Accepted Manuscript

Title: CORPORATE DEBT AND INVESTMENT WITH

FINANCIAL CONSTRAINTS: VIETNAMESE LISTED
FIRMS

Author: Trang Phan Quynh

PII: S0275-5319(17)30590-1
DOI: https://doi.org/10.1016/j.ribaf.2018.03.004
Reference: RIBAF 903

To appear in: Research in International Business and Finance

Received date: 19-8-2017

Revised date: 24-12-2017
Accepted date: 30-3-2018

Please cite this article as: Phan Quynh, Trang, CORPORATE DEBT AND
INVESTMENT WITH FINANCIAL CONSTRAINTS: VIETNAMESE
LISTED FIRMS.Research in International Business and Finance
https://doi.org/10.1016/j.ribaf.2018.03.004

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CORPORATE DEBT AND INVESTMENT WITH FINANCIAL CONSTRAINTS: VIETNAMESE LISTED
FIRMS

Phan Quynh Trang*

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Lecturer
Faculty of Finance – Banking, Open Universiry HCMC

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35-37 Ho Hao Hon, District 1, HCMC, Vietnam

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*
Corresponding author: trang.pq@ou.edu.vn

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Graphical abstract

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Vietnamese context
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Debt - financing Firm Investment

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Debt Debt
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level maturity
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Abstract: In this paper, we investigate how the choices of debt level and debt maturity could affect firm investment
behaviors. We also test firm investment – debt financing relation in the control of several firm-specific characteristics
in different sub-samples. Using a balanced panel dataset of Vietnamese listed firms over the period 2010 – 2016, the
regression results show that the level of debt significantly negatively impacts on firm investment but the maturity of
debt is insignificantly related to investment rate. The negative relation between leverage and firm investment also
holds for private firms with long-term loans financing from banks. For state-shareholding enterprises, debt maturity
has positively effect on investment level.

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Keywords: leverage, debt maturity, corporate investment, firm constraints, emerging markets

JEL: G30, G31, G32

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1. INTRODUCTION

In their seminal paper, Modigliani and Miller (1958) indicate that corporate financing and investment behaviors are
irrelevant in a perfect market (no taxes, no transaction costs, no bankruptcy costs, no asymmetric information, etc.).

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The following researchers, however, have loosed these market assumptions to investigate the potential interactions
between corporate financing and investment decisions. Myers (1977), for instance, categorizes two firm groups of
high growth opportunities and low growth opportunities to examine the underinvestment problem. He suggests that

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high-growth firms with long-term debt may reject the potential positive net present value project due to the interest
conflict between debtholders and shareholders-managers. Another facet of financial and investment reciprocal relation
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is studied in Jensen (1986) in which he evaluates how the firms make decision in investment if they have a large free
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cash flow. He argues that firms with a huge availability of free cash flow could invest in risky projects because firm
managers may optimize firm assets than paying dividends to shareholders. Empirically, the later researchers provide
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some evidences on the effect of debt choices on firm investment across countries, such as Aivazian (2005a & 2005b)
in US firms, Dang (2011) in UK firms and Khaw and Lee (2016) in Malaysian firms.

The interaction between corporate financing and investment behaviors not only affected by intrinsic factors, such as
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agency conflict between shareholders and managers or contradiction between debtholders and shareholders but also
external factors such as the characteristics of financial system, business culture and the government policies. Hence,
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it is questionable to consider the financial decisions and investment behaviors relation in separated firm groups to
capture the differences and similarities among firms in order to suggest the implications for policy-makers. The similar
methodology is also applied in a large number of the existing empirical papers. Kadapakkham et al. (1998), for
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example, divide firms into three groups by firm size to examine the effect of cash flow on firm investment in six
OECD countries. This article shows that cash flow – investment relation is the most sensitive in the group of largest
firms whereas and the smallest firm group holds the lowest degree of sensitivity. Similarly, Zheng and Zhu (2013)
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find that political connections play an important role in debt financing by referring the level of political connection to
group these firms. The paper shows that the less profitable firms are more reliable on political connection to get loans
from banks as well as firms with tight political connection have less investment efficiency than the firms with less
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tight political connection. In terms of state-ownership structure, Okuda and Nhung (2012) make a comparison between
private firms and state-controlled firms in debt financing to find that the private firms are more dependable on the
long-term debt than the state-controlled firms.

Vietnam presents a particular case to examine the impact of corporate financing on investment behaviors under the
certain conditions of local context. First, Vietnam is a developing country where the demand for investment in
infrastructures and fixed assets is the key in substantial development. Second, Vietnam is also a transition economy
where state sector plays an important role in most of situations, such as the voting rights in board management, the

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lending biases from commercial banks, the preferential policies of the government. Additionally, the characteristics
of Vietnamese financial system could cause several issues in debt financing for firm investment. In terms of equity
market, by the year of 2015, the stock market capitalization to GDP is only 24.94% compared to 74.33% in East Asia
and Pacific region, 95.85% in Thailand and 129% in Malaysia (World Bank, 2016). In terms of capital market,
corporate bond issuance volume to GDP is only 0.05% in 2014 compared to 2.55% in East Asia and Pacific and 3.94%
in Thailand (World Bank, 2016). In terms of banking system, the commercial banking system is still dominated by
the five state-owned commercial banks (SCOBs). By the year of 2015, the five SOCBs employ above 45% of total
asset in banking system, compared to 40% held by 23 joint stock commercial banks (Vo, 2016a). The next section

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will discuss more detail in both the Vietnamese financial system and the overview of investment structure. Therefore,
the relation between investment behaviors and debt financing, particularly long-term debt, is the one of central issues
in Vietnamese firms to reach long-run growth goals.

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The previous studies jointly examine the interaction of corporate financing and firm investment in the different groups
of high-growth firms and low-growth firms. However, the important question is how debt financing impact on firm

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investment in which firms face with various financial constraints regarding market characteristics, firm characteristics
and country-specific characteristics. The goal of this study is to provide an empirical investigation of investment –
debt financing interaction in different financial constraints. Specifically, this study aims to address these questions.

