The impact of corporate investment on stock liquidity: Evidence on Viet Nam

Corporate investment affects stock liquidity in the Viet Nam stock market, the distinction between different measures of corporate investment and liquidity, financial comprehension with reference to the variables of stock liquidity, association of corporate investment on stock liquidity

Graduation Paper ABSTRACT This dissertation aims to explore the impact of corporate investment on stock liquidity in the context of Viet Nam, conducted with a sample of Ho Chi Minh listed companies during the period 2006-2017 The results show that there is a positive relationship between stock liquidity and corporate investment I also find the strong positive impact on stock liquidity Specifically, a 71.1% or 57,8% growth in corporate investment (CAP or CRD) proposes a 100% growth in stock liquidity In reference to this outcome, one can conclude that corporate investment influences strongly on stock liquidity on Ho Chi Minh stock exchange Undoubtedly, there is a different reaction of corporate investment on stock liquidity between various businesses And hopefully this finding will be attributable to other studies about the effect of corporate investment on stock liquidity from now and in the future Graduation Paper TABLE OF CONTENTS Graduation Paper LIST OF TABLES CHAPTER INTRODUCTION 1.1 Study overview Following the fast-paced expansion of the world’s economy, public companies in general and listed companies in the stock market notably in Viet Nam have been affirming their role in the worldwide market After approximately 20 years of operating, the Vietnam stock market has around 1500 listed companies, registered on Ha Noi and Ho Chi Minh stock exchange Above 1000 different types of public business that have not been listed; Over million transaction accounts of small and big traders That is the reason stock liquidity becomes a considerable concern for investors Many surveys propose that the liquidity of stock market can build up the development of the economy Levine and Zervos (1998) shows that the liquidity of stock market and banking development have a positive impact on GDP growth This study aims for discovering the impact of corporate investment on stock liquidity in the context of Viet Nam, the degree of its influence How investment decision can affect stock liquidity Therefrom, hopefully we can boost the liquidity of stocks by investing in assets properly Liquidity is one of the most essential proportions of the ideal slice of resources The liquidity capability refers to how quickly can the financial assets be transferred into cash at anytime without loss of profit Convertible securities can be modified into cash in the stock market at any time traders want, but there is no assurance against loss The conversion of assets into cash is one of the most fundamental affairs of financial markets and then boosting liquidity ability at the same time controlling liquidity risk At the present day, given the economic circumstances and inconstancy of the stock market indication Components that affect suitable performance of liquidity in financial markets deserve such consideration Elements like the numbers of stock traders, the number of days that a particular stock has been traded, and mean daily volume of transaction to total stocks issues affect the degree of liquidity The role of liquidity in micro and macro levels is unquestionable The stock market affects economic activities through liquidity Investors always desire a stock that can be traded at the lowest possible cost (Saeedi and Dadar, 2009) The constitutional risk of investment makes investors skeptical Hence, awareness of risk and earnings is highly important for investors Many lucrative investment projects demand a long-term commitment to capital, but investors often weigh the pros and cons of losing control to their savings over the long term The absence of liquidity of a financial asset would be treated as a risk The liquidity market makes the investment Graduation Paper less risky and more appealing, because it grants investors to sell shares comfortably at low cost when they need cash or want to change their portfolios Simultaneously, companies that like sustainability can raise capital by issuing equity By having the advantage of the long-term course, investments will be more profitable, market liquidity improves capital allocation and enhances the prospects for long-term growth of the economy Moreover, when investments are less risky and more profitable, the liquidity of the stock market will attract more investment Therefore, the relationship between stock liquidity on the stock market and investment in the company is worth taking into consideration Strengthening and improving corporate investment plays a major factor in expanding and shaping businesses, contributing positively to enhancing enterprise value Furthermore, most studies have shown that changes in corporate investment activities in each country have a strong effect on liquidity (Moonsoo, Wei & Chanyuong