 𝑆𝐶𝐼,𝑡 + 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝑖,𝑡 + 𝑣𝑖 + 𝑣𝑡 + 𝜀𝑖,𝑡 (2.3) 2.3.3 Testing the impact of state ownership on investment–leverage relations The following model is used to test H2.3 Two different proxies for state ownership (SC) described in section 2.3.2 are used to interact with leverage (LEV) as follows: 𝐼𝐾𝑖,𝑡 = 𝛼0 + 𝛼1 𝐶𝐹𝐾𝑖,𝑡 + 𝛼2 𝐿𝐸𝑉𝑖,𝑡−1 + 𝛼3 𝑆𝐶𝑖,𝑡 + 𝛼4 𝑆𝐶𝑖,𝑡 ∗ 𝐿𝐸𝑉𝑖,𝑡−1 + 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝑖,𝑡 + 𝑣𝑖 + 𝑣𝑡 + 𝜀𝑖,𝑡 (2.4) All the tests are conducted for full-sample, SOEs and non SOEs subsamples, and high growth and low growth subsamples 2.3.4 Data An unbalanced panel data in 2009-2015 for non-financial companies listed on the HOSE and the HNX is used Both financial and market data are extracted from the Thomson Reuters database Observations with missing data are omitted, and outliers that may influence the results are also excluded by winsorizing 1% of the two tails for each variable 2.4 Summary of the study results The study investigates the impact of state ownership on the relation between investment and cash flow in Vietnam, a small transition economy The results also show higher cash flow sensitivity of investment at SOEs, implying higher financial contraints, compared with non-SOEs because the former have social and political responsibilities At SOEs, sensitivity is higher when cash flows are positive than when cash flows are negative Our results also show that privately owned companies increase investment more when they have 12 a positive rather than negative cash flow, but the investment behavior of state-owned companies is the opposite They reduce investment more when they have negative cash flow than when cash flow is positive Furthermore, the study finds that bigger as well as riskier companies make less investment than smaller or less risky ones Table 4.4 Summary of regression result testing the U-shape investment and cash flow relation Panel A: Regression with square of cash flow (CFKSQR) State-owned Non-state-owned enterprises enterprises CFK 0.002*** -0.005 0.002*** (2.69) (-0.64) (2.87) CFKSQR 0.00001*** 0.002*** 0.00001*** (34.72) (7.43) (34.06) Panel B: Regressions separating CFK into CFKPOS and CFKNEG State-owned Non-state-owned Full sample enterprises enterprises CFKPOS b1 0.026*** 0.067*** 0.026*** (16.95) (15.00) (20.56) CFKNEG b2 -0.002 -0.105*** 0.0005 (-1.42) (-6.18) (0.64) joint test (b1=b2) 0.000 0.000 0.000 R-sq 0.564 0.498 0.562 Fixed Effect Year and Industry Year and Industry Year and Industry No of Obs 2734 773 1961 Full sample Different investment behaviours are found by companies with high versus low growth opportunity Investment by both SOE and nonSOE high growth companies is less dependent on internal cash flow High growth SOEs have higher cash flow sensitivity of investment than non-SOEs However, low growth SOEs have higher cash flow sensitivity of investment than non-SOEs, suggesting that the social and political investments by the former may be inefficient 13 Table 4.5: Impact of state ownership on investment – cash flow relations CFKPOS b1 CFKNEG b2 CFKPOS_SC b3 CFKNEG_SC b4 SC Joint test (p-value) b1=b2 b1+b3=0 b2+b4=0 b1+ b3=b2+b4 R-sq Fixed Effect No of obs SC = STATE 0.0234*** (15.24) 0.00005 (0.07) 0.048*** (7.28) -0.119*** (-13.52) 0.015 (1.21) 0.000 0.000 0.000 0.000 0.570 Year and Industry 2734 SC = GOV 0.028*** (24.47) 0.002*** (8.27) -0.029*** (-7.63) -0.039** (-2.28) 0.029 (1.36) 0.000 0.668 0.029 0.037 0.572 Year and Industry 2734 Moreover, I also find that previous-period leverage has a positive effect on SOEs High growth SOEs have a soft budget constraint, but both high growth non-SOEs and low growth SOEs are more reliant on internal cash flows to finance their investments Our study provides additional evidence on the impact of state ownership on corporate investment–cash flow relations, especially in a small transition economy, which may be useful for future research on a similar topic in a similar context However, the research only investigate the impact of the Vietnam’s state ownership among various forms of ownership, which could be further exploited in future studies, on the investment- cash flow relation 14 Chapter FIRM’S INVESTMENT – CASH FLOW RELATIONSHIP UNDER THE CONTEXT OF BANKING SYSTEM REFORM IN VIETNAM 3.1 Study motivation: This study examines the effect of banking system reform which is measured