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How do the firm’s choices of debt impact on the investment behaviors? What are the different behaviors between
large firms and small firms in terms of the interaction of debt financing and investment? How the tight relationship
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between firms and banks could affect investment behaviors – debt finance? What is the difference between private
and state-shareholding firms in the effect of debt choice on investment behaviors?
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Finally, this paper utilizes the balanced panel dataset of Vietnamese listed firms over the period 2010 – 2016. Since
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various recent studies have more paid attention in developed countries where the firms have numerous powerful
channels to finance their investment, such as issuing new equity, corporate bond or borrowing from banks and other
sources, it is questionable to investigate the impact of corporate debt choices on investment behaviors in an emerging
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country with over 30 years in reform progress from central-economy to market-oriented economy. Moreover, this
study shows the interesting differences in debt financing patterns between firms in an emerging country and in
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developed countries. In particular, compared to other developed markets, Vietnamese firms have dramatically higher
debt amounts, sharply shorter debt maturities, significantly lower growth opportunities and higher investment rate.
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The remainder of this paper is organized as follows. Before developing the literature review and hypotheses in Section
3, the section 2 summarizes the Vietnamese context of investment structure and the development of financial markets.
Section 4 discusses on the sample selection and variable measurements. Section 5 demonstrates the empirical
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regression results and discussion. Conclusion and further suggestion are proposed in the last section.

2. VIETNAMESE CONTEXT

2.1 Investment during 2010 – 2016 period

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In general, economic growth and investment are closely interrelated in all countries, especially in developing
countries, long-term investment is even more important to reach the long-run goals. Investment in infrastructure, such
as transportation, electricity generation, water and telecommunication, etc. are the key variables in production
function, meet social needs and foster the economic growth. On the other hand, investment in plant, equipment and
machinery help firms to improve their infrastructure, remain competitive by introducing higher quality products. The
process of economic reform (Doi moi) has initiated since 1986 at the 6th National Congress (1986), The Communist
Party of Vietnam has identified that industrialization and modernization was one of the most important directions to

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bring Vietnam from agriculture-based economy into industrialized economy. To step-by-step specify the Party lines
a number of laws has been enacted to attract investment from non-state sector, such as the Law on Encouraging
Foreign Investment in 1987, the Law on Private Enterprise and the Company Law in 1990. Evidently, total new
investment has increased from about 29 trillion dong in 1999 to approximately 1,500 trillion dong in 2016. At the 12th
National Congress (2016), industrialization and modernization process continues to highlight in the next stage in
which the proportion of value-added manufacturing industry could be increased and develop high-technological
industries (Hoang, 2016).

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On the one hand, long-term investment from public sector generates the return to increase the quality of life for society.
On the other hand, some long-term investment from private sector usually serve production process, directly involves
in producing the goods for consumption and exports. Specifically, investment in infrastructure still accounted for

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nearly two-third of total investment comes from the national budget while the capital for investment in fixed assets
comes from both private sector and public sector through state-owned firms. In recent years, the investment structure
by sector have been more balanced between private sector and public sector with nearly the equal proportions. Figure

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1B indicates both the private investment and state investment range around 37% - 40% during 2012 – 2016 period in
comparison with the state investment accounted for around 50% in 1996 – 2005 period (Vu, 2006). Despite the equal
proportion in terms of value, the investment from private sector generally make more contribution in economic growth

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than public sector (Khan and Reinhart, 1990), private investment is even more efficient than public sector (Vu, 2006).

Figure 1A. Investment by items N Figure 1B.Investment structure by sector

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5% 5% 5% 5% Others 26% 25% 22% 22% 22% 23% 23%
17% 18%
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18% 19%

Supplementfor
38% 38% 38% 39% 39%
workingcapitalfrom 36% 39%
ownedcapital
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74% 73% 73% 72%

Capitalforfixed
assetsrepairand
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upgrading 40% 40% 40%

38% 37% 38% 38%
Fixedassets
procurementcapital
forproduction
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2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016
Infrastructure
State Non-state FDI
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Source: GSO

The process of industrialization and modernization has divided into two stages: first stage is the transition from the
agricultural economy to manufacturing economy, the next phase is to overcome the innovative economy. In terms of
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economic activities, investment in fixed assets directly involve in production process, provide firms with a capacity
of producing more future high-quality goods for export and consumption, contribute to GDP growth. However, unlike
investment in infrastructure that mostly come from national bonds, investment in fixed asset in private sector requires
long-term funds which firms can raise from internal funds and external funds. The figure 1A shows that the capital
for investment in new and upgrading fixed assets which accounts for nearly 25% in total investment during 2013 –
2016 period. As a partial success in industrialization and modernization, Vietnam from a country without exported
high-tech products in late 1990s to high-tech products accounted for 15% of manufactured commodities in 2012 (Vu,

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2006). On the other hand, investment allocates in industrial manufacturing has slightly raised from average 38% in
2007 – 2009 to 41% in 2014 – 2016. However, the allocation in credit supply for industrial manufacturing has a
tendency of slight decline from around 28% in 2012 – 2013 to 23% in 2015 - 2016. It supposed that the proportion of
manufacturing in investment structure and proportion in credit structure are inversely correlated.

Figure 2A. Investment structure by economic Figure 2B. Credit structure by

activitives economic activities

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27% 28% 29% 28% 27% 26% 23% 21% 21% 22% 28% 28% 33% 36% 37%
11% 11% 14% 12% 11% 4% 4%
13% 12% 12% 12% 11% 9% 9% 2%
8% 9% 10% 8% 20% 19% 3% 4%
6% 7% 7% 7% 11% 11% 19%
8% 9% 8% 9% 10% 10% 12% 12% 18% 17%

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9% 10% 10% 10% 9%
39% 37% 37% 38% 38% 39% 38% 40% 42% 41% 29% 28% 26% 23% 23%
6% 6% 6% 6% 6% 5% 6% 5% 6% 6% 10% 11% 10% 10% 10%

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016

Others Others

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Transportation Transportation
Trading Trading
Construction and Real estate Construction and Real estate
Industrial manufacturing
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Sources: GSO, NFSC 2016 Report

There are several recent papers examine the various aspects of the debt financing – investment relation in the sample
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of Vietnamese firms. Nguyen and Vo (2015), for instance, examine what factors could affect the equipment and
machinery investment in Can Tho Province, Vietnam. The finding shows that firms could decrease the investment if
they have high leverage. Another example in real estate sector, Nguyen et al (2017) use the financial statement dataset
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of listed firms to investigate the firm behaviors in corporate financing. They find that the real estate firms prefer
issuing debt to equity in their capital structure. Furthermore, the paper finds that the real estate firms could use both
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long-term debt and short-term debt to finance their investment.