Eom, 2015), (Moonsoo, Khaksari & Kiseok, 2018) Liquidity measures the length to which any asset can be bought or sold in the market without affecting the market price of that asset When an investor makes a choice to buy an asset, he or she needs to evaluate the possibility of reselling the asset in order to make a profit This influences the free cash flow that can be received from asset sales, so liquidity is a critical factor used to appraise assets Liquidity covers not only financial assets such as securities but also the prices of many other assets Liquid securities are those that are available in the market for easy resale, relatively stable prices over time and high ability to recover the original investment Thanks to the stock market, investors can transform their own securities into cash as they want and liquidity is one of the appealing characteristics that dominates the procurement of investors of a particular stock, and of course it is the bet that they have to confront as well Liquidity shows that the flexibility and safety of investment capital and operating market are more dynamic and effective Investors or traders always demand high liquidity due to the intrinsic risk of investment Thus, insight of risk and also return on investment has to be really important for investors So the tendency to assess this tricky problem is one of the major concerns for investors Most of the previous research, using growth in fixed assets and capital expenditure (Capex) or growth in total assets and increases in inventory Muñoz (2012), as measures of investment The author also provides stock liquidity measure as trading volume (this measure uses the number of shares traded daily and the total number of outstanding shares of the company) and the volume of transactions modified by industry This study is built on the research of Kang et al (2015), concentrating on the impact of corporate investment has on stock liquidity in companies in the context of Vietnam market by methods of measurement of investment and stock liquidity will be indicated below, conducted with the sample of companies listed on the Ho Chi Minh Stock Exchange from 2006 to 2017, this paper aims for figuring out the connection of two elements in Viet Nam, a developing country and the market is less exploited by researchers However, along with the flourishing economy, the advent of listed companies has also escalated immensely Graduation Paper over the years, causing the market’s activities fluctuate constantly Therefore, I chose this topic to employ and also I have a singular interest in the theme of investment literature As far as I comprehend, in Viet Nam, there has not been any related research documented.This study also examines what influence that abnormal corporate investment has on stock liquidity and considering this relationship in the condition that the company has issued shares and has other financial biding status 1.2 Study goals and questions: This dissertation inspects and mainly focuses on the relationship of corporate investment and stock liquidity At the same time, examine the implication of corporate investment along with correlative variables to stock liquidity Thereby, finding out which transmission channel in the Vietnamese market that corporate investment has an impact on stock liquidity This study is conducted to provide an appropriate model to examine the association between these two variables, because it is one of the management challenges in the current stock market In order to achieve the above research goal, the questions need to be justified: « How does corporate investment affect stock liquidity in the Viet Nam stock market? If It does, how is the distinction between different measures of corporate investment and liquidity? « How does stock liquidity change when considering the impact of abnormal corporate investment on stock liquidity plus financial constraints? 1.3 Objectives and scope • Objective: The impact of corporate investment on stock liquidity in companies listed on Vietnam’s stock market • Scope: Companies listed on Ho Chi Minh Stock Exchange (Hose) in the period from 2006 – 2017 1.4 Research method Conducting synthesis from reports, scientific papers, scientific journals, and processing data through quantitative methods The paper uses a table data regression method with fixed effect control and interactive variables using regression method In addition, the research uses interactive variables that represent the interaction between stock liquidity on the stock market and company characteristics such as stock issuance and financial binding Graduation Paper 1.5 1.5.1 Contribution Scientific meaning The research results contribute to confirming the correlation between corporate investment and stock liquidity of listed companies on Vietnam stock market This study also enriches to the expanding literature on stock liquidity Determinants on stock liquidity are plenty, but only a few studies explore the meaning of corporate activity on stock liquidity 1.5.2 Practical meaning The result