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DETERMINANTS OF CORPORATE INVESTMENT DECISIONS – THE CASE STUDY OF VIETNAM
I. 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 the firm in long run but also influence the 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. Nonetheless, the results of previous studies in different countries using the q-theory of investment are mixed. In particular, Hall et al. (1998) studied the key factors which affect investment in scientific firms for the United States, France and Japan during the period 1979-1989, and found that the profit, sales, cash flow and investment have connections, but differs for each country. Aquino (2000) found contrary results that there was no significant relationship between investment rate and q. He also showed that there is an insignificant relationship between the investment rate and cash flow.
30. In other words. it can cause stagnant equity. the efficiency in investment of corporate businesses lowers. Canada.200 billions or over USD 50 millions). Because of this. This comes in the wake of Vietnam’s joining of the WTO in 2007. Concretely. Although there are several papers that have studied on the determinants of investment decisions at the firm level. sea transport. EVN has remained in debt to PetroVietnam about VND 8. Mineral Industries Corporation about VND 1. beers. steels. The reasons are by economic trends at the domestic. construction and renovation of factories. and Korea). while the management capacity and inexperience of enterprises.g. real estate. Because of multi-sector and spread investment. This has conversely created a trend..main sector. Apart from this. VINASHIN has been facing to financial problems in heavily (more than VND 80. As a result. This can thus affect the firms’ investment decisions and processes of production with their business operations. These businesses have been investing in several projects which do not relate directly to their strong main sectors such as real estate and stocks.. and influence the financial situation of the firms. the loss is VND 8.400 billions or over USD 400 millions) and facing large debts (as of June. media. they have chased the trend of the multi-sector and spread investment so that they can obtain benefits immediately.shipbuilding. the real lending rate is 18% . 2 .000 billions or over USD 4 billions of debt) and facing lawsuits to be raised by foreign creditors (e. Elliott Vin. the United Kingdom. investment issues affect not only the survival of the businesses.g. ports. 1 VINASHIN is a Vietnam Shipbuilding Industry Group. these however are mainly focused on developed economies and some emerging countries (e. This could ultimately lead to bankruptcy. only a group of researchers have attempted to address this issue as it relates to the scenario in Vietnam. and may even be at the level of a loss. Netherlands). and since then. in order to become conglomerates. a variety of companies have invested in multi-sectors businesses and spread-out. the United States. the group has been facing a large losses in recent years (in 2010. and improving human resource management so as to develop their businesses.20% per year. insurance. 2 EVN is a Vietnam Electricity Group. tourisms. This Group involved in many projects in several different fields of economics beside its main business . India. but also the levels of unemployment and economic development of a country. as in the cases of VINASHIN1 and EVN2. China. but also spreads in hospitality. and infrastructure have not developed as fast as the multi-sector and spreading investments. 2011. Instead of investing directly in foundational material such as machinery. banking. As a consequence. while investment decision of the firms as become a big issue in recent years. it is not easy for enterprises to access sources of capital when real lending interest rate is so high in recent time (normally.860 billions or over USD 440 millions. To the best of my knowledge. etc. for instance.The Vietnamese government has implemented a series of policies aimed at improving the business environment for enterprises in the country. This group invests not only in electricity. and Vietnam National Coal. research and development (R&D). air services. regional and global level. cements. the government’s institutions. import (cars and motorbikes) and agricultures. some cases is 23% per year).
III. the research aims to address the following questions: (1) Does cash-flow affect the investment decisions of Vietnamese firms? (2) Do investment opportunities influence corporate investment decisions in Vietnam? (3) Can corporate investment decisions be explained by other financial factors in Vietnam? (4) What are the strategic implications for the firms in making investment decisions? IV. As of 2010. (4) To suggest policy recommendations for the enterprises in making decisions. proposes to investigate this situation as it relates to a larger scale. However. (2007) analyzed some factors involved with the impact on investment decisions of private enterprises in the Mekong River Delta. (3) To test whether other financial factors impact on investment decisions at the micro level. the thesis just analyzes non-financial firms because the determinants of their investment decisions are different from 3 . Nonetheless. This thesis. or business risk. Research questions Specifically.K.Ninh L. which might have an influence on investment decisions at the firm level. there were 644 firms listed on Vietnam’s stock market. To achieve this overall goal requires meeting the following specific objectives: (1) To determine whether cash flow affects corporate investment decisions. et al. the overall goal of this thesis is to examine factors which affect investment decisions at the firm level in Vietnam. region. namely investment opportunities. this research did not determine other variables. II. Scope and Methodology of Research 1 Data sources The research employs data of firm-level which is listed on the stock market in Vietnam (HOSE and HNX). Research Objectives With investment situation of enterprises in Vietnam and the continuing importance of corporate investment decisions in mind. therefore. (2) To determine whether investment opportunities exerts influence on investment decisions of the firms.