Even though the number of listed firm is extremely smaller than the total number of firms in economy, over 600 firms
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and over 400 thousands firms, respectively. Listed firms are still considered the best representative firms in Vietnam
due to the better corporate governance quality. In particular, listed firms have to meet the minimum requirements to
get approval of listing from the stock exchanges (at least two year operating, no cumulative loss two recent years,
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etc.). In addition, listed firm could have higher need for investment compared to small and medium enterprises
(SMEs). Moreover, listed firms could have less asymmetric information than SMEs or unlisted firms, hence they have
more opportunities to raise fund and more power of bargaining in debt negotiation. Finally, listed firms have larger
size than SMEs in term of total asset, they probably have more asset to be treated as collateral when they borrow from
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banks.

2.2 Financial system

Long-term investment requires long-term financing. Firms can raise new long-term fund through issuing new equity
in equity market, issuing corporate bond in capital market or borrowing long-term loan from banks and other sources.
The sufficiency of the financial markets will offer more opportunities for firms to finance their investment. The
financial markets can be classified into equity market, capital market and banking system.

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i) Equity market: The Ho Chi Minh Securities Trading Center (HoSTC) was established in 2000 and then renamed as
Ho Chi Minh Stock Exchange (HOSE) in 2007. At the time of opening there were only four companies listed (Vo,
2016). The Hanoi Stock Exchange (HNX) was opened in 2005 with less restrictive conditions of listing, such as low
minimum capital requirement. The number of listed firms and total market have extremely increased since 2009 in
both exchanges. By the year of 2015, above 600 companies listed in both exchanges with total market capitalization
of over 1,300 trillion dong (Vo, 2016). However, Vietnamese firms show the lower growth opportunities compared to
the other markets. The average mean of Tobin’s Q is 0.87 in comparison with US firms is 1.75 (Aivazian, 2005a,
2005b), UK firms is 1.79 (Dang, 2011). Moreover, the individual investors dominate the investor share in market. By

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the end of 2015, the share of individual investor is 99.43% including domestic and foreign investors (VSD, 2017). In
general, the individual investors usually invest in short-medium terms due to the lack of capital and long-term
strategies. The trading products are also limited when derivatives product has just launched in 2017.

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ii) Capital market: Corporate bond market could be remarkable since 1996 when the first private enterprise
(Refrigeration Engineering Enterprise) issued a convertible bond. Until 1992, the next private enterprise (Vietnam

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International Leasing Enterprise) issued the fixed-rate bonds. Until now, the corporate bond market in Vietnam still
very small and inactive. Even though listed firms are considered as large firms compared to the rest of the firms but
only 74 firm-year observations out of over 3,000 firms-year observation have issue corporate bond. Moreover, banks,

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securities firms and real estate firms mainly dominate the corporate bond markets. By the year of 2016, the corporate
bond volume from banks and securities firms occupies nearly 60% total market (VCBS Report, 2016).
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iii) Banking system: Because of the insufficient capital and equity markets, Vietnamese firms mainly finance their
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investment from banks as a formal channel. The commercial banking system can be classified into two large groups
of State-Ownership Commercial Banks (SOCBs) and Join Stock Commercial Banks (JSCBs). By the year of 2015,
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the five SOCBs accounted for above 45% of total asset in banking system, compared to 40% of total asset of 23 JSCBs
(Vo, 2016). Subsequently, SOCBs provide 52.9% credit and JSCBs provide 40.1%, respectively. Moreover,
approximately 45% out of total loan is short-term loan and 55% is medium and long-term loan (NAFS, Annual Report,
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2016). Similar to the stock market, the products and instruments are not diversified in banking system. For example,
long-term loans with floating interest rate are unpopular for firms. Due to the rapid expansion, workers in banking has
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dramatically increased in triple from 2000 to 2012. However, according to Vu (2015), only approximately one-third
bankers well educated the specialized in finance – banking
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Although the base rate is tightly controlled by the State Bank of Vietnam the interest rate is still high volatile during
years. Figure 3 demonstrates the lending interest over 2007 – 2016 period. During 2007 – 2009, lending interest rate
reached large movements from about 10% in the beginning of 2008 to the peak of 20% in the mid-year due to the
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massive credit expansion and the effect of global financial crisis.

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 Figure 3. Interest rate 2007 - 2016
25.00

20.00

15.00

10.00

5.00

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0.00

2013M04
2007M01
2007M06
2007M11
2008M04
2008M09
2009M02
2009M07
2009M12
2010M05
2010M10
2011M03
2011M08
2012M01
2012M06
2012M11

2013M09
2014M02
2014M07
2014M12
2015M05
2015M10
2016M03
2016M08
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Central Bank Policy Rate Lending Rate

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Source: IMF

Figure 4A and 4B present the credit to private sector and the ratio of bad debt to total loans in banking system during

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2007 – 2015 period. Undeniably, the credit to private sector decreased, associated with the highest rate of non-
performing loans in 2012.

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[insert Figure 4A and Figure 4B here]
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3. LITERATURE REVIEW AND HYPOTHESES

3.1 Debt financing and firm investment

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Myers (1977) argues the potential interaction between debt choices and corporate investment. Firms could reject to
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invest in positive net present value projects if the investment option expires before the maturity of corporate debt since
the debtholders could partially be accrued more benefit than shareholder-management. Hence, higher levered firms
with longer term debt have more likely underinvestment problem as compared with lower levered firms with short-
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term debt. Both the level of debt and the maturity of debt are the signals for firm future investment. The effect of debt
choices on firm investment has exploited in different samples and different methodologies. Both Lang et al. (1996)
and Aivazian et al. (2005a) examine the relationship between firms investment and financial leverage to find that the
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leverage has the negative effect on firm investment. Aivazian et al. (2005b) use the sample of US firms from 1982 to
2002 to test the effect of debt maturity on investment decision to confirm that debt maturity significantly negatively
impact on investment for firms with high growth opportunities but there are no evidence on the effect of debt maturity
on investment for firms with low growth opportunities. Dang (2011) uses the sample of UK firms to examine the
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potential interaction among leverage, debt maturity and firm investment to find that high-growth firms tend to reduce
leverage to reach optimal investment strategy. The regression result shows that, however, debt maturity has no effect
on firm investment. In Asia region, Khaw and Lee (2016) use the dataset of 612 non-financial Malaysian listed firms
from 1995 to 2013 to investigate how firms use debt maturity as a discipline tool to mitigate underinvestment problem.
This study shows that firms with low Tobin’s Q tend to use the maturity of debt to mitigate the underinvestment
problem. This result is different from the previous studies by Aivazian et al (2005b) and Dang (2011).

