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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. 2 . a variety of companies have invested in multi-sectors businesses and spread-out.000 billions or over USD 4 billions of debt) and facing lawsuits to be raised by foreign creditors (e.main sector. but also the levels of unemployment and economic development of a country. In other words.. To the best of my knowledge. This Group involved in many projects in several different fields of economics beside its main business . This group invests not only in electricity. and may even be at the level of a loss. tourisms. the loss is VND 8. they have chased the trend of the multi-sector and spread investment so that they can obtain benefits immediately. air services. and improving human resource management so as to develop their businesses. and influence the financial situation of the firms.400 billions or over USD 400 millions) and facing large debts (as of June. As a consequence. Although there are several papers that have studied on the determinants of investment decisions at the firm level. etc. China. media. the group has been facing a large losses in recent years (in 2010. ports. as in the cases of VINASHIN1 and EVN2. but also spreads in hospitality. the efficiency in investment of corporate businesses lowers. research and development (R&D). This comes in the wake of Vietnam’s joining of the WTO in 2007. Instead of investing directly in foundational material such as machinery. regional and global level. insurance. import (cars and motorbikes) and agricultures. construction and renovation of factories.g. in order to become conglomerates. beers. while the management capacity and inexperience of enterprises. and Korea). As a result. This could ultimately lead to bankruptcy. Netherlands).200 billions or over USD 50 millions). India. This can thus affect the firms’ investment decisions and processes of production with their business operations. some cases is 23% per year). VINASHIN has been facing to financial problems in heavily (more than VND 80. these however are mainly focused on developed economies and some emerging countries (e.g. The reasons are by economic trends at the domestic. EVN has remained in debt to PetroVietnam about VND 8. These businesses have been investing in several projects which do not relate directly to their strong main sectors such as real estate and stocks. real estate. Because of multi-sector and spread investment. This has conversely created a trend. the real lending rate is 18% .860 billions or over USD 440 millions. Because of this. for instance. Apart from this..shipbuilding. it can cause stagnant equity. and Vietnam National Coal.20% per year. and infrastructure have not developed as fast as the multi-sector and spreading investments. sea transport. it is not easy for enterprises to access sources of capital when real lending interest rate is so high in recent time (normally. the United States. 1 VINASHIN is a Vietnam Shipbuilding Industry Group. the United Kingdom. 2 EVN is a Vietnam Electricity Group.The Vietnamese government has implemented a series of policies aimed at improving the business environment for enterprises in the country. banking. only a group of researchers have attempted to address this issue as it relates to the scenario in Vietnam. steels. Canada. and since then. while investment decision of the firms as become a big issue in recent years. cements. Mineral Industries Corporation about VND 1. investment issues affect not only the survival of the businesses. 2011. Elliott Vin. Concretely. the government’s institutions.

(2) To determine whether investment opportunities exerts influence on investment decisions of the firms. (2007) analyzed some factors involved with the impact on investment decisions of private enterprises in the Mekong River Delta. proposes to investigate this situation as it relates to a larger scale. namely investment opportunities. or business risk.Ninh L. This thesis. region. To achieve this overall goal requires meeting the following specific objectives: (1) To determine whether cash flow affects corporate investment decisions. However. Research Objectives With investment situation of enterprises in Vietnam and the continuing importance of corporate investment decisions in mind. there were 644 firms listed on Vietnam’s stock market. this research did not determine other variables. Nonetheless. II. III. As of 2010.K. (3) To test whether other financial factors impact on investment decisions at the micro level. which might have an influence on investment decisions at the firm level. 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. et al. (4) To suggest policy recommendations for the enterprises in making decisions. the overall goal of this thesis is to examine factors which affect investment decisions at the firm level in Vietnam. the thesis just analyzes non-financial firms because the determinants of their investment decisions are different from 3 . 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). therefore. Research questions Specifically.

