Firms’ investment – cash flow relationship in the context of state ownership and banking system reform in vietnam (tt)

MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HO CHI MINH CITY
-------------------------

TU THI KIM THOA

FIRMS’ INVESTMENT – CASH FLOW
RELATIONSHIP IN THE CONTEXT OF
STATE OWNERSHIP AND BANKING
SYSTEM REFORM IN VIETNAM
Major: Finance - Banking
Code: 9340201

SUMMARY OF PH.D THESIS
Ho Chi Minh City, 2020


1
The thesis is carried out at:
University of Economics Ho Chi Minh City
Academic supervisors:
Dr. Vu Viet Quang
Dr. Nguyen Thi Uyen Uyen
Reviewer 1 : ..........................................................................
..............................................................................................
Reviewer 2 : ..........................................................................
..............................................................................................
Reviewer 3 : ..........................................................................
..............................................................................................
The thesis will be defended at the Doctorate Thesis Committee
of Examiners of the University of Economics Ho Chi Minh City

at………… on ………..
The thesis can be referred at the library: ..............................
..............................................................................................


1
Chapter 1: INTRODUCTION
1.1. Motivations
Relationship between investment and cash flows, especially in
the context of financial constraints have attracted interests of many
scholars in the field corporate finance. Fazzari, Hubbard, Petersen,
Blinder, and Poterba (1988) show that financially contrained firms
have high investment – cash flow sensitivity because of higher cost of
external funds in compared with that of internal funds. Different types
of the relationhip between investment and cash flow have been found
in financial literatures. Fazzari et al. (1988) find the linear relationship
while Cleary, Povel, and Raith (2007) document the non-linear (Ushaped) ones, which have been confirmed by many other studies
(Firth, Malatesta, Xin, & Xu, 2012; Guariglia, 2008; Tsai, Chen, Lin,
& Hung, 2014). So, there is no consistent relation between investment
and cash flows found in the literatures. Moreover, this relation has not
been under-investigated for Vietnam context.
The investment – cash flow sensitivity is one of commonly used
measures of financial constraint, which is defined as a limit in capital
accessibility, either internally or externally. Several studies shows
evidences that state-ownership does have impact on this sensitivity
(Firth et al., 2012; Haider, Liu, Wang, Zhang, & Money, 2018; Tsai et
al., 2014) while H.-C. M. Lin and Bo (2012) shows that state –
ownership does not help to reduce financial constraints on investment,
even via the state-controlled banking system. However, most of the
studies conducted in the context of well-developed economies or big

transition country like China. How about Vietnam, a small and young
transition economy? Vietnam used to follow the centrally planned


2
economy which was entirely dominated by state-owned enterprises
(SOEs). Althought under the impact of Doi moi policy, the role of
private sector in the economy has been increasing, the government still
plays an important role in a large number of companies by holding a
large percentage of outstanding shares at many equitized SOEs. In the
literatures, the impact of state ownership on firm performance as well
as financial decisions is still controversial. Some report a positive
impact (R. R. Chen, El Ghoul, Guedhami, & Nash, 2018; Du &
Boateng, 2015; Sun & Tong, 2003) while some other evidence
different effects (Allen, Qian, & Qian, 2005; G. Chen, Firth, & Xu,
2009). So, whether state ownership has any impact on corporate
financial constraint, specifically, investment – cash flow relation of
Vietnamese companies is still an unanwered question.
In Vietnam, due to the underdevelopment of financial market,
beside internal cash flows, bank loans have been main financing
sources of funds for firm’s investments. However, credit market is not
a fair play ground for private companies due to some historical
reasons1 although Vietnam has done several efforts to improve the
situation. Nhung and Okuda (2015) show that Vietnamese SOEs have
an advantage over privately owned firms in accessing bank loans as
well as making a profit, even after economic booms. The higher
accessibility to bank loans, the less financially constrained the firm is,
meaning the lower investment – cash flow sensitivity. Therefore,
banking system reform is proved to have an impact on investment –
cash flow relation (Tsai et al., 2014). In the process of reforming the

Vietnam used to be a centrally-planned economy in which state – owned banks
mainly served for state-owned enterprises.
1