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In Vietnam, a developing transition and bank-based economy, the relation between debt financing and investment
could more sensitive than the developed countries. The firms don’t have many choices in the channels of debt
financing due to the insufficient capital market with the dominant of banks and real estate companies, young equity
market with the dominant of individual investors, tight controlling of state central banks in banking system and the
dominant of state-owned commercial banks. Moreover, monetary policy is quite big challenge for firms. On the one
hand, research papers in capital structure mostly report that Vietnamese firms prefer issuing debt to equity (Tran,
2015, Nguyen et al., 2017, Vo, 2016). Debt financing even face several obstacles. For example, lending interest rate
is quite high, at some time over 20% per year during 2011 – 2012. SBV control the situation by applying the ceiling

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and floor interest rate. The lending policy of commercial banks also depend on the SBV policy when the government
curb the high inflation rate therefore fix the credit growth rate (20% during 2011) instead of controlling by banks.
Furthermore, the long-term loans are required fully collateral. Enterprises survey reported that 91% of loans requiring

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collateral, relatively higher 10% compared to firms in East Asia and Pacific Region. More than that, the value of
collateral of the loan amount is double.

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In principle, the impact of long-term debt on investment has two folds. On the one hand, leverage has negative impact
on investment behaviors due to the potential interest conflict between debtholders and shareholders. On the other
hand, firms may refuse to invest if they could not raise finance with long time horizon because they do not want to

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bear the rollover risk. Thus, we expect that firm debt financing and investment are negatively correlated. We develop
the hypothesis as follow:
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Hypothesis 1: Both debt level and debt maturity have the negative effect on firm investment.
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3.2 Firms characteristics and firm debt – investment relation
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The potential interest conflicts in internal firms may impact directly or indirectly on firm behaviors. Agency problem
between manager and shareholder interests may propose that firm managers are likely to invest in the negative net
present value project to expand the scale of the firm. The firm availability of free cash flow, however, could restrict
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board of management to carry out this policy. In addition, agency cost of debt selection between shareholders -
managers and debtholders suggest that firms may reject the positive net present value projects because debtholders
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could partially accrue more benefit than shareholders – managers could if the term of debt expire after the investment
option. On the other hand, obtaining long-term fund for firm investment may be constrained by the characteristics of
the firm and the preference of lender in the capital and equity market, such as liquidity, firm size, firm – bank relation,
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the structure of ownership and so on. Several recent researchers focus on the impact of firm characteristics, market
characteristics on the interactions among corporate decisions, such as bank loan – trade credit relation (Lin & Chou,
2015), the choice of debt maturity (Cai et al., 2008), investment – cash flow interaction (Kaplan & Zingales, 1997).
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Therefore, we categorize firms by three indicators: firm size, the availability of long-term loan and state-shareholding
to test the relation between corporate debt and investment rate.

3.2.1 Large firms and Small firms: Firm size is the one of key factors affect the capacity of obtaining fund. First, larger
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firms have greater the power of bargaining than smaller firms in negotiating with credit providers, such as banks.
Second, larger firms may have less potential asymmetric information problem than smaller firms; hence debtholder
prefer to give loan to larger firms. Third, large firms may have more the fixed asset to be treated as the collateral asset
in long-term financing from financial institutions. Moreover, firm size is also a key factor affecting different decisions
in corporate financing, such as capital structure, debt maturity structure.

In Vietnam, several recent papers confirm that the firm size is one of the key determinant of corporate financing across
segments and sectors. Most papers investigate financial behaviors has paid concentrated to SMEs sector (Nguyen and

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Ramachandran, 2006; Le, 2012; Rand 2007). However, even listed firms which match the minimum requirement of
capital from the stock exchange the scale of firms also vary broadly. Particularly, by 2016, the largest firms has total
asset of 180,450 billion dong (VIC) compared to the smallest firms has total asset of only nearly 13 billion dong
(SAP). On the one hand, SMEs use short-term debt to finance their operations due to the limited access to bank loan
(Nguyen and Ramachandran, 2006). On the other hand, listed firms also tend to use external debt for their investment
because of the inadequate stock market (Vo, 2016; Chang et al., 2014; Nguyen et al., 2012). Moreover, it is confirmed
that larger firms have more long-term debt in their capital structure. Therefore, we would expect that the effect of debt
financing on investment behaviors are different between two groups of listed firms.

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Hypothesis 2: Debt and firm investment relation is more sensitive in large firms than in small firms

3.2.2 Firms with long-term loan and firms without long-term loan: In a bank-based economy, banks could play an

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important role in corporate funding (Shleifer & Vishny, 1997). By using the panel dataset of Chinese from 1999 to
2009, Sleifer & Vishny (1997) examine how bank lending’s incentive influence firm investment behaviors to propose

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that agency problem is more intensive for firms that easier to access financing in controlling of firm – fund provider
relation. The more loan firms get from banks the more investment firm could. Our hypothesis is that firms with long-
term loan will raise more the investment rate than firms without bank loan on per unit of decreased debt level.

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Capital market and equity market is small and inadequate as Vietnam, bank is the most powerful formal channel of
credit. Enterprise Survey 2015 report that nearly 41% firms in Vietnam need bank loan, compared to around 30% in
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East Asia and Pacific Region. However, only 15% investment financed by banks and 67% have to finance internally.
It raise the extremely question for firms. The accessibility of credit depend on several factors, such as firm size (SMEs
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are restrictive than large firms), political networking between firms’ managers and banks manager, the age of
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relationship. Rand (2007) shows that about one-fourth Vietnamese enterprises are constrained in credit accessibility.