Furthermore. they cannot invest because access to external funds is limited. In other words. the study calculates the values of variables which determine investment decisions. Adelegan and Ariyo (2008). Saquido (2003).1 (appendix). In brief.t / Ki. The information of listed firms is mainly obtained from VNDIRECT and Cophieu68 websites. firms already know about potential investment opportunities. Cash-flow is an important determinant for investment decisions of firms because if firms have enough cash inflows. When cash-flow is improved. however. it can be utilized in investment activities. or. This variable is taken from Balance Sheets of firms. enterprises which operate in the financial sector have different Balance Sheets from those of the non-financial firms. reflects corporate investment decisions. the research investigates a sample of 520 of 644 listed firms during the years 2006 to 2010. the research chooses these independent variables under literature and empirical studies on the factors affect investment decisions at the firm level. Independent variables Cash-flow The research uses cash-flow as a proxy for internal net worth of company. which is used as dependent variable. It is the ratio of investment expenditure to capital stock. the thesis excludes enterprises which have been no longer listed as BBT. others are from companies’ websites. which is a total of 1. 2 Variables The research presents the variables used to analyze the determinants of corporate investment decisions. companies where there is not enough information on Financial Statements.544 observations. Azzoni and Kalatzis (2006). Aivazian et al.that of financial companies. Besides that. t-1 in which capital stock equals fixed assets. (2005). and. they can participate in attractive opportunities that might be otherwise unavailable. described by following formula: Ii. a. In particular. Based on Financial Statements of these listed enterprises. t-1= (Capital Expenditureending – Capital Expenditurebeginning) / Ki. Therefore. Jangili and Kumar 4 . the unbalanced panel data covers a 5-year period from 2006 to 2010 with observations on 520 listed firms. Audretsch and Elston (2002). This variable is taken from Balance Sheets and Income Statements of firms. The set of dependent and independent variables is summarized in Table 3. Dependent variable Investment rate Investment rate. It is generated by the sum of net income after tax and depreciation and amortization.

Azzoni and Kalatzis (2006). Bokpin and Onumah (2009). Thus. Therefore. Leverage Measure of leverage in the research is the ratio of total liabilities to total assets. Ruiz-Porras and Lopez-Mateo (2011) also found that cash flow impacts positively on firm investment decisions. therefore leverage has an inverse effect on investment decisions at the firm level. as well as the website of Cophieu68 for stock prices.(2010). (2005). only Bokpin and Onumah (2009) concluded that the relationship between cash flow and investment is negative. Leverage might have a negative impact on corporate investment decisions through two channels. and more debts. higher levels of debt result in reducing funds in hand. Li et al. Ninh L. Li et al. In terms of empirical studies. Jangili and Kumar (2010). and Nair (2011) found that there is positive relationship between leverage and investment. Tobin’s q Tobin’s q is used as a proxy for investment opportunities of enterprises. This connection is also negative in the research of Aivazian et al. 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. Based on the proposal of Li et al. et al. However. The reason is that firms which have more investment opportunities. managers are afraid that shareholders would be move to decline borrowings and/or reduce investment. Li et al. higher risk projects. Secondly. (2010) also documented that the link between investment and q is positive.K. Aivazian et al. Moreover. (2010). the thesis expects that investment decisions are positively influenced by investment opportunities. On the contrary. Saquido (2003). Carpenter and Guariglia (2008). the expectation of this link in this thesis is positive. It can be stated that investment opportunities are involved in the investment decisions. This variable is calculated from Balance Sheet of each firm. (2010). it might push the asset substitution by increasing more investment to cover their performance. Adelegan and Ariyo (2008). Nair (2011). (2008). (2005). 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. First of all. (2007). Baum et al. (2010) concluded that the 5 . an increase in leverage might strengthen bankruptcy risks. The measurement of q is the ratio of market value of total assets to book value of total assets.

it leads to an increase in demand for production. The research. Most of previous studies. et al (2007). Fixed capital intensity The research also uses fixed capital intensity in the model of investment although it is rarely employed.relation between debt financing and investment is mixed. Hence. therefore. 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 relationship between investment decisions and leverage is expected as negative or positive. it means the firms invest more in machinery to satisfy demand for production. However. namely. or sales growth. Firm size 3 Robert S. 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. therefore. It can be stated that if demand for consumer goods goes up. Sales growth’s values are calculated from Income Statements of firms. investment decisions should be affected by changes in risk levels 3. The expectation of this connection. Business risk According to theory. is positive. 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. also employs this variable in analysis of investment decisions. this variable is expected to have positive relationship with investment. It is normally stated in terms of a percentage growth from the prior year. Carpenter and Guariglia (2008) also found that the relationship between investment decisions and sales growth is positive. Saquido (2003). Ninh L.K. Fixed capital intensity is measured by fixed assets divided by total assets that are taken from Balance Sheets of firms. Thus.Pindyck (1986) – Capital risk and models of investment behavior 6 . Hence. the research takes information from Income Statements of firms. Sales growth Growth of sales is used as a proxy for firms’ growth that may affect investment decision. It is clear that when fixed capital increases. It means that increase in sales leads to the firm invest more and otherwise. the demand for capital and machinery will increase as well.

