International Review of Finance, 2017

DOI: 10.1111/irfi.12130

Foreign Ownership and Corporate

Cash Holdings in Emerging Markets*
XUAN VINH VO†,‡
†
University of Economics Ho Chi Minh City, Ho Chi Minh City, Vietnam and
‡
CFVG Ho Chi Minh City, Ho Chi Minh City, Vietnam

ABSTRACT

This article examines the link between foreign ownership and corporate cash
holdings. We utilize a data sample of firms listed on the Ho Chi Minh City
stock exchange covering the period 2007–2015. Employing different
econometric techniques for panel data, we find that higher foreign ownership
is associated with more corporate cash holdings. This finding suggests that
foreign investors in the Vietnam stock market are subject to precautionary
motive and agency motive forcing firms to hold more cash. However, the
outcome suggests potential agency problems because managers might
subsequently use this cash reserve for their own advantages. These problems
are even more pronounced in emerging markets where investor protection
mechanism is weak. Accordingly, this highlights the importance of a
monitoring mechanism to refrain corporate managers from investing in
value-destroying projects.

JEL Codes: G30; G32

I. INTRODUCTION

Corporate cash holding is an important topic in finance that has received

increasing interest from different stakeholders. Practically, cash holdings play
an important role in the firm’s balance sheet (Tong 2011). Accordingly, a huge
volume of theoretical studies in the literature has been devoted to this topic.
However, the empirical studies on corporate cash holdings have received
increasing attention by academics only in the last decades (Bigelli and Sánchez-
Vidal 2012).
In this paper, we analyze this promising topic by shedding further light into
the relationship between foreign ownership and corporate cash holdings in the
Vietnam stock market. We employ a data set of firms listed on the Ho Chi Minh
City stock exchange covering the period 2007–2015. We fill the gap by providing
an analysis on the unexplored topic in the context of a key emerging market.
* We would like to thank Professor Ramo Gencay (the managing editor) for critical comments and
helpful suggestions that greatly improve the brevity of the paper. We thank Huynh Anh Duong for
excellent research assistance. Any remaining errors are our own responsibility.

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Many recent papers document the growing importance of Vietnam from

different perspectives (O’Toole and Newman 2016). Accordingly, investigating
the link between foreign ownership and corporate cash holdings in Vietnam is
interesting in its own merit.
The inconclusive literature gives rise to important motivation of the current
paper. Cash holdings offer an interesting context to study the implication of
agency problems. Free cash flow channel links corporate managers’ private
incentives to cash holdings (Chen et al. 2012). More specially, managers prefer
larger cash holdings because they could access to cash holdings with less scrutiny
and use them in a discretionary way (Tong 2011). Further, firm managers could
turn cash holdings into private benefits at lower costs (Myers and Rajan 1998).
Accordingly, shareholders prefer and tend to force corporate managers to disgorge
cash (Harford et al. 2008). On the other hand, other studies suggest that higher
cash reserve is associated with higher firm value (Mikkelson and Partch 2003).
Another motivation is the recent growing contentious debate on corporate
cash holdings. For example, Bates et al. (2009) provide a comprehensive review
of motives for corporate holdings of cash. More specially, this work documents
four important motives for firms to hold cash, which are the transaction motive,
the precautionary motive, the tax motive, and the agency motive. Moreover, Gao
et al. (2013) assert that previous studies explaining cash holdings tend to focus
on financing frictions and agency conflicts. Financing friction results in higher
demand for firms to hold extra cash. Agency conflicts arise when there is a strong
information asymmetry about investment opportunities, and this leads firms to
hold more cash.
We contribute to the contentious debate on this topic in a number of
perspectives. Firstly, we shed light on the implication of agency problems in
emerging markets by examining the association between foreign ownerships
and cash holdings in a small open economy of Vietnam. Secondly, the depth
and the unique context of Vietnam offer important contribution. Most of
previous work on corporate cash holdings mainly refers to developed countries
(Bigelli and Sánchez-Vidal 2012), while issues related to impact of foreign
ownership on cash holdings remain unexplored in the Vietnamese context.
The finding of the article suggests that higher foreign ownership is associated
with higher cash holdings in Vietnamese firms. This might be explained by the
fact that foreign investors lead firms to hold more because they are subject to
precautionary motive and agency motive. However, this outcome offers strong
implication related to the agency problems. For example, Harford (1999) argue
that there is a strong reason for shareholders to be concerned about managers
of cash-rich firms. Managers with greater control over cash flows are more prone
to pursue private benefits at shareholders’ expense and might not invest these
cash in value-maximizing projects (Jensen and Meckling 1976; Jensen 1986;
Stulz 1990; Masulis et al. 2009). In addition, firms with higher cash holdings
are normally associated with lower value (Faulkender and Wang 2006). These
highlight the importance to apply a monitoring mechanism to prevent firm
managers from investing these extra cash into value-destroying projects.