Audretsch and Elston (2002). reflects corporate investment decisions. however. Independent variables Cash-flow The research uses cash-flow as a proxy for internal net worth of company. It is the ratio of investment expenditure to capital stock. which is a total of 1.544 observations. Saquido (2003). Furthermore. the study calculates the values of variables which determine investment decisions. Jangili and Kumar 4 . which is used as dependent variable. t-1 in which capital stock equals fixed assets. Azzoni and Kalatzis (2006). Therefore. Aivazian et al. they can participate in attractive opportunities that might be otherwise unavailable. or.that of financial companies. In brief. In particular. t-1= (Capital Expenditureending – Capital Expenditurebeginning) / Ki. the research investigates a sample of 520 of 644 listed firms during the years 2006 to 2010. others are from companies’ websites. enterprises which operate in the financial sector have different Balance Sheets from those of the non-financial firms. the research chooses these independent variables under literature and empirical studies on the factors affect investment decisions at the firm level. Besides that. described by following formula: Ii. It is generated by the sum of net income after tax and depreciation and amortization. Dependent variable Investment rate Investment rate. companies where there is not enough information on Financial Statements. The set of dependent and independent variables is summarized in Table 3.1 (appendix). Cash-flow is an important determinant for investment decisions of firms because if firms have enough cash inflows. the thesis excludes enterprises which have been no longer listed as BBT. Adelegan and Ariyo (2008). This variable is taken from Balance Sheets and Income Statements of firms. the unbalanced panel data covers a 5-year period from 2006 to 2010 with observations on 520 listed firms. This variable is taken from Balance Sheets of firms. In other words. firms already know about potential investment opportunities. Based on Financial Statements of these listed enterprises. they cannot invest because access to external funds is limited. (2005). it can be utilized in investment activities. When cash-flow is improved. 2 Variables The research presents the variables used to analyze the determinants of corporate investment decisions. The information of listed firms is mainly obtained from VNDIRECT and Cophieu68 websites. a. and.t / Ki.
First of all. Jangili and Kumar (2010). Higher investment opportunities would cause higher investment in a world where enterprises attempt to maximize the value of firm through net present value positive projects. The reason is that firms which have more investment opportunities. Adelegan and Ariyo (2008). Baum et al. The measurement of q is the ratio of market value of total assets to book value of total assets. and Nair (2011) found that there is positive relationship between leverage and investment. Bokpin and Onumah (2009). On the contrary. It can be stated that investment opportunities are involved in the investment decisions. higher levels of debt result in reducing funds in hand. Leverage might have a negative impact on corporate investment decisions through two channels. This connection is also negative in the research of Aivazian et al. Li et al. However. Azzoni and Kalatzis (2006).(2010). as well as the website of Cophieu68 for stock prices. (2010). (2007). Leverage Measure of leverage in the research is the ratio of total liabilities to total assets. Moreover. Tobin’s q Tobin’s q is used as a proxy for investment opportunities of enterprises. an increase in leverage might strengthen bankruptcy risks. et al.K. This variable is calculated from Balance Sheet of each firm. Saquido (2003). In terms of empirical studies. therefore leverage has an inverse effect on investment decisions at the firm level. (2008). Therefore. (2010). Secondly. managers are afraid that shareholders would be move to decline borrowings and/or reduce investment. the expectation of this link in this thesis is positive. the thesis expects that investment decisions are positively influenced by investment opportunities. (2005). Aivazian et al. Based on the proposal of Li et al. only Bokpin and Onumah (2009) concluded that the relationship between cash flow and investment is negative. the market value of total assets is employed by following formula: Market value of total assets = (Liability + stock price * number of tradable share + net asset per share * number of untradeable share) Information of this variable is taken from Balance Sheets and Annual Reports of firms. Li et al. higher risk projects. (2010) also documented that the link between investment and q is positive. it might push the asset substitution by increasing more investment to cover their performance. Carpenter and Guariglia (2008). (2010) concluded that the 5 . Li et al. Thus. Ruiz-Porras and Lopez-Mateo (2011) also found that cash flow impacts positively on firm investment decisions. Ninh L. Nair (2011). (2005). and more debts.