by foreign bank’s presence on investment-cash flow relation in a context of a small transition economy The study is motivated by the fact that in Vietnam, financial system has been going through many reforms to improve its efficiency as well as to integrate into the world economy, including accepting the presence of foreign banks Tsai et al (2014) document that presence of foreign banks would reduce corporate investment-cash flow sensitivities in China To my best knowledge, there is quite few studies on this topic So, case of China may not be generalized for other small developing countries with unmature financial market like Vietnam although Vietnam shares some political, cultural, social and economic similarities with China 3.2 Literature review Among studies on impact of foreign banks, Detragiache, Tressel, and Gupta (2008) find evidence that foreign banks are less sensitive to political pressure, and they have less pressure of lending relation partners, who are capable of breaking relation barriers Political and non-economic motivations are not top priorities of domestic banks now Therefore, state-owned commercial banks are transformed from politically – incentive organization to modern corporate governance – oriented ones Therefore, reforming bank 15 system by allowing foreign banks holding ownership at domestic state-owned banks could reduce policies favoring politically – oriented investments of state – controlled companies With presence of foreign investors, credit granting would be more prudential, in that way careless loans as well as politically-oriented loans could be mitigated With this research, Detragiache et al (2008) use foreign ownership in domestic bank as proxy for banking system reform and this research is supported by Berger, Klapper, Peria, and Zaidi (2008) Berger et al (2008) report that after reform, foreign ownership in domestic banks, especially state-controlled banks can change their lending practice, from politically – oriented to commercially-oriented banks Non state-controlled listed companies are considered more transparent, more commercially-oriented and more efficient than state-controlled listed companies Therefore, after reform, non-statecontrolled listed companies have more channels to access bank loan and underinvestment problem of non-state- controlled listed companies are reduced Tsai et al (2014) in their study on effect of bank system reform on investment – cash flow sensitivity measures banking system reform by presence of foreign bank at region where company had headquartered or branches The research finds evidence that with presence of foreign banks, politically-oriented investments at state controlled listed companies are reduced because state-owned banks transform from more politically – oriented to more commercially – oriented financing Problem of underinvestment at non state – controlled listed companies seems to be mitigated due to an increase in their bank loan accessibility The study also documents a reduction 16 of distortion of investment in state controlled listed companies as well as reduction on financial constraints at non state – controlled listed companies 3.3 Research methodology 3.3.1 Hypothesis development and model specification 3.3.1.1 Effect of banking system reform on investment–cash flow relation It is common to have problem of “flexible” budget constrain in the centrally-planned economy, which refers to the favorable policies for state-controlled organizations Due to being owned by government, these organizations are often bailed out if they are in trouble, normally in form of subsidy, tax deduction or exemption, set low input cost, set high output price, low cost financing, etc Therefore, state – owned enterprises in Vietnam normally can access bank credit much easier and normally at lower cost than private ones, that leads to the situation of overinvestment Moreover, like China, overinvestment problem in state-controlled companies are mainly caused by politically- oriented investments (Firth et al., 2012) because officials in these companies also have incentives to achieve social and political objectives for their promotion (Liu & Lu, 2007) Meanwhile, non-state-controlled companies are not favored with these privileges, so they have to rely on their own internal cash flow to finance their investment opportunities (Tsai et al., 2014) With the presence