The effect of cash flow sensitivity on enterprises cash holdings, evidence from vietnam

UNIVERSITY OF ECONOMICS HO CHI MINH CITY VIETNAM ERASMUS UNVERSITY ROTTERDAM INSTITUTE OF SOCIAL STUDIES THE NETHERLANDS VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE EFFECT OF CASH FLOW SENSITIVITY ON ENTERPRISES’ CASH HOLDINGS: EVIDENCE FROM VIETNAM BY LE KHA TU MASTER OF ARTS IN DEVELOPMENT ECONOMICS HO CHI MINH CITY, December 2017 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 THE EFFECT OF CASH FLOW SENSITIVITY ON ENTERPRISES’ CASH HOLDINGS: EVIDENCE FROM VIETNAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS By LE KHA TU Academic Supervisor: Dr NGO MINH HAI HO CHI MINH CITY, December 2017 ABSTRACT Cash holdings have long been a particular concern when studying the financial policies of enterprises The global financial crisis in 2008 has impacted many economies in the world; Vietnam was one of the few emerging economies in Southeast Asia being less affected by the crisis However, the crisis has negative impacts on the macroeconomy of Vietnam Low GDP growth rates, booming inflation and escalating interest rates made Vietnamese enterprises’ situation more difficult Along with the Central bank's tightening monetary policy to curb inflation, commercial banks simultaneously restricted the issuance of large loans, which were more difficult for firms to access more capital In that context, the efficient use of cash holdings is the key to business success To use effectively the cash flow of the firms, it is important to study the factors that affect the cash holdings of firms Thus, the author chose the topic "The effect of cash flow sensitivity on enterprises’ cash holdings: Evidence from Vietnam" to study the effect of financial factors on firms’ cash holdings in Vietnam The main objective of the study was to find empirical evidence on the effects of cash flow sensitivities on cash holdings in the world and to seek evidence of this in Vietnam The study uses data from financial statements of 274 non-financial firms listed on Hanoi Stock Exchange (HNX) and Hochiminh Stock Exchange (HOSE) between 2009 and 2015 In Vietnam, cash flow sensitivities have a real impact on the cash holdings of firms, which is greater for firms with negative cash flows The financial constraint also affects the relationship between cash flow sensitivity and cash holdings, but the agency problem does not show any significant influence on this relationship Based on the results of the study, the paper offers some recommendations to help businesses make better cash management options At the same time, the paper also outlines some of the remaining limitations of research and future research Keywords: Cash flow sensitivity, cash holdings, financial constraint, agency problem, asymmetric i ACKNOWLEDGEMENT The first word I would like to send my sincere thanks to all Vietnam – Netherlands Programme professors, who have taught and imparted me valuable knowledge during the time of study and research, enabling me to complete this thesis You all not only gave me the knowledge but also created the best conditions for me in the data collection and thesis writing process Friendly and kind Vietnam – Netherlands Programme staff were always willing to help me on physical facilities as well as references I would like to sincerely and gratefully thank Dr Ngo Minh Hai, my supervisor, for his great assistance, principal and valued advice, guiding me from the smallest steps to help my thesis complete I would like to express my deep gratitude to all my friends, families, who have always been with me, cheered and supported me all the time Despite all the effort, due to limited knowledge and time, the problems presented in this thesis will certainly have many shortcomings I look forward to receiving feedback, evaluations and comments from the professors ii CONTENTS CHAPTER 1: INTRODUCTION 1.1 The problem statement 1.2 The research objectives 1.3 Research contribution 1.4 The thesis structure CHAPTER 2: LITERATURE REVIEW 2.1 Introduction 2.2 Studies on the effects of cash flow sensitivity on ca 2.2.1The impact of change in cash flo 2.2.2The relationship between financ company 2.3 Summary of previous findings CHAPTER 3: RESEARCH METHODOLOGY 3.1 The analytical framework 3.2 The econometric models 3.2.1 Model the effect of cash flow sen 3.2.2 The effect of cash flow