of this study will also bring constructive meaning to listed companies: - Evaluate the impact of corporate investment on stock liquidity of listed companies on Vietnam stock market in a logical and scientific way Identify meaningful of factors of corporate investment and stock liquidity of listed companies on Viet Nam stock market Evaluate the degree which corporate investment impact on stock liquidity 1.6 Structure The contents of this study are as the followings: © Chapter suggests the outlook and introduction of this study and an overall viewpoint of the thesis © Chapter presents previous theoretical and research plus empirical evidence about the impact of corporate investment on stock liquidity And Hypothesize different channels through which investment affects on stock liquidity and the influence of other factors on stock liquidity © Chapter introduces research methods, models and data sources used © Chapter depicts the results of empirical research in Viet Nam from 2006 – 2017 © Chapter demonstrates limitations and relevant debates of the study in Vietnam market © Chapter shows conclusion of the study Graduation Paper CHAPTER LITERATURE REVIEW 2.1 Empirical studies on the relationship between liquidity and corporate investment Previous studies have resulted in a heterogeneous relationship between stock market liquidity and investment decisions, but this relationship can be interpreted into three different degrees: neutral, positive and negative relationships After all of the findings and researches, one can conclude that corporate investment contributes to stock liquidity dramatically As I know thus far, the correlation between them is an important topic in finance In their seminal paper, Kang, M., et al., (2017) motivate the relation between the two by providing empirical evidence on the role corporate investment in shaping stock liquidity This analysis proposes that corporate investment reduces the risk of a firm and that a change in the risk influences the behaviour of a market maker and that leads to an increase in stock liquidity This paper depicts the association between corporate investment and stock liquidity in the context of Viet Nam over the period 2006-2017 The main idea is to see how a change in the risk of a stock influences stock liquidity I chose only the Ho Chi Minh city stock exchange because I think it could represent well enough the Vietnam current market in some specific ways The current paper surely offers several contributions to the current literature Firstly, this should add to the ongoing argument on whether corporate investment decision affects stock liquidity This is crucial for understanding on the research question to see if Vietnam’s market is in line with previous studies Secondly, the study provide an empirical analysis in the context of emerging markets This is an important contribution because it is commonly known that the findings from the context of advanced countries might not be able to fulfil for the context of emerging markets Moreover, since investment decision affects strongly on stock liquidity in the real world of incomplete market, empirical studies are critical to support this proposition Some recent literature documents studies specifically the physical link on these subjects For staters, (Berk, Green, & Naik, 1999) argued that, businesses that well function tend to be those that have discovered specifically valuable investment opportunities As they utilized those opportunities, their systematic risk modifies, having said that we can assume optimal corporate investment changes the risk of a stock, the link of the risk of a stock and its liquidity also need to be evaluated Kyle (1985) structured a research to explore the informational content of prices, the liquidity characteristics of a theoretical market, and trade motives of insiders His research addresses that a change in the risk influences the pricing strategy of market makers, which leads to a change in the price impact and liquidity of a stock Liquidity is also a trade motive, which influences stock liquididity (Admati, A R., & Pfleiderer, P., 1988) In their paper, they concluded that both trade motives endogenously are subject to the risk of a stock, a change in the risk leads market makers to change the strategy of pricing and this affects the price impact, imposing stock liquidity On top Graduation Paper of that, Kyle (1985) proposes that at the equilibrium, the risk of a stock demonstrates a negative relationship with stock liquidity Furthermore, the recent liquidity literature provides evidences on a negative link between the systematic component of the risk and stock liquidity Gotten it all together, without considering the risk of the source or structure, a change in the risk of a stock negatively co-varies with stock liquidity Particularly, this hypothesis comes from this theory: corporate investment decisions can be evaluated in a real options context because the decision of how-to corporate investment changes growth options into assets in place (Berk, et al., 