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 Foreign Ownership and Corporate Cash Holdings

The rest of the article proceeds as follows. Section II describes data and
methodology. Section III presents the results and discussion of results.
Section IV offers some concluding remarks.

II. DATA AND METHODOLOGY

A. Data
Data are collected from the Vietstock Database, a leading financial and business
database in Vietnam. Our data cover nonfinancial firms listed on the Ho Chi
Minh City Stock Exchange for the period from 2007 to 2015.

B. Model
We employ two formulations to estimate the impact of foreign ownership and
cash holdings. The first formulation is a fixed effects model, which is outlined
as follows:

Cashholdingsi;t ¼ α þ β1  ForeignHoldingsi;t þ γ  X þ ηi þ ϵit (1)

where i and t are firm and time subscripts, respectively; ηi captures the firm fixed
effects; and ϵit is the error term.
Cashholdings is the measure of cash holdings, which is calculated as cash plus
cash equivalents divided by the total assets; ForeignHoldings is the proportion of
foreign holdings in a firm at the beginning of the year; X is a vector of control
variables that potentially affect cash holdings, including the following: SIZE is
a proxy for firm size, measured as the log of total asset; ROA is the return on
assets; SALE_GROWTH is the firm sale growth.
Moreover, previous studies provide evidence that foreign investors have
preference to invest in firms with large cash position (Dahlquist and Robertsson
2001; Luo and Hachiya 2005), and this highlights the problem of potential
causality. Further, other studies on foreign investors in Vietnam also suggest that
foreign investors have preference for some firm-specific attributes (Batten and Vo
2015), and this suggests the possible endonegeity problem. Accordingly, we
employ the dynamic model approach in order to control for the possible reverse
causality and endonegeity problems. More specially, we utilize the second
formulation, which is the dynamic model. The second dynamic model is
presented as follows:

Cashholdingsi;t ¼ α Cashholdingsi;t1 þ β1  ForeignHoldingsi;t þ γ  X þ ϵit (2)

We employ Generalized Method of Moments (GMM) estimator to estimate

the dynamic regression model presented by the equation (2). The GMM

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estimator introduced by Arellano and Bond (1991) is also appropriate for the
nature of our data set of “small T, large N”. We use the Hansen J-test to assess
the validity of the instrument variables.

III. RESULTS AND DISCUSSION OF RESULTS

Table 1 presents the descriptive statistics of the variables employed in the

analysis.
Table 2 reports both the fixed effects estimation and dynamic GMM
estimation results where the dependent variable is the cash holdings. Overall,
we find that the coefficient for foreign ownership is positive and significant in
explaining cash holding. In other words, we find that higher foreign ownership
is associated with more corporate cash holdings. The reported result of the
Hansen test at the bottom the table (J-statistics and p-value) confirms the validity
of instruments.
The result of a positive relation between foreign ownership and cash holdings
postulates that foreign investors seem to enforce the common practice of holding
more cash in financial management practice in Vietnamese firms. This result
supports the obvious trend in the developed countries, for example, the evidence
that the US firms hold more cash than they used to (Bates et al. 2009). More
importantly, the holdings of large cash reserve is proved to be associated with
systematic market share gains at the expense of industry rivals (Fresard 2010).
In the context of an emerging market, the result might be explained by the
fact that foreign investors tend to force firms to hold more cash primarily because
of the precautionary motive and the agency motive. The precautionary motive
suggests that foreign investors force firm managers to use extra cash as a
precautionary hedge against the possibility that capital frictions cause adverse
shocks and financial distress that make external finance more costly (Lins et al.
2010). The agency motive suggests that foreign investors are good at the
monitoring role so that they force financial managers to hold more cash to avoid