Jangili and Kumar (2010).K. Li et al. while some firms have not. these firms are strongly influenced by the government. leverage and fixed capital intensity.K. total revenue. Gomes (2001). One on hand. One the other hand. Ruiz-Porras and Lopez-Mateo (2011). taking 0 for others. Carpenter and Guariglia (2008). state-owner enterprises might be different from other types of enterprises. Ninh L. The reason is that large firms should have better access to external capital sources. the thesis employs ownership concentration as a dummy variable to express characteristics of listed firms. Thus. Li et al. the government expects that state-owner firms will be more active in investment than non-state owned enterprises. Ninh L. For that reason. there are three measurements of firm size such as log value of total assets. Based on the Tobin’s q model. Ownership concentration In terms of investment decisions. 3. more stable cash flows and more diversified than small firms. Yit = α0 + ∑β k =1 k k X kit + uit (1) 7 . thus. (2010). and total employees. firm size is expected to be mix associated with investment.From previous researches. Some information is not complete because the Annual Reports of some firms contain the information of number of employees. (2007). since total asset is used for measuring Tobin’s q. Bokpin and Onumah (2009). it leads to incentive investment activities. et al (2007). Hanousek & Filer (2004). (2010). and a further modification on the research of Hu Schiantarelli (1998). this thesis proposes the following model to estimate the determinants of investment decision at the firm level. the thesis therefore employs the total revenues measurements to analyze. Therefore. Saquido (2003). they tend to less investment. Adelegan and Ariyo (2008). Taking 1 for firms whose state stock holding equals or more than 50%. Additionally. The information of total assets is obtained from Income Statements. et al. The reason is that the management capabilities or human resource cannot control all things or meet requirements in a large firm. Ruiz-Porras and Lopez-Mateo (2011) had opposite findings. Specifically. Erickson & Whited (2000). Modeling specification There are many factors affecting enterprise investment. Bokpin and Onumah (2009) proved that firm size as a negatively significant determinant of investment decisions. and even as tools for the implementation of government policies. Therefore. and Nair (2011).

The Chi-squared statistics (15. 8 . Therefore. The subscript i. they are less oriented towards profit than private firms. X includes cash-flow of firms. using STATA11 software. Basically. t.1 Breusch-Pagan Lagrange Multiplier (LM) test: In order to find out whether OLS or REM would be more proper. and Random Effects Model (REM). k indicates firms. Tobin’s q. and a Hausman (1978) test to choose FEM or REM.2 Hausman test: To decide between FEM and REM. the research firstly performs a Breusch-Pagan Lagrange Multiplier (1980) test to decide between OLS and REM. Normally. The best way to deal overcome these two concerns is therefore through IV-GMM (Instrument Variables . and thus. the thesis performs the LM test in which OLS is the null hypothesis or variances across firms is zero. interaction between leverage and ownership concentration4. the null hypothesis is rejected at the 1 percent level of significance. Particularly. the robust standard errors also perform to cope with heteroskedasticity problem if it is present. Furthermore. This result implies that there is evidence of cohort effect is different from zero. time (year) and the number of explanatory variables respectively. leverage of firms.Generalized Method of Moment). 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. They are thus expected to be more active in inestment than private firms. and uit is the error term. The specification tests are carried out as below: 4. growth of sales. That is the reason why they are able to make less utility of good investment opportunites and to be not incentive investment.3. firm size. it is difficult to choose which one is the most appropriate. it tests whether the unique errors are correlated with the regressors. Nonetheless. FEM and REM are used to cope with this problem. the firm’s investment rate. if having the presence of endogeneity and serial correlation problems. 4 In this equation. In addition.65) is recorded in Table 4. because state-owned enterprises are under the strong support of the government. 4. the OLS is not suitable. the researchers assumed the unobservable individual effect is zero and employ pooled OLS regression to estimate the investment equation. business risk of firms. these can lead to biased and inconsistent parameter estimates. Hence. the reasearch adds the interaction between leverage and ownership concentration to investigate the following hypothesis. fixed capital intensity. methods of estimation for panel data are Ordinary Least Square (OLS).where Y is predicted variable. The state-controlled enterprises are strongly supported by the government. However. Fixed Effects Model (FEM). This assumption leads to problem of heterogeneity across industries and across firms within the same industry. 4. Methods of estimation The research employs panel data including pooled time series of cross section where one has repeated observations on firms over years.