In a bank-based financial system as Vietnam, “banks play an a leading role in mobilizing savings, allocating capital,
overseeing the investment decisions of corporate managers and in providing risk management vehicles” (Demirguc-
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Kunt and Levine, 1999). However, Vietnamese firms get bank financing, long-term loan depend on several factors,
such as political connections, professional knowledge. Malesky and Taussig (2008) are the first researchers
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investigating the “connections” in bank lending behaviors in Vietnam. The finding provides some insightful results
that Vietnamese banks are heavily reliable on the political connections and collateral in determining loan to firms.
Moreover, banks are afraid of giving long-term loan due to high volatile interest rate, lack of skill staff in credit
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verification. For example, lending interest rate is around 11% per year in 2007 to nearly 20% in mid-year 2008. Banks
are also afraid of giving long-term loan because of uncertainty interest rate, long-time horizon to collect the debt as
well as manage collateral. Moreover, firms are difficult to access long-term debt because of restrictive collateral, such
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as land or machinery. On the one hand, firms are lack of skill to propose long-term strategic business plan when they
submit a request for long-term debt. On the other hand, bank officers are lack of skill to verify a business plan.
Therefore, banks offer long-term loan depend on political networking between banks and corporate managers, the age
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of relationship, the amount of collateral and also the regulation by the central state bank. Thus, we suppose firms with
and without long-term loans are extremely different in term of the connection with banks

Hypothesis 3: Debt and firm investment relation is more sensitive in firms with more long-term bank loan than in
firms without long-term bank loan

3.2.3 State-shareholding firms and private firms

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In recent years, Vietnam has become an emerging economy in Asia with the average annual growth rate at around 6
percent. This success could be the result of the economic reform starting from Doi Moi II (1986), then Equitisation
Program from 1992 in order to reduce the number of state firms, increase the private portion in firm share. However,
the government still owns nearly 57% firm shares in state-owned enterprises in some main industries. Moreover, the
government guarantees for state firms to approach loan. The effect of state-ownership on firm’s behaviors have
proposed by several present studies (Shleifer & Vishny, 1994 & 1997, Lizal & Svejnar, 2002, Lin et al., 2013, Lin &
Chou, 2015). In the case of Vietnam, various studies show that state – owned firms have more advantageous than
private firms in debt financing. Nguyen & Ramachandran (2006), for example, indicate that state firms have more

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opportunities to access long-term loan than private firms. Hakkala & Kokko (2007) argues that private firms still
struggles to compete against the state firms, mainly with the problem of market accessing and firm financing.

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A number of SOEs has sharply decreased in recent years due to two reason: the government push the equitization of
the state wholly-owned firms and the new definition of SOEs has introduced. Per the 2014 Law on Enterprises, an
SOE is defined as an enterprise in which the state holds 100 percent of its equity, a definition that does not follow

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international standards and obscures the true number of SOEs. Compared to the 2005 Law on Enterprises, an SOE is
defined as an enterprise in which the state holds from 50 percent of its equity. At a result, by 2015, number of State-
owned enterprises and state-involved enterprise occupies nearly one percent over total number of acting enterprises

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in Vietnam but they are holding nearly a half of fixed assets and long-term financial investment. In the past, the
government also usually gives preferential support for SOEs by providing supplementary capital, rescheduling debt
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or even debt forgiveness. The preferential support for SOEs has been lasted for long time to create the tight relationship
between loan providers and corporate managers. Despite the new definition of SOEs, the reduction of the support for
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SOEs due to inefficiency performance, the nature of equitized firms which former whole SOEs still long-lived remain
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in the form of business relations, nature of corporate leaders and the view of partnership. It is raise a concerns to
consider the corporate behaviors in investment and debt decision between two groups of firms

Hypothesis 4: Debt financing and firm investment relation are more sensitive for non-state firms as compared with
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state-shareholding firms
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4. DATA AND VARIABLE MEASUREMENTS

4.1 The sample

We utilize the balanced panel dataset of Vietnamese firms that provided by Vietstock, included the market data and
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financial statements. These data are then used to calculate both the dependent variable and explanatory variables. The
original sample starts with all companies that are listed on Ho Chi Minh City Stock Exchange and Ha Noi Stock
Exchange from 2010 to 2016. We start the sample period in 2010 to avoid the effect of 2008 – 2009 global financial
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crisis. We stop the sample period in 2016, which is the latest data in the current market. We exclude financial firms
(i.e., banks, insurance and life insurance companies, securities corporations and finance corporations) from the sample
due to the differences in financial structure (Rajan & Zingales, 1995, Dang, 2011). We exclude firms do not have full
A

observations from 2010 to 2016 due to the use of GMM estimator (Dang, 2011). The final panel data sample consists
of 435 firms with 3,045 firm-year observations. The Table 1 shows the statistical description of the variables.

To examine Hypothesis 2 and 3, the sample firms are divided into two sub-sample regarding three indicators of
financial constraints: long-term bank loan availability, firm ownership and firm size. The sub-sample of firms with
higher financial constraint includes the firm-years use neither the channels of banks for the long-term debt financing,
lower natural logarithm of total asset than sample median. To examine Hypothesis 4, the sample firms are divided
into two sub-samples, state-shareholding firms and private firms. The group of state-shareholding firms consists of

10
the firm-years with the presence of the state owner in share, otherwise are private firms. Tables show statistic
descriptions for sub-samples are in Appendix.

Table 1 presents descriptive information on the variables used in this paper. One can see that there is a dramatically
high variation in investment rate for Vietnamese firms. The mean value of the ratio of capital expenditures to fixed
assets at the beginning year (INV) is 0.24 with the standard deviation of 1.74. This figure is significantly higher than
other developed countries such as the mean in US is 0.74 (Aivazian, 2005b) and UK is 0.082 (Dang, 2011). The
sample mean of the ratio of long-term debt to total debt is 0.17. This figure is significantly lower than other developed

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countries such as the mean in US is 0.66 (Aivazian, 2005b), Australia is 0.74 (Alcock 2010); France, Germany and
the UK are 0.59, 0.53 and 0.46, respectively (Antoniou et al., 2006). The average leverage level (LEV) is 0.50 with
the standard deviation of 0.22. This figure is significantly higher than other developed countries, such as the mean in

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US is 0.25 (Aivazian, 2005b), in UK is 0.22. The sample mean of Tobin’s Q is 0.87, which reflects the market
expectations of weak growth opportunity.