of foreign bank, credit market become more competitive and transparent State-owned banks may have to change its lending practices from politically-oriented to commerciallyoriented, so non-state controlled companies have more chance to 17 access bank financing, so underinvestment problem of these company could be reduced H3.1: Banking system reform mitigates overinvestment problem at state – controlled companies H3.2: Banking system reform mitigates underinvestment problem at non state – controlled companies Following Firth et al (2012), the impact of foreign bank presence on investment cash flow sensitivity is tested by following model: 𝐼𝐾𝑖,𝑡 = 𝛼0 + 𝛼1 𝐶𝐹𝐾𝑃𝑂𝑆𝐼,𝑡 + 𝛼2 𝐶𝐹𝐾𝑁𝐸𝐺𝐼,𝑡 + 𝛼3 𝐶𝐹𝐾𝑃𝑂𝑆𝐵𝐴𝑁𝐾𝐼,𝑡 + 𝛼4 𝐶𝐹𝐾𝑁𝐸𝐺𝐵𝐴𝑁𝐾𝐼,𝑡 + 𝛼5 𝐵𝐴𝑁𝐾𝐼,𝑡 + 𝛼6 𝑆𝑎𝑙𝑒𝑠𝐺𝑟𝑜𝑤𝑡ℎ𝑖,𝑡−1 + 𝛼7 𝑆𝐼𝑍𝐸𝑖,𝑡 + 𝛼8 𝐿𝐸𝑉𝑖,𝑡 + 𝛼9 𝐴𝐺𝐸𝑖,𝑡 + 𝛼10 𝐵𝐸𝑇𝐴𝑖,𝑡 + 𝑣𝑖 + 𝑣𝑡 + 𝜀𝑖,𝑡 (3.1) where i and t are firm and time, respectively; vi is the firm-fixed effects; vt is the year-fixed effects, and eit is the error term IKit is the investment ratio CFKi,t is the annual internal cash flow ratio Controls is a vector of control variables that potentially affect firm investment, including the SalesGrowthi,t-1 (firm’s sales growth); SIZE (firm size); LEVi, t-1 (financial leverage); AGEi,t (firm age); BETAi,t (beta coefficient) POS, NEG and BANK are interaction variables which POS takes a value of if CFK is greater than 0, and otherwise; NEG takes a value of if CFK is less than 0, and otherwise BANKi,t takes the value for firms located in a region where foreign banks are allowed to business in year t and afterwards, and otherwise 3.3.1.2 Effect of banking system reform on investment-leverage relation As many other transition economies, bank loans are still main source of external funds in Vietnam where stock market is still young 18 and immature Moreover, presence of foreign banks provides additional credit channel for firms, resulting in mitigation of financial constraints, as well as motivation for domestic banks to improve their efficiency to be more competitive and to change lending practice to be more commercially-oriented So, to examine if banking system reform have any impact on investment –debt relation, the following hypothesis is developed: H3.3: Banking system reform has a positive impact on firm’s investment – debt relation: Following model is used to test the hypothesis H4.3: 𝐼𝐾𝑖,𝑡 = 𝛽0 + 𝛽1 𝐶𝐹𝐾𝑖,𝑡 + 𝛽2 𝐿𝐸𝑉𝑖,𝑡−1 + 𝛽3 𝐵𝐴𝑁𝐾𝑖,𝑡 + 𝛽4 𝐵𝐴𝑁𝐾𝑖,𝑡 ∗ 𝐿𝐸𝑉𝑖,𝑡−1 + 𝛽5 𝑆𝑎𝑙𝑒𝐺𝑟𝑜𝑤𝑡ℎ𝑖,𝑡−1 + 𝛽6 𝑆𝐼𝑍𝐸𝑖,𝑡 + 𝑣𝑖 + 𝑣𝑡 + 𝜀𝑖,𝑡 (3.2) Definitions of other variables are as above 3.3.2 Data The study uses an unbalanced panel data from the period 2009 to 2014 for non-financial companies listed on Ho Chi Minh City Stock Exchange (HOSE) and Hanoi Stock Exchange (HNX) Financial firms are excluded because of their different investment behaviors Both firm’s financial data and financial market information such as stock’s adjusted market price and market index are taken from the Thomson Reuter Database Missing value observations and outliers are also excluded 3.3 Summary of the study results This study focus on investigating investment cash flow sensitivity in a context of Vietnam as well as if investment behavior of Vietmamese companies is affected by banking system reform which is measured by presence of foreign banks The study again 19 confirms the U-shape relation between investment and cash flows, both state controlled and non state controlled firms Table 5.5 Effect of banking system reform on investment – cash flow relation CFKPOS b1 CFKNEG b2 CFKPOSBANK b3 CFKNEGBANK b4 BANK joint test (p-value) b1=b2 b1+b3=0 b2+b4=0 b1+ b3=b2+b4 R-sq Year Dummy Industry Fixed Effect No of Obs Full sample 0.044*** (3.10) -0.240*** (-6.06) 0.044*** (2.77) 0.223*** (5.52) 0.013** (2.12) SOEs 0.062*** (3.12) -0.179*** (-3.55) 0.091*** (3.48) 0.137** (2.46) 0.029** (2.35) Non SOEs 0.036 (1.57) -0.238*** (-5.26) 0.032 (1.3) 0.219*** (4.79) 0.010 (1.34) 0.000 0.000 0.065 0.000 0.166 Yes Yes 0.000 0.000 0.065 0.000 0.118 Yes Yes 0.000 0.000 0.055 0.000 0.164 Yes Yes 2266 667 1601 Banking system reform measured by presence of foreign banks has signigicant impact on investment behaviour of Vietnamese companies Underinvestment problem of uncontrolled firms is mitigated by the reforms due to their better accessibility to external financing Unlike our expectation, overinvestment problem of state controlled firms is almost not reduced which is