1999) So, if growth opportunities are finite, corporate investment decision modifies the ratio of growth options to assets in place that leads to a change in the asset risk of a firm In addition, corporate investment decreases the risk of a stock since the new assets are less risky than the options they replace (Carlson et al., 2004) Combining stock liquidity with the risk change affecting corporate investment leads to the assumption that corporate investment decisions contribute to stock liquidity through the risk of a stock Also (Kang, M.,et al,2017) depicts a positive relationship between abnormal corporate investment and stock liquidity They established a link between corporate investment and stock liquidity by combining this line of corporate investment study to the market micro-structure literature and providing empirical evidence on the role of corporate investment in shaping stock liquidity and argue that this risk contributes to stock liquidity 2.2 Corporate investment Corporate investments come in many variations, and they can be classified into several elements They have a huge impact on economic growth and expansion Literally, investment has always been addressed as a major affair, because it is one of the most economically critical variables When we discuss about investing, it is described as a way of using funds or leverage and utilise capital that maybe lying redundant in bank or to seek a better return on their business money Based upon this concept, every utilization of funds for assets or manufacturing exercises will be deemed as investment All things considered, if there is an investment venture with returns that exceed their required expenditure, the company would utilize its redundant revenues to subsidize it If the investment events have taken a lot more than the company ‘s revenues, there would be no other way for the company but it has to issue new stocks or take in more loans For the time being, with the scope of business activities and economic affairs grows larger and larger, financial decisions include investment of businesses are at the top of vital and sophisticated topic for the ambition of gaining the highest returns possible In this interest, all executives seek to find the relationship among those key factors in the companies (Aon & Huang, 2008) The level and degree of investment to distinctive projects are examined as well, with restricted resources of the company, a good manager should appraise the scale in which the company should finance to gain the maximum profit and produce value for the company (Verdi, 2006) Graduation Paper Carlos et al (2014) analyzed the influence of financial distress on the investment bahavior of businesses They figured out that the impact of financial distress on investment is distinctive in accordance with the investment opportunities available to businesses That companies in adversities with fewer investments have the greatest inclination to under invest, while firms in adversities with better circumstances not show different investment behavior than healthy companies And the explaination is based upon the investment opportunities accessible to the company In this manner, firms with excellent opportunities assume that the extra investment can subsidize them to overcome their adversities, hence they have taken in investment behavior with no difference corresponding to healthy firms when it comes to having an opportunity to invest And the reason why businesses with fewer invesetment opportunities have a tendency to stay in distress is that the managers only tend to take advantage of projects that they deem may prevent the bankruptcy of the company, so they would miss the real profitable opportunies helping to overcome adversities The level of investment calculates as follows: Investment is measured as fixed assets variation between period t and t – 1, the following: - NFA: net fixed assets D: depreciation expenses K: replacement value of capital According to Lyandres et al (2008), in their seminar paper, they have used a more extended idea to estimate investment They calculate investment-to-assets as the annual change in gross property, plant, and equipment (item 7) surplus the annual change in inventories (item 3) divided by beginning-of-year book assets (Item 6) in year t-1 They used property, plant, and equipment to appraise investment in long-term assets used in facilities over many years such as buildings, machinery, and other equipment They use inventories to measure real investment in short-term assets used in a traditional running cycle such as merchandise, raw materials, and work in progress In fact, the optimal level of investment has been an argumentative subject among economists 2.3 Stock liquidity Stock liquidity is well known as an intriguing concept with many different characteristics As stated by Gregorio and Engin (2010), the concept of stock liquidity is the capacity to trade quickly with having had a low price effect In his point of view, Graduation Paper the significance of stock liquidity is positively