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Table 1 Descriptive statistics

Number of Standard
Variable Mean Minimum Maximum
observations Deviation

U
INV 3,041 0.24 1.74 -1.00 66.77
DMAT 3,045 0.17 0.22 0.00 0.97
LEV
Q
3,045
3,045
0.50
0.87
N 0.22
0.33
0.01
0.19
0.97
4.15
A
CFL 3,041 1.86 68.12 -801.68 3,654.04
M

Table 2 reports the correlation between variables which are not high. The correlation between long-term debt ratio
and leverage is 0.2156. The multicollinearity is not serious problem in this study. The correlation between debt
D

maturity (DMAT) and debt ratio (LEV) is positive implying the positive interaction between corporate debt decisions.
However, firm cash flow (CFL) are negative correlated to debt choices as the correlation with debt maturity (DMAT)
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is -0.0122 and the correlation with debt amount (LEV) is -0.0343.

Tabe 2 Correlation matrix

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INV DMAT LEV Q CFL

INV 1.0000
DMAT 0.0823 1.0000
CC

LEV 0.0259 0.2156 1.0000

Q 0.0490 0.0333 0.0420 1.0000
CFL 0.0508 -0.0122 -0.0343 0.0124 1.0000
4.2 Model, variables and methodology
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In order to investigate the effect of debt choices on firm investment behaviors, we consider the first case where the
effect of market-to-book ratio, debt maturity and leverage in previous year on the current long-term investment. We
use fixed effects methods to investigate within groups. The use of fixed effects is to capture the unobservable variables
and the correlation between unobservable variables and observable variables. Here, μi represents unobservable firm-
specific and time-invariant effects and εi,t is an idiosyncratic disturbance term. The limitation of static model is not
capture the adjustment process of investment and corporate finance decisions over the period.

11
In static model:

INVi,t = β0 +β1 DMATi,t−1 + β2 LEVi,t−1 + β3 Q i,t−1 + β4 CFLi,t + μi + εi,t

Then, we consider the second case where the long-term investment in previous year could affect firm investment this
year. We add lagged dependent variable as an explanatory variable. Then we use the first-difference – GMM
(Generalized Methods of Moments) method to eliminate the individual effects and the potential correlation between
individual effects and lagged values of dependent variables.

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In dynamic model:

INVi,t = β0 + β1 INVi,t−1 β2 + β2 DMATi,t−1 + β3 LEVi,t−1 + β4 Q i,t−1 + β5 CFLi,t + εi,t

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As the previous studies, we measure firm investment by the ratio of capital expenditure to net fixed asset at the
beginning year (Kadapakkham et al., 1998, Aivazian, 2005a & 2005b, Lang, 1996).

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Debt maturity (DMAT) measured by the amount of long-term debt scaled by total debt (Cai et al., 2008, Antoniou et
al., 2006, Alcock et al., 2012, Barclay & Smith, 1995). Long-term debt is the debts with over one year maturities,
whereas short-term debt is the debts with less one year maturities.

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Leverage (LEV) measured by the ratio of total debt to total assets (Cai et al., 2008, Antoniou et al., 2006, Alcock et
al., 2012, Barclay & Smith, 1995)
N
Tobin’Q (Q) measured by the ratio of the market value of total assets to the book value of total assets. Market value
A
of total assets equals to the sum of the book value of total liabilities and market value of equity. We calculate Tobin’s
at the beginning of the fiscal year. (Kaplan & Zingales, 1997, Dang, 2011, Cai et al., 2008, Antoniou et al., 2006,
M

Alcock et al., 2012, Barclay & Smith, 1995)

Cash flow (CFL) measured by the ratio of earnings before interest, tax and depreciation to net fixed assets at the
beginning of the year (Kaplan & Zingales, 1997, Dang, 2011, Lang, 1996, Aivazian, 2005a & 2005b)
D

5. RESULTS AND DISSCUSION

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Table 3 shows the regression result on firm investment for Vietnamese listed firms over period 2010 – 2016. The
effects on firm investment of variables such as leverage (LEV), lagged investment (INV), growth opportunity (Q) and
cash flow (CFL) have the expected signs. The coefficient for leverage variable (LEV) is significant and negative which
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implies the negative impact of debt level on firm investment. Higher debt amount in capital structure is associated
with the lower investment. The results are in line with previous works (Aivazian, 2005a & 2005b, Dang, 2011). Cash
flow have the significantly positive effect on investment. The result is consistent with previous studies in cash flow
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sensitivity – investment relation (Kadapakkham et al., 1998). The significant positive relation between Tobin’s Q and
investment implies the higher expectation of equity investors the more investment the firms could.

Not surprisingly, the long-term debt insignificantly impact on investment behaviors in Vietnamese listed firms. It
A

supposes that these firms are not concern in the availability of long-term debt in their investment decisions. It could
be explained by the characteristics of financial system, the traditional behaviors of corporate managers and
professional knowledge. First, the firms-year observations with corporate bond issuances accounts for only 2.5% total
firm-years observations. It confirms that even listed firms have larger scale, more information transparency these firms
are also constrained to raise finance from capital market. Second, banks prefer offering short-term loan to giving long-
term loan to firms due to the unpredicted interest rate, monetary policy and lack of skilled staffs. To curb two-digit
inflation rate, the government released an announcement of cutting credit growth from approximately 30 percent in

12
2009-2010 to 20% in 2011 (Resolution No. 11/NQ - CP on February 2011). Moreover, according to BIDV report
(2016), banks tend to use short-term deposit to finance middle and long-term loans; the ratio of short-term deposit to
middle and long-term loan is 7.5% in 2011 to 31% in 2015. In general, long-term loan offers higher return to banks
but bears a high risk as well. Even though bank are limited to lend with long maturity since bankers is lack of skill to
evaluate project and banks are also less regulated. In addition, the accessibility to long-term debt are not only
dependable on the strong performance of firms but also the close relationship between corporate management and
debt providers. Therefore, debt maturity is not a key variable in determining investment decision in Vietnamese firms.