external instruments are arduous to find and they might in turn be invalid. therefore. However. if the error terms do not have constant variance. 4. This result suggests that FEM is more appropriate. the alternative hypothesis is endogenous variable at a specific significance level. However.5 Instrumental Variables techniques: As displayed above. After that. The GMM regression can deal with not only endogeneity and autocorrelation issues but also the panel dataset. the problem of multi-collinear is not serious. In specific.3. In fact. if the explanatory variables in the model are endogenous to investment and autocorrelation issue. the thesis employs the Robust Standard Errors to resolve the problem. In the presence of HET.and. a modified Wald test is designed. The thesis. which has a short time dimension (T=5) and a larger firm dimension (N= 520). In order to detect any linear model of HET. use the GMM estimator to analyze. 4. If HET is present. 4. 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 . FE estimator is criticized that the parameters might be biased and inconsistent. researchers thus employ internal instruments to prevent bias problems. Anderson and Hsiao (1982) utilized the second lag of the outcome variable as instruments. FEM is the most proper among these three methods of estimation. the null hypothesis is rejected at the 10 percent level of significance. based on the Chi-squared statistic (146.3 Robust Standard Errors correction: Secondly. the Durbin-Wu Hausman test is applied. Arellano and Bond (1991) designed differences GMM estimator with employing lagged levels as instruments for the predicted and predictor variables. the results of Table 4. An alternative method to solve these problems is to instrument for the endogenous variables.49) is displayed in Table 4. Normally. The null hypothesis is the considered predictor variable is exogeneity. Instruments can be from external sources or internal ones. therefore. The research conducts exogeneity test on all the predictor variables used in the regression models. the null hypothesis is they are not. the standard errors are biased.40.2 is basically smaller than 0. Nonetheless. there can be a high correlation between the different predictor variables that might influence the efficiency of the estimated coefficients. they are said to be heteroskedasticity (HET). First of all. there are econometric issues which may affect FE estimator. It thus causes bias in test statistics and confidence intervals. Otherwise.4 Durbin-Wu Hausman test: To identify endogeneity problem.

Section 3 describes data collection and methodology in which the model for estimation and method of estimation are outlined. 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. including this introduction. δi represents firm specific effects. and leverage x region dummy6. E(εit) = 0 and Var(εit) = σ2. 5 Sector dummy variables include variables for Health Care. The subscript i. recommendations and limitations. Technology. Southeastern. V. In addition. instruments are cash-flow. sales growth. business risk. Highlands. Consumer Services. Research structure The research is organized in five sections. Tobin’s q. the number of explanatory variables and the number of lags respectively. Yit-s represents lagged predicted variable. Consumer Goods. Telecommunication. εit represents disturbance term having the properties. time (year). the firm’s investment rate.Where Y is outcome variable. 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. s indicates firms. Basic Materials. North Central. Ho Chi Minh. and Mekong River Delta. Section 2 reviews theories of investment and empirical studies of investment decision at the micro level. After taking first-difference equation (2) to eliminate the specific effects. and Utilities. risk x ownership. endogenous variables are found out such as fixed capital intensity. Section 5 briefly draws the conclusion. X represents explanatory variables. Section 4 presents the results from analyzing data and discussion. leverage x ownership. Central Coast. t. 10 . Northern. and leverage. 6 Region dummy variables include variables for Hanoi. firm size. leverage x section dummy5. Oil & Gas. Industrials. k.