and substantially correlated with transactional costs and rewards of traders’ view Robin (2007) expressed transparently, the liquidity of an asset is the ability to sell and obtain that asset in the time and payment desirable Athough these terms observable and comprehensible, in financial literature, marketability or liquidity is indicated as a simple but inspicuous concept that means while grasping it is effortless, analyzing and estimating it is really sophisticated The simplest way to comprehending stock liquidity is the ease of trading a particular stock A more realistic understanding would be when every corresponding transaction cost are minimized that is how the market is considered liquidity In fact, secondary market minimizes the cost of capital through the exploration of price and the capacity to allocate risk while maintaining marketability Liquidity is a intergral matter in pricing assets, which has a significant influence on their prices Liquidity implies the speed of conversion of assets to cash is fast and the expense of that is at a minimum, which acts as a major role in the captivation of investment The absence of liquidity means liquidity risk, this event should have a unfavorable impact on stock prices As the majority are risk averters, they prefer a more certain return to an alternative with an equal return but is risky They enjoy investing in securities which possess higher liquidity It really is a main paradigm of financial market (Safari, 2010) also declared that for investors to maximize their prosperity, they also have to look over it In accordance with Amihud and Mendelssohn (1988), an increase in stock liquidity is firmly correlated with the increasing of investment in the stock trading market as financial assets of the businesses are weaken at a lower cost of capital when the liquidity of the capital market upturns The components that construct liquidity include: the cost of finding a partner for doing business with, the risk of residual risk because of transaction delay, risk of opposing selection and risks of market precariousness Kyle (1985) Coming from this controversy, many authors have formulated different liquidity measurements Each measure focuses on utilizing on aspect of liquidity definition Liquidity is estimated in numerous countries and all kinds of markets In his paper Lesmond (2005) evaluated the impact of legal source and political institutions on liquidity levels shows that countries with unsteady political and legal establishments have significantly higher liquidity costs than countries with healthy political and legal facilities, even to the prevention of legal origin or insider trading enforcement He used five commonly known liquidity measures to analyze the effectiveness of these estimators in computing firm-degree liquidity across countries, employing 31 emerging markets The liquidity estimators regarded are Roll’s measure (Roll, 1984), the Amivest measure (Amihud et al., 1997), Amihud’s measure (Amihud, 2002), turnover, and the LOT measure (Lesmond et al., 1999) In general, the results represents that each measure has their own advantages and disadvantages when utilized to assess cross-country or within-country liquidity The discovery pointed out that the LOT measure and Amihud’s measure monopolize Roll’s measure and turnover Factor analysis reveals that in about half of the 31 markets, there is a single factor which 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Descriptive statistics The below table presents descriptive summary statistics for the data set AMH is the logarithm of the Amihud (2002) daily liquidity measure which is an absolute daily return scaled by daily dollar trade volume measured over one year after the fiscal year ends CAP (or CRD) is capital expenditure (plus R&D) scaled by beginning of year assets SIZE is the firm size defined as the logarithm of market capitalization in the year PRC is the average of the logrithm of a stock price in the year TNV is average of the logarithm of daily turnover in the fiscal year VOL is the logarithm of the standard deviation of daily stock return in the fiscal year RET is a stock return in the fiscal year CB is cash balance, scaled by the beginning of year assets The sample spans the year of 2006 to 2017 Variable Obs Mean Std.Dev Min Max AMIHUD 2393 -3.097265 3.483797 -11.99319 3.989574 CAP 2439 0667036 3223425 -.7188937 8.155383 CRD 2496 1375123 3325173 -.6905475 8.254021 LAMH 2150 -2.999693 3.414745 -11.51125 3.989574 CRD 2496 1375123 3325173 -.6905475 8.254021 RET 2200 0769547 6416579 -2.488458 13.20905 VOL 2191 -3.625222 3099562 -7.759233 -.1453591 PRC 2200 9.437111 7286449 6.684612 12.10553 TNV 2135 -6.562759 1.560196 -12.39844 -3.044705 SIZE 2654 26.57707 1.504196 19.21819 33.30739 CB 1899 0706251 1717229 0001456 4.561876 27 Graduation Paper 28 Graduation Paper Table - Correlations This table indicates the time series average of cross-sectional correlations mong variables AMH is the logarithm of the Amihud (2002) daily liquidity measure which is an absolute daily