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The coefficient for the ratio of total debt amount to total asset is significant which confirms that Vietnamese firms use
short-term debt to finance their investment. Firms tend to use short-term debt to finance their long-term investment
due to the limited accessibility to long-run funds, the lack of risk management skill and their owned risk-appetite.

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First, banks general finance their loans by interbank funds which usually have very short maturities. Bank also slightly
cautious to offer long-term loans because they have the shortage of skilled credit staff to evaluate the project, the
monitoring system to manage the client’s cash flow and debt collection. On the other hand, firms may even prefer

SC
short-term debt since the interest rate for long-term debt is extremely high and fixed. Nevertheless, firms general do
not have the specialization to manage the uncertainty of interest rate.

U
Table 3 GMM regression results for full sample
Expected (1) (2)
Variables

INVt-1
signs
+
Coefficients
0.0176**
N
Standard errors
(0.0062)
Coefficients Standard errors
A
DMATt-1 - -0.7994 (0.6729) -0.141 (0.3522)
LEVt-1 - -0.8509* (0.3644) -1.077* (0.4430)
M

Qt-1 + 0.2182* (0.1043) 0.191 (0.1648)

CFLt + 0.0012*** (0.0001) 0.00134** (0.0005)
Number of Observations 2,170 2,606
D

AR(1) -2.35
TE

AR(2) -0.70
Sargan Test 10.09
Number of instruments 13
EP

Notes: *, **, *** shows significance at 90%, 95% and 99% respectively. Standard errors are given the parentheses.
The column (1) and (2) show the regression results by difference – GMM and fixed effects methods, respectively.

i) Large firms and small firms have the significant differences in investment – debt financing behaviors regarding the
CC

availability of internal funds, the capacity of fund raising; hence, the size of firm is one of the most significant
indicators to point out potential investment behaviors. Debt amount and debt maturity are insignificant related to
investment decision in large firms while both coefficients have negative impact on investment behaviors for small
A

firms.

In terms of firm size, compared to smaller firms, larger firms may have higher needs for investment in fixed asset,
more availability of internal funds and higher likely raising fund from alternative sources, such as institutional
investors. Hence, cash flow, the previous investment and market-to-book ratio play significant roles in determining
investment behaviors in larger firms. On the contrary, debt financing is negatively correlated to investment in small
firms. However, small firms could unlikely invest more if they bear a lot of debt and long-term debt also in that

13
situation they might pay very high interest rate to bank. The long-term lending interest is on average above 15% per
annum.

Table 4 Regression result for sub-samples of firm size

Large firms Small firms

Variables
Coefficients Standard errors Coefficients Standard errors
INVt-1 0.0167* (0.0075) 0.0052 (0.0179)
DMATt-1 -0.3448 (0.9351) -1.7973* (0.9048)

PT
LEVt-1 -0.6602 (0.8102) -0.7184* (0.3057)
Qt-1 0.5513* (0.2487) 0.0296 (0.0890)

RI
CFLt 0.0012*** (0.0001) -0.0008* (0.0004)
Number of Observations 1,124 1,046
AR(1) -2.99 -3.23

SC
AR(2) -0.81 1.59
Sargan Test 5.17 9.1
Number of instrument 13 9

U
Notes: *, **, *** shows significance at 90%, 95% and 99% respectively. Standard errors are given the parentheses.

N
ii) The bank loan availability is relative to corporate decisions. This is clearly shown in the regression result for two
groups of firms, firms with long-term bank loan availability and firms without bank long-term loan. Similar to large
A
firms, firms could finance themselves for their investment that do not adjust debt level and debt maturity in investment
decision. On the other hand, firms are more reliable on bank concerned about debt level in their investment decisions.
M

This result is associated with descriptive information of two sub-samples. First, in general, firms without long-term
loan less invest than firms with long-term loan. The average mean value of investment rate for bank-independent firms
is 0.13 compared to the average mean of bank-dependent firms is 0.35. Second, firms with no bank loan hold a little
D

portion of long-term debt as compared to firms with bank loan, 0.06 and 0.28, respectively. Firms without bank loan
make decision in investment based on the previous year invest and cash flow availability. It is also clear that firms are
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thoroughly concerned potential return versus interest in their investment procedure.

Table 5 Regression result for sub-samples of bank-dependences

EP

Firms without long-term loan Firms with long-term loan

Variables
Coefficients Standard errors Coefficients Standard errors
INVt-1 0.0769** (0.0296) 0.0092 (0.0090)
CC

DMATt-1 -0.0397 (0.2329) -0.8252 (0.6904)

LEVt-1 0.3183 (0.1997) -3.1715*** (0.9636)
Qt-t 0.0199 (0.0673) 0.5726 (0.3155)
A

CFLt 0.0011*** 0.0000 0.8030*** (0.2407)

Number of Observations 1,104 1,066
AR(1) -3.8 -1.72
AR(2) 0.53 -1.56
Sargan Test 4.95 3.24
Number of instruments 13 13
Notes: *, **, *** shows significance at 90%, 95% and 99% respectively. Standard errors are given the parentheses.

14
iii) We run two separated regressions for two sub-samples of state-shareholding firms and private firms. The regression
results show some interesting evidences. First, the ownership structure significantly impacts on the interaction between
debt choices and investment behaviors. It is quite understandable that equitized firms, formerly state-owned firms
which are entitled to many special favors as before.

The firms with the proportion of state in share could have more advantageous in debt financing, then could have
different view-point of investment decision. Second, debt – asset ratio has the significantly negative effect on
investment behaviors in private firms. It is consistent with the several previous results that firm use leverage as a tool

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to manage the underinvestment problem. Surprisingly, the maturities of debt, not the level of debt impact on state-
shareholding firm investment. The longer term debt state-shareholding firms have on hand the more investment they
could made. It could be that state firms only invest once they can raise long-term fund. It can be explained by the

RI
agency problem between state holder and management. State-shareholding firms may not difficult to get the short-
term debt from financial institutions in which government partially guarantees for them. However, the most important
issue in long-term investment is how they secured by their collateral assets. Private firms are more difficult to debt

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financing from banks and equity market in compared with state firms. Moreover, in principle, private are more difficult
to obtain long-term debt. Thus, they could roll over short-term debt to fund long-term investment. It could be the case
in Vietnam market.