different with findings by Tsai et al (2014)Tsai et al (2014) It can be explained that foreign bank presence in Vietnam is still very limited while state owned banks 20 are still playing dominating role on the credit market Besides, both high and low growth state controlled firms seem not change their investment behavior much after the reform However, high growth uncontrolled firms signigicantly increase their investment after the reforms while low growth uncontrolled firms seems have to more rely on their cash flows in the post reform period Our results also shows a significant change from negative to positive investment – leverage relation from pre reform period to post reform period for both state and non state controlled firms, meaning that firm investments are less dependent on internal financing in the post reform period This impact are especially significant for low growth opportunity firms Chapter CONCLUSION In this thesis, I investigate the firm’s investment – cash flow relationship under the two different contexts: state ownership and banking system reform in a small transition economy – Vietnam The following two big conclusions are withdrawn: - State ownership may increase firm’s financial constraints may be due to its political and social responsibilities - Presence of foreign banks may reduce firm’s financial contraints because their lendings are mainly based on commercial purposes Otherwise, this is also additional channel of financing, especially for private sector From the above implications, reccommendations are suggested: the following policy 21 o To accelerate equitization process both in term of quality and quantity o Policy regulations should be set up in the way SOEs should focus on the business functions The political and social responsibilities should be implemented via indirect tools such as tax o It is better to improve the competitiveness of the banking system through the healthy banking operations and strict management of bad debts o Step by step opening and liberalizing the financial sector to integrate deeply and broadly with the world o Companies with good future investment opportunities may choose a low level of financial leverage to avoid debt overhang The study’s findings can provide some useful impications for academics, managers, investors and policy makers Regarding academics, the study can be used to be learning materials for finance students Managers and investors may refer the findings to make better financial decisions Policy makers may use the findings as reference to make relevant policies to improve business environment which have transparency, fair playground for all kinds of businesses as well as to improve effectiveness of government stakes in companies 22 THESIS-RELATED LIST OF AUTHOR’S PUBLICATIONS A Scientific jounals 1) Tu Thi Kim Thoa, Nguyen Thi Uyen Uyen (2017) Banking System Reform and Investment - Cash flow Relation – Case of Vietnam, Research In International Business and Finance, Vol 41, October 2017, Pages 500-515 DOI: 10.1016/j.ribaf.2017.04.038 2) Từ Thị Kim Thoa, Nguyen Thi Uyen Uyen (2017), Kiểm định mối quan hệ đầu tư dòng tiền: trường hợp Việt nam, Tạp Chí Khoa Học, 57(6), 49-63 3) Tu Thi Kim Thoa and Nguyen Thi Uyen Uyen (2019), Stateownership and the Relationship between Investment and Cash Flow:The Case of Vietnamese Listed Firms, Emerging Market Finance and Trade, DOI: 10.1080/1540496X.2019.1610874 B Scientific researches 1) University level (2016), “Ảnh hưởng cải cách hệ thống ngân hàng lên mối quan hệ phi tuyến dòng tiền dầy tư”, Code: CS-2015 - 104 (Research leader) Excellent rated 2) Univeresity level (2017): “Mối quan hệ đầu tư dòng tiền, vai trò kiểm soát nhà nước – Trường hợp doanh nghiệp niêm yết Việt nam” Code: CS-2016-29 (research leader) Excellent rated  ... Firm’s investment – cash flow relationship in the context of state ownership in Vietnam; and Firm’s investment – cash flow relationship in the context of banking system reform in Vietnam 1.2 Thesis... objectives: The thesis aims to investigate the impact of state ownership and banking system reform on the relationship between firm’s investment and internal cash flows in the context of small transition... Chapter FIRM’S INVESTMENT – CASH FLOW RELATIONSHIP UNDER THE CONTEXT OF BANKING SYSTEM REFORM IN VIETNAM 3.1 Study motivation: This study examines the effect of banking system reform which is