return scaled by daily dollar trade volume measured over one year after the fiscal year ends LAMH is past AMH measured over one year after the previous fiscal year ends CAP is capital expenditure, scaled by beginning-of-year assets SIZE is the logarithm of market capitalize in the fiscal year PRC is the logarithm of a stock price in the fiscal year TNV is the average of the logarithm of daily turnover in the fiscal year VOL is the logarithm of the standard deviation of daily stock return in the fiscal year RET is a stock return in the fiscal year CB is cash balance, scaled by beginning-of-year assets The sample spans the year of 2006 to 2017 AMIHUD CAP CGD LAMH AMIHUD 1.0000 CAP -0.0229 CGD LAMH -0.0281 0.6838 RET VOL PRC TNV SIZE CB 1.0000 0.9008 1.0000 -0.0756 -0.0707 1.0000 RET -0.1856 -0.0104 0.0291 0.0057 1.0000 VOL 0.0095 -0.0117 -0.0742 0.1541 0.2283 1.0000 PRC -0.1760 0.1409 0.2393 -0.3229 0.0578 -0.1687 1.0000 TNV -0.5184 -0.0032 -0.0412 -0.5605 0.0717 0.2345 -0.0589 1.0000 SIZE -0.4986 0.0124 0.0814 -0.4341 0.0770 -0.2888 0.4422 -0.1765 1.0000 CB -0.0182 0.3478 0.3508 -0.0594 0.1218 0.0322 0.0589 -0.0025 1.0000 29 0.1638 Graduation Paper Table - Cross sectional analysis: corporate investment and stock liquidity This table presents the regression results of the model (1) This is the connection between corporate investment and stock liquidity AMHi,t = α t + β 1INVi,t-1 + γ 1LAMHi,t-1 + γ 2SIZEi,t-1 + γ 3PRCi,t-1 + γ 4TNVi,t-1 + γ 5VOLi,t-1 +γ 6RETi,t-1 + γ 7CBi,t-1 + η i,t The samples includes 270 listed companies on Ho Chi Minh stock exchange, the sampamles spans over the course from 2006 to 2017 The below table is separated into columns, columns presents INV values through Capital expenditure (Cap), columns presents INV through CGD, a broaden definition of evaluating investment The two variables were used following after Kang, M., et al (2017) Other than dependent variable AMH (2002), all independent variables remained in the model are demonstrated as lagged values AMH is the logarithm of the Amihud (2002) daily liquidity measure which is an absolute daily return scaled by daily dollar trade volume measured over one year after the fiscal year ends LAMH is past AMH measured over one year after the previous fiscal year ends CAP (or CRD) is capital expenditure (plus R&D), scaled by beginning-of-year assets SIZE is the logarithm of market capitalize in the fiscal year PRC is the logarithm of a stock price in the fiscal year TNV is the average of the logarithm of daily turnover in the fiscal year VOL is the logarithm of the standard deviation of daily stock return in the fiscal year RET is a stock return in the fiscal year CB is cash balance, scaled by beginning-of-year assets The sample spans the year of 2006 to 2017 30 Graduation Paper Table - The sustainability result of stock liquidity and corporate investment (CAP) on models This table presents the results of the sustainability test between liquidity and corporate investment (CAP) The sample includes companies listed on Ho Chi Minh Stock Exchange (HOSE) from 2006 to 2017 The table is divided into columns (2), (3), sustainability testing results need to be studied through two models: Lagged value control model and Firm-fixed effect model AMH is the logarithm of the Amihud (2002) daily liquidity measure which is an absolute daily return scaled by daily dollar trade volume measured over one year after the fiscal year ends LAMH is past AMH measured over one year after the previous fiscal year VARIABLES (1) General results CAP LAHM RET VOL PRC TNV SIZE CB CONSTANT -0.711** (-2.38) 0.507*** (13.47) 0.099 (0.51) -1.006*** (-2.86) 0.213*** (2.63) -0.670*** (-9.73) -0.866*** (-14.45) -0.154 (-0.27) 13.705*** (8.75) 1,521 VARIABLES CGD LAMH RET VOL PRC TNV SIZE CB CONSTANT (1) General results -0.578** (-2.15) 0.510*** (13.59) 0.108 (0.56) -1.033*** (-2.94) 0.236*** (2.89) -0.664*** (-9.67) -0.863*** (-14.38) -0.207 (-0.37) 13.370*** (7.59) 1,522 OBSERVATIONS OBSERVATIONS ADJUSTED RADJUSTED R0.7572 0.7566 SQUARED SQUARED ends CAP (or CRD) is capital expenditure (plus R&D), scaled by beginning-of-year assets SIZE is the logarithm of market capitalize in the fiscal year PRC is the logarithm of a stock price in the fiscal year TNV is the average of the logarithm of daily turnover in the fiscal year VOL is the logarithm of the standard deviation of daily stock return in the fiscal year RET is a stock return in the fiscal year CB is cash balance, scaled by beginning-of-year assets The sample spans the year of 2006 to 2017 VARIABLES (2) Lagged value control model 31 (3) Firm-fixed effects model Graduation Paper CAP -0.615*** -0.282 (-4.54) (-1.08) 0.523*** 0.036 (13.78) (0.87) 0.133 -0.050 (0.76) (-0.39) -0.863*** -0.804** (-2.60) (-2.42) 0.278*** -0.247** (3.37) (-2.20) -0.647*** -0.790*** (-9.34) (-9.66) -0.886*** -1.767*** (-14.24) (-8.06) -0.470 -0.267 (-0.58) (-0.41) 10.086*** (6.03) 38.993*** (6.66) OBSERVATIONS 1,425 1,521 ADJUSTED RSQUARED 0.7664 0.8223 LAMH RET VOL PRC TNV SIZE CB CONSTANT Robust t-statistics in parentheses *** p