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The distinct difference between state-shareholding firms and the other firms is that state-involved firms do not consider

N
the under/overinvestment problem. The important element in the first-stage investment procedure is that how much
long-term debt they can raise for their project. It also propose the problem in their state-involved firms that the state
A
sector partially owns the firms. In reality, the state-owned firms invest less efficiently.

Table 6 Regression result for sub-samples of ownership structure

M

State-shareholding firms Private firms

Variables
Coefficients Standard errors Coefficients Standard errors
D

INVt-1 0.1031* (0.0474) 0.0185** (0.0068)

DMATt-1 0.6976* (0.3314) -1.3014 (0.7392)
TE

LEVt-1 0.2767 (0.2925) -0.9895* (0.4021)

Qt-1 0.2536** (0.0886) 0.211 (0.1155)
CFLt 0.2133*** (0.0540) 0.0012*** (0.0001)
EP

Number of Observations 357 1,813

AR(1) -2.55 -2.22
AR(2) -1.34 -0.89
CC

Sargan Test 4.73 8.91

Number of instruments 13 13
Notes: *, **, *** shows significance at 90%, 95% and 99% respectively. Standard errors are given the parentheses.
A

6. CONCLUSION AND SUGGESTION

This study examines the effect of both debt maturity and debt level on firm investment level for different sub-samples
in order to address the main research questions. First, it investigates how the choices of debt financing affect
investment behaviors. Second, it evaluates this relation in different sub-samples regarding to the firm differences in
size, ownership structure of state share and the availability of long-term bank loan. Our regression results provide
some interesting evidences on the interaction between firm investment and the choices of debt.

15
Using the dataset of Vietnamese firms, we find that, in general, firms tend to reduce the total amount of debt to increase
investment level but the long-term debt ratio has no significant effect on firm investment as reported in Dang (2011)
for UK firms. Second, the relation between debt financing and investment are distinctly different among the group of
firms. Specifically, private firms use both leverage and debt maturity as the discipline tools to reach optimal investment
while large firms are not concerned about debt financing in their investment behaviors. Similar to large firms, firms
are less reliable on banks for long-term financing that only consider cash flow capacity and last-term investment in
their current investment. On the other hand, bank-dependent firms use total debt ratio but not long-term debt ratio to
adjust their investment. Differently, state-involved firms increase their investment when they can raise more long-

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term debt in comparison with the decreased in leverage to reduce investment in private firms.

The implication for the government is that the government should create the favorable environment for firm to fairly

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access debt from several channels, such as banks, equity market and capital market. The reform of banking system
should be improved in order to reduce the dominant of SOCBs, improve the quality of core management system in
banks approaching Basel III.

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This regression results do not control for the effects of industries. The aim to control for industry effects is that whether
firms with more investment in an industry have higher or lower the debt levels and debt maturities than the other firms

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in another industry. The research was conducted in Vietnam, which does not allow us to make comparison with another
transition economy in terms of debt financing – investment relation. Our further research should consider the impact

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of cultural and institutional context on the debt finance and investment behaviors.
A
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 Figure 4A. Domestic credit to private sector by banks to Figure 4B. Bank non-performing loans to total gross
GDP (%) loans (%)

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Source: World Bank

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APPENDIX. Statistic descriptions for different sub-samples

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Panel A

Variable Number of
State-shareholding firms
Mean Standard
N Number of
Private firms
Mean Standard
A
observations Deviation observations Deviation
INV 581 0.16 0.60 2,460 0.26 1.92
M

DMAT 581 0.20 0.23 2,464 0.17 0.22

LEV 581 0.56 0.21 2,464 0.49 0.22
Q 581 0.85 0.26 2,464 0.87 0.34
D

CFL 581 0.66 1.72 2,460 2.14 75.73

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Panel B
Equity-based firms Non-equity based firms
EP

Variable Number of Mean Standard Number of Mean Standard

observations Deviation observations Deviation
INV 74 0.45 1.53 2,967 0.24 1.75
CC

DMAT 74 0.42 0.23 2,971 0.16 0.22

LEV 74 0.62 0.16 2,971 0.50 0.22
Q 74 0.86 0.19 2,971 0.87 0.33
A

CFL 74 1.08 2.06 2,967 1.88 68.96

Panel C
Liquid firms Illiquid firms
Number of Standard Number of Standard
Variable Mean Mean
observations deviation observation deviation
INV 1,524 0.23 2.08 1,517 0.26 1.32

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DMAT 1,525 0.16 0.23 1,520 0.18 0.21
LEV 1,525 0.36 0.18 1,520 0.65 0.15
Q 1,525 0.86 0.42 1,520 0.88 0.19
CFL 1,524 1.37 8.07 1,517 2.35 96.12

Panel D
Large firms Small firms

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Variable Number of Mean Standard Number of Mean Standard
observation deviation observation deviation
INV 1,523 0.32 2.19 1,518 0.16 1.12

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DMAT 1,523 0.24 0.24 1,522 0.11 0.17
LEV 1,523 0.58 0.21 1,522 0.43 0.21
Q 1,523 0.90 0.30 1,522 0.84 0.35

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CFL 1,523 3.48 93.95 1,518 0.24 20.89

Panel E

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Firms with long-term loan Firms without long-term loan
Variable Number of Mean Standard Number of Mea Standard

INV
observation
1,570 0.35
deviation
2.35
N observation
1,471
n
0.13
deviation
0.60
A
DMAT 1,570 0.28 0.23 1,475 0.06 0.14
M
LEV 1,570 0.59 0.19 1,475 0.41 0.22
Q 1,570 0.87 0.24 1,475 0.87 0.40
CFL 1,570 0.65 1.81 1,471 3.16 97.92
D
TE

Panel F

Firms with Q>=1 Firms with Q<1

Number of Standard Number of Standard
EP

Variable Mean Mean

observations Deviation observations Deviation
INV 553 0.41 3.33 2,488 0.20 1.12
DMAT 554 0.16 0.23 2,491 0.17 0.22
CC

LEV 554 0.44 0.23 2,491 0.52 0.22

Q 554 1.36 0.44 2,491 0.76 0.15
CFL 553 6.51 159.14 2,488 0.83 6.69
A

20
 A
CC
EP
TE
D
M

21
A
N
U
SC
RI
PT