3
economy as well as intergrating to the world, Vietnam gradually
accepts the entry of foreign banks to do business in Vietnam. The
presence of foreign banks on one side would increase competition in
credit market, and on the other side put pressures on domestic banks
to improve their transparancy, effeciency and profitability to be
survival and grow in a integrated market. As such, the presence of
foreign banks – which can be considered a measure to reform the
banking system – may have certain impact on companies accessibility
to external funds to finance their investment, or on the other words,
firm’s investment – cash flow relation. Therefore, this is also another
motivation for me to choose this topic.
The topic of investment – cash flows have been intensively
conducted in financial literatures, but most of them use the samples of
developed countries like U.S, Canada, or China – a big transitional
economy. To my best knowledge, the relationship between investment
and cash flows, especially in the context of state – ownership and
foreign bank entry has still not investigated for the case of a small
transition economy like Vietnam. Furthermore, in spite of sharing
some cutural, social and political similarities with China, Vietnam also
has many differences such as size of economy, history of the
transformation, openness to the world economy, development of
financial market, etc. Studying the Vietnamese context is believed to
be worthwhile and valuable for international finance literatures

because results form the rather specific case of China may not be
generalizable for other small emerging markets. Therefore, I choose
to examine the impact of banking system reform, and state ownership
on investment – cash flow sensitivity in Vietnam for my Ph.D thesis.


4
The thesis follows the series of essays format which consists of
two independent essays: Firm’s investment – cash flow relationship
in the context of state ownership in Vietnam; and Firm’s investment –
cash flow relationship in the context of banking system reform in
Vietnam.
1.2. Thesis objectives:
The thesis aims to investigate the impact of state ownership and
banking system reform on the relationship between firm’s investment
and internal cash flows in the context of small transition economy –
Vietnam.
1.3. Methodology:
The study applies quantitative method on non-balanced panel
samples of Vietnamese listed firms which are extracted from the
Thomson Reuters database and manually collected from companies’
annual reports. All the regressions are estimated by Generalized Least
Squared (GLS) method to fix the heteroscedasticity problem and
robusted by Generalized Method of Moment (GMM) for
endogeneitity potential.
1.4. Empirical findings
The results show that the investment–cash flow relation for both
state-owned and non-state-owned firms is U-shaped. In addition,
state-owned companies have higher cash flow sensitivity of
investment, which perhaps is due to their socioeconomic and political

responsibilities, poor corporate governance and agency problem.
Also, presence of foreign banks in Vietnam results in a decrease in
investment cash flow sensitivities of Vietnamese companies.
Although overinvestment of state controlled firms is not reduced but


5
underinvestment problem of non- state -controlled listed firms is
mitigated due to better accessibility to bank loans with presence of
foreign banks.
1.5. Contributions
The studies provides evidences on the non-linear relationship
between investment and cash flows in Vietnam, which have been
under-investigated. More importantly, it sheds further light on the
implications of financial constraints on investment under the impact
of state ownership and banking system reform, especially in a small
transitional economy such as Vietnam. Therefore, the study results can
be helpful reference for policy makers, managers, economic and
business lecturers and students.

Chapter 2
FIRM’S INVESTMENT – CASH FLOW RELATIONSHIP
IN THE CONTEXT OF STATE OWNERSHIP CONTROL
IN VIETNAM
2.1. Study motivations
This chapter presents the first essay: a study on firm’s
investment - cash flows relationship under the context of state
ownership control in Vietnam. The study is motivated by the
domination of state ownership in Vietnamese companies while its
impact on firm performance as well as financial decisions have still

been unconsistent in the literature. Otherwise, from our best
knowledge, little attention to date has been paid to the impact of state
ownership on the investment–cash flow relation, especially in a small
transitional economy such as Vietnam.


6
2.2. Literature review and hypothesis development
2.2.1. Relation between investment and cash flow
Fazzari et al. (1988) is the first person who show the linear
relationship between investment and cash flow by using a sample of
US manufacturing firms in the period 1970–1984. The authors also
evidence find that the relation is more sensitive at financially
constrained firms and less sensitive at non-financially constrained
firms. The linear relationship also supported by Hoshi, Kashyap, and
Scharfstein (1991); Kaplan and Zingales (1997); Cleary (1999) and
Almeida and Campello (2007).
However, Cleary et al. (2007) find a U-shaped relation, which
is caused by cost and revenue effects, between investment and cash
flow. The cost effect arises because when firms invest more, their
borrowing cost rises. The authors conclude that firm’s investment has
a positive relation with internal cash flows when the cash flows are
significant, and a negative relation if they are low. The U-shape is also
supported by Guariglia (2008). Additionally, beside comfirming the
non-linear curve, Firth et al. (2012) further argue that the curve may
vary with politically oriented investment or a soft budget constraint.
Tsai et al. (2014) assert the flatter U-shaped curves with the presence
of foreign banks, which reduce financial constraints for firms,
especially those that are privately owned. This means that lower
investment - cash flow sensitivity reduces underinvestment by listed

SOEs.
The U-shaped relation between investment and cash flow may
be explained as follows. The small and young companies normally
have low range of cash flows and good investment opportunities,