Table 1 Descriptive statistics of the variables employed in the analysis

CASH FOREIGN SIZE ROA SALE_GROWTH
Mean 0.0958 0.0363 27.3385 0.0677 1.2967
Median 0.0550 0.0000 27.2551 0.0523 0.1561
Maximum 1.3560 0.4900 32.1362 0.6624 316.0564
Minimum 0.0001 0.0000 20.2150 0.6455 1.0000
Obs 1060 1100 1060 1060 1005

Notes: This table shows the descriptive statistics of the variables employed in this study.
Cashholdings is the measure of cash holdings, which is calculated as cash plus cash equivalents
divided by the total assets; ForeignHoldings is the proportion of foreign holdings in a firm at the
beginning of the year; X is a vector of control variables, including the following: SIZE is a proxy
for firm size, measured as the log of total asset; ROA is the return on assets; SALE_GROWTH is
the firm sale growth.

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Table 2 Fixed effects and dynamic GMM estimation results

(I) (II)
Fixed effects estimation GMM estimation
Variable Coefficient p-value Coefficient p-value
c 0.3348 0.0273
A_CASH(1) 0.2434*** 0.0000
FOREIGN 0.0251** 0.0193 0.0010* 0.0769
SIZE 0.0151*** 0.0071 0.0140 0.1105
ROA 0.2251*** 0.0000 0.1640*** 0.0033
SALE_GROWTH 0.0003*** 0.0006 0.0001 0.6597
R-squared 0.6822
Adjusted R-squared 0.5717
F-statistic 6.1746
Prob(F-statistic) 0.0000
J-statistic 28.8054
Prob(J-statistic) 0.3704

Note: This table shows the fixed effects (I) and Generalized Method of Moments (GMM) estimation
results (II). Panel (I) shows the estimates for the regression equation (1) using fixed effects
* *
estimator: Cashholdingsi , t = α + β1ForeignHoldingsi , t + γ X + ηi + ϵit; where where i and t are firm
and time subscripts, respectively; ηi captures the firm fixed effects; and ϵit is the error term.
Cashholdings is the measure of cash holdings, which is calculated as cash plus cash equivalents
divided by the total assets; ForeignHoldings is the proportion of foreign holdings in a firm at the
beginning of the year; SIZE is a proxy for firm size, measured as the log of total asset; ROA is
the return on assets; SALE_GROWTH is the firm sale growth. Panel (II) shows the estimates
*
for the regression equation (2) using GMM estimator: Cashholdingsi , t = α Cashholdingsi , t  1
* *
+ β1ForeignHoldingsi , t + γ X + ϵit. *Significance at 10%. **Significance at 5%. ***Significance at 1%.

riskier cash flows and costly access to external finance (Bates et al. 2009; Gao et al.
2013).
This result also indicates some implications for different stakeholders with
respect to firm value when firms have excess cash holdings. Firstly, it is important
to address the monitoring role of foreign investors in preventing firm managers
from building up excess cash in order to overinvest in a value-destroying
investment (Venkiteshwaran 2011). Secondly, the agency problem is more
pronounced in emerging markets. Further, in countries where shareholder
protection is weak, firm values are lower when controlling managers hold more
cash (Kalcheva and Lins 2007).

IV. CONCLUSIONS

In this paper, we study the link between foreign ownership and corporate cash
holdings in emerging markets. More specially, we attempt to shed further light
on the question of whether foreign investors could influence corporate decisions
in the context of Vietnam. The result indicates that higher foreign ownership is
associated with higher corporate cash holdings.

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The finding from the paper implies that foreign investors holding shares in
Vietnamese firms tend to be more precautious in their financial management
practice. This outcome is consistent with the overwhelming evidence that
foreign investors push firms to hold more cash as a response to financial frictions
(Amess et al. 2015). Other explanations might be resulting from the agency
motive. More specially, because of the information asymmetry, foreign investors
demand corporate managers to hold more cash.
However, many studies assert that the marginal value of cash is negatively
associated with large cash holdings (Faulkender and Wang 2006). Accordingly,
our result implies that potential problems might arise because managers in firms
holding more cash could subsequently invest in value-destroying investment
projects. This is a critical caveat because of agency problems and weak investor
protection in emerging economies. Therefore, this outcome highlights the
importance of a monitoring mechanism to align managers toward corporate
value maximization.

Xuan Vinh Vo
University of Economics and CFVG Ho Chi Minh City
59C Nguyen Dinh Chieu Street
District 3, Ho Chi Minh City
Vietnam
vinhvx@ueh.edu.vn

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