Ninh L. therefore. the research takes information from Income Statements of firms. It is clear that when fixed capital increases. this variable is expected to have positive relationship with investment. namely. Business risk According to theory. It means that increase in sales leads to the firm invest more and otherwise. Saquido (2003). or sales growth. Most of previous studies. therefore. the relationship between investment decisions and leverage is expected as negative or positive. is positive. The expectation of this connection. investment decisions should be affected by changes in risk levels 3. Thus. Hence. Sales growth Growth of sales is used as a proxy for firms’ growth that may affect investment decision. This variable is expected to be inversely related to investment because firms will be afraid of investing in the projects which has more risks. The research. Carpenter and Guariglia (2008) also found that the relationship between investment decisions and sales growth is positive. Hence. Firm size 3 Robert S.relation between debt financing and investment is mixed.Pindyck (1986) – Capital risk and models of investment behavior 6 . also employs this variable in analysis of investment decisions. the demand for capital and machinery will increase as well. et al (2007). it leads to an increase in demand for production. It can be stated that if demand for consumer goods goes up. It is generated by variation of revenue with following formula: Business risk = standard deviation (Revenuet – Revenuet-1) / mean (Revenue) In order to calculate the value of business risk.K. However. Fixed capital intensity is measured by fixed assets divided by total assets that are taken from Balance Sheets of firms. it means the firms invest more in machinery to satisfy demand for production. It is normally stated in terms of a percentage growth from the prior year. Fixed capital intensity The research also uses fixed capital intensity in the model of investment although it is rarely employed. Aquino (2000) and Saquido (2003) analyzed this variable and found that setup costs related to high fixed capital expenditures put some restraint on additional investment in the context of Philippines. Sales growth’s values are calculated from Income Statements of firms.
while some firms have not.K. and total employees.K. the thesis employs ownership concentration as a dummy variable to express characteristics of listed firms. the thesis therefore employs the total revenues measurements to analyze. Therefore. The reason is that the management capabilities or human resource cannot control all things or meet requirements in a large firm. Adelegan and Ariyo (2008). (2010). One the other hand. For that reason. Specifically. they tend to less investment. Ruiz-Porras and Lopez-Mateo (2011) had opposite findings. taking 0 for others. thus. Some information is not complete because the Annual Reports of some firms contain the information of number of employees.From previous researches. The information of total assets is obtained from Income Statements. Gomes (2001). Bokpin and Onumah (2009) proved that firm size as a negatively significant determinant of investment decisions. total revenue. et al. One on hand. Ruiz-Porras and Lopez-Mateo (2011). and even as tools for the implementation of government policies. it leads to incentive investment activities. more stable cash flows and more diversified than small firms. and Nair (2011). et al (2007). Bokpin and Onumah (2009). Yit = α0 + ∑β k =1 k k X kit + uit (1) 7 . (2010). leverage and fixed capital intensity. the government expects that state-owner firms will be more active in investment than non-state owned enterprises. The reason is that large firms should have better access to external capital sources. Ninh L. Jangili and Kumar (2010). Li et al. Hanousek & Filer (2004). Modeling specification There are many factors affecting enterprise investment. state-owner enterprises might be different from other types of enterprises. 3. Erickson & Whited (2000). Taking 1 for firms whose state stock holding equals or more than 50%. and a further modification on the research of Hu Schiantarelli (1998). Based on the Tobin’s q model. Therefore. firm size is expected to be mix associated with investment. Thus. Carpenter and Guariglia (2008). Ownership concentration In terms of investment decisions. Additionally. there are three measurements of firm size such as log value of total assets. this thesis proposes the following model to estimate the determinants of investment decision at the firm level. Saquido (2003). (2007). these firms are strongly influenced by the government. since total asset is used for measuring Tobin’s q. Li et al. Ninh L.
Tobin’s q. k indicates firms. 4. the research firstly performs a Breusch-Pagan Lagrange Multiplier (1980) test to decide between OLS and REM. firm size. and a Hausman (1978) test to choose FEM or REM. and uit is the error term. Normally. the firm’s investment rate. it is difficult to choose which one is the most appropriate. The subscript i. Furthermore. This assumption leads to problem of heterogeneity across industries and across firms within the same industry. and Random Effects Model (REM). 4 In this equation.1 Breusch-Pagan Lagrange Multiplier (LM) test: In order to find out whether OLS or REM would be more proper. they are less oriented towards profit than private firms.65) is recorded in Table 4. time (year) and the number of explanatory variables respectively. The state-controlled enterprises are strongly supported by the government. This result implies that there is evidence of cohort effect is different from zero. Nonetheless. 8 . Basically. these can lead to biased and inconsistent parameter estimates. That is the reason why they are able to make less utility of good investment opportunites and to be not incentive investment. Hence. The Chi-squared statistics (15. interaction between leverage and ownership concentration4. They are thus expected to be more active in inestment than private firms. The best way to deal overcome these two concerns is therefore through IV-GMM (Instrument Variables . the null hypothesis is rejected at the 1 percent level of significance. X includes cash-flow of firms. However.Generalized Method of Moment).where Y is predicted variable. the research run the Hausman test where the null hypothesis is that the coefficients estimated by the efficient RE estimator are the same as the ones estimated by the consistent FE estimator. using STATA11 software. Fixed Effects Model (FEM). it tests whether the unique errors are correlated with the regressors. business risk of firms. because state-owned enterprises are under the strong support of the government. leverage of firms. Methods of estimation The research employs panel data including pooled time series of cross section where one has repeated observations on firms over years. the reasearch adds the interaction between leverage and ownership concentration to investigate the following hypothesis.2 Hausman test: To decide between FEM and REM. if having the presence of endogeneity and serial correlation problems. methods of estimation for panel data are Ordinary Least Square (OLS). the thesis performs the LM test in which OLS is the null hypothesis or variances across firms is zero. t. the OLS is not suitable. fixed capital intensity. 4. FEM and REM are used to cope with this problem. growth of sales. and thus. the researchers assumed the unobservable individual effect is zero and employ pooled OLS regression to estimate the investment equation. Therefore. the robust standard errors also perform to cope with heteroskedasticity problem if it is present. In addition.3. Particularly. The specification tests are carried out as below: 4.