sensitivi constraints 3.2.3 The effect of cash flow sensitivi 3.3 The data 3.4 Fixed Effects and Random Effects 3.5 GMM4 estimations 3.6 Expectations on research results 3.6.1 Effects of cash flow sensitivity o 3.6.2 Effects of cash flow sensitivity o 3.6.3 Effects of cash flow sensitivity o CHAPTER 4: RESEARCH RESULTS 4.1 Data description iii 4.2 Regression results and discussions 4.2.1 Effects of cash flow sensitivity o 4.2.2 Effects of cash flow sensitivity o 4.2.3 Effects of cash flow sensitivity o CHAPTER 5: CONCLUSIONS 5.1 Conclusions 5.2 Policy implications 5.3 Limitations REFERENCE APPENDIX iv LIST OF TABLES Table 1: Sample statistics 24 Table 2: Variable description 25 Table 3: Compare the mean of variables 25 Table 4: Pearson and Spearman correlation coefficients 27 Table 5: The results of Almeida (2004) 29 Table 6: Estimation results of the model 31 Table 7: Results of the asymmetry sensitivity of cash flow 34 Table 8: Cash Flow and Cash of FPT Corporation for the period 2009 – 2015 .36 Table 9: The number of observations of companies by year divided into three categories 38 Table 10: The summary statistics for the cash holdings of the two groups of companies by the three classification criteria 39 Table 11: Estimation results for financial constraints 40 Table 12: Estimation results of the model for agency problem .43 v CHAPTER 1: INTRODUCTION 1.1 The problem statements The 2008 financial crisis was the worst economic disaster since the Great Depression of 1929, having a strong impact on the world in general and Southeast Asia in specific However, Vietnam was one of the few economies that were less affected by the recession caused by this crisis Nevertheless, the GDP growth rates for seven consecutive years (from 2009 to 2015) were in low level, showing that the crisis still had negative impacts on Vietnamese economy Moreover, in the period of 2009-2015, Vietnam’s inflation was abnormal (a sudden increase to 19% in 2011 and then declining), bad debts became a serious problem and getting worse Vietnamese enterprises were directly affected by the crisis, the number of enterprises reporting losses was increasing and many businesses were forced to dissolve In that context, cash holdings were paid more attention, since cash management is the key to a success business as accessing capital markets is difficult For effective cash management, the first problem is what factors affect the firm's cash holdings Prior literature has widely studied the effects of cash flow on cash holdings and got certain conclusions Almeida et al (2004), Khurana et al (2006) found cash flow sensitivity was positive Meanwhile, Riddick and Whited (2009), Bao, Chan and Zhang (2012) found that cash flow sensitivity was negative The study of cash flow sensitivity of cash holdings may help firms proposing a better cash management model, thereby firms use cash more efficiently However, in Vietnam, the effect of cash flow sensitivity on cash holdings has yet to be studied extensively, and there are disputations on this problem in the world For this reason, the author chose the research topic "The Effect of Cash Flow Sensitivity on Cash Holdings: Evidence from Vietnam", examining whether or not the effect of cash flow sensitivity on cash holdings in Vietnamese enterprises Table 25: Hausman test for Equation cashflow neg cf_neg inst cf_inst inst_neg cf_inst_neg q size expenditure acq dncwc shortdebt B = Test: Ho: difference in coefficients not systematic chi2(129) = Prob>chi2 = 65 Table 26: List of companies in Research Data Industry Rubber Travel services Pharmacy - medical Mineral Energy Steel Oil and Gas Plastics - Packaging Food Seafood Transportation Construction Trade Manufacturing Telecommunications technology Fertilizer Building materials 73 ... topic "The Effect of Cash Flow Sensitivity on Cash Holdings: Evidence from Vietnam" , examining whether or not the effect of cash flow sensitivity on cash holdings in Vietnamese enterprises 1.2 The. .. Chan and Zhang Besides the studies on the effects of cash flow sensitivity on cash holdings, studies on impacts of agent costs on the effect of cash flow sensitivity on cash holdings had certain... 3.2.2 The effect of cash flow sensitivity on cash holdings is under financial constraints After examining the effect of cash flow sensitivity on cash holdings, the study examines how cash flow sensitivity