However. researchers thus employ internal instruments to prevent bias problems. After that. Otherwise. if the error terms do not have constant variance. therefore. The research conducts exogeneity test on all the predictor variables used in the regression models. the null hypothesis is rejected at the 10 percent level of significance. the thesis employs the Robust Standard Errors to resolve the problem. Arellano and Bond (1991) designed differences GMM estimator with employing lagged levels as instruments for the predicted and predictor variables. Anderson and Hsiao (1982) utilized the second lag of the outcome variable as instruments. If HET is present. based on the Chi-squared statistic (146. 4. there can be a high correlation between the different predictor variables that might influence the efficiency of the estimated coefficients. the alternative hypothesis is endogenous variable at a specific significance level. Normally.5 Instrumental Variables techniques: As displayed above. This result suggests that FEM is more appropriate. The null hypothesis is the considered predictor variable is exogeneity.and. if the explanatory variables in the model are endogenous to investment and autocorrelation issue.2 is basically smaller than 0. use the GMM estimator to analyze. the problem of multi-collinear is not serious. which has a short time dimension (T=5) and a larger firm dimension (N= 520). However. The GMM regression can deal with not only endogeneity and autocorrelation issues but also the panel dataset. Instruments can be from external sources or internal ones. therefore.49) is displayed in Table 4. external instruments are arduous to find and they might in turn be invalid. a modified Wald test is designed. GMM estimator is explained based on dynamic panel model as below: Yit = α 0 + ∑ Yit − s + ∑ X itk + ε it s =1 k =1 s k (2) 9 . In fact. The thesis.3 Robust Standard Errors correction: Secondly. the Durbin-Wu Hausman test is applied. the null hypothesis is they are not. Nonetheless. 4.40. FEM is the most proper among these three methods of estimation. First of all. In specific. An alternative method to solve these problems is to instrument for the endogenous variables.3. the results of Table 4. In order to detect any linear model of HET. the standard errors are biased. they are said to be heteroskedasticity (HET). In the presence of HET. 4.4 Durbin-Wu Hausman test: To identify endogeneity problem. FE estimator is criticized that the parameters might be biased and inconsistent. there are econometric issues which may affect FE estimator. It thus causes bias in test statistics and confidence intervals.
t. leverage x ownership. εit represents disturbance term having the properties.Where Y is outcome variable. Section 2 reviews theories of investment and empirical studies of investment decision at the micro level. and Mekong River Delta. Section 4 presents the results from analyzing data and discussion. North Central. the number of explanatory variables and the number of lags respectively. firm size. After taking first-difference equation (2) to eliminate the specific effects. Telecommunication. leverage x section dummy5. recommendations and limitations. s indicates firms. endogenous variables are found out such as fixed capital intensity. Consumer Goods. the firm’s investment rate. time (year). The research separated different regions without following by administrative ones because most of listed firms in the Vietnamese stock market are located in Hanoi or Ho Chi Minh City. k. business risk. Basic Materials. Section 5 briefly draws the conclusion. risk x ownership. 10 . and Utilities. and leverage. Ho Chi Minh. Consumer Services. Section 3 describes data collection and methodology in which the model for estimation and method of estimation are outlined. Research structure The research is organized in five sections. Oil & Gas. Northern. including this introduction. V. sales growth. GMM estimator is utilized to estimate: ∆Yit = ∆α 0 + ∑ ∆Yit − s + ∑ ∆X itk + ∆ε it s =1 k =1 s k (3) In the GMM technique. Tobin’s q. 6 Region dummy variables include variables for Hanoi. 5 Sector dummy variables include variables for Health Care. Central Coast. Industrials. δi represents firm specific effects. Yit-s represents lagged predicted variable. Highlands. Southeastern. Technology. and leverage x region dummy6. In addition. E(εit) = 0 and Var(εit) = σ2. X represents explanatory variables. instruments are cash-flow. The subscript i.
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