7
which are well perceived by the market, so these companies are easier
to raise external capital from financial market, resulting in a negative
investment – cash flow relation. However, having no current
investments, higher cash flows will not materialize in the future.
Therefore, it is not a feasible strategy to coincide timing investment
with high cash flow period (Hovakimian, 2009). This argument also
supports the argument by Cleary et al. (2007) with cost – revenue
effect explanation. Therefore I expect that Vietnamese firms have a
similar investment–cash flow relationship, so the following hypothesis
is set:
H2.1: The investment and cash flow relation at Vietnamese
companies is U-shaped.
2.2.2. State Ownership and Investment–Cash Flow Relations
Many studies have been conducted on the impact of soft budget
constraints on the relationship between cash flow and investment.
Early research by Chow and Fung (1998) finds evidence that
investment by private firms has higher cash flow sensitivity than that
by SOEs, implying that the latter face fewer financial constraints than
non-SOEs. Héricourt and Poncet (2009), as well as Poncet, Steingress,
and Vandenbussche (2010) arrive at similar conclusions. According to
Cleary et al. (2007), the less financially constrained a firm is, the flatter
its U-shaped curve is, as company investment is less dependent on
internal cash flow. Guariglia, Liu, and Song (2011) find that SOEs’

asset growth is not affected by liquidity constraints, while the
availability of internal funds constrains the growth potential of private
companies. The soft budget constraints at SOEs are due to their social
and political responsibilities (Bai, Lu, & Tao, 2006; C. R. Chen, Li,


8
Luo, & Zhang, 2017a; J. Y. Lin & Tan, 1999; Sheshinski & LópezCalva, 2003). On the contrary, Firth et al. (2012) show that SOEs have
a steeper U-shaped curve than private firms, especially on the lefthand side of the curve. The findings appear to contradict the argument
on SOEs’ soft budget constraints. The authors argue that Chinese
SOEs are induced by the government to use their own cash flows to
invest more, so as to achieve multiple government socioeconomic
objectives when they have abundant internal cash flows and when they
face negative internal funds.
In Vietnam, SOEs also have responsibilities to fulfil
government socioeconomic and political objectives as the Chinese
ones. The SOEs, under the government influences in many cases, have
to undertake some assigned, even negative net present value (NPV)
investments, leading to overinvestment problems. However, unlike the
private firms, the Vietnamese SOEs do not associate investments with
firm’s fundamentals (O'Toole, Morgenroth, & Ha, 2016), indicative of
poor investment efficiency. R. Chen, El Ghoul, Guedhami, and Wang
(2017b) also report that SOEs’ investments have lower efficiencies
than non SOEs do. Lower efficiency may cause a higher cost of
external financing, which in turn make SOEs have more reliance on
the internal capital. Therefore, the following hypothesis is posited:
H2.2: SOEs have higher investment–cash flow sensitivity.
2.2.3. State Ownership and Investment–Leverage Relation
In literature, a negative relation between debt and investment
are found by many studies (Aivazian, Ge, & Qiu, 2005; Firth, Lin, &

Wong, 2008; Jensen, 1986; Lang, Ofek, & Stulz, 1996; Myers, 1977).
On the other side, as indicated in many studies (Chow & Fung, 1998;


9
Guariglia et al., 2011; Héricourt & Poncet, 2009; J. Y. Lin & Tan,
1999; Poncet et al., 2010), SOEs have a soft budget constraint, which
means they can easily access external financing (Allen et al., 2005;
Cull, Li, Sun, & Xu, 2015; Cull & Xu, 2003). Nhung and Okuda
(2015) also point that Vietnamese SOEs have easier access than other
firms when borrowing funds from banks and making profits, even after
an economic boom. As such, state ownership may have certain impact
on the relation between investment and leverage. Therefore, the thesis
also investigate the impact of state ownership on investment–leverage
relations by developing the following hypothesis:
H2.3: State ownership has a positive impact on a firm’s
investment–leverage relations.
2.3. Research design
2.3.1. Testing Investment–Cash Flow Relation
In order to test the U-shape relationship, in this study, two
different approaches to examine investment–cash flow relations, using
the basic model of investment developed by Fazzari et al. (1988) are
employed as follows:
In the first approach, CFKSQRi,t is added into the basic model
as employed by Cleary et al. (2007); Firth et al. (2012):
𝐼𝐾𝑖,𝑡 = 𝛼0 + 𝛼1 𝐶𝐹𝐾𝑖,𝑡 + 𝛼2 𝐶𝐹𝐾𝑆𝑄𝑅𝑖,𝑡 + 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝑖,𝑡 + 𝑣𝑖 + 𝑣𝑡 + 𝑒𝑖,𝑡

(2.1)

where i and t are firm and time, respectively; vi is the firm-fixed

effects; vt is the year-fixed effects, and eit is the error term. IKit is the
investment ratio. CFKi,t is the annual internal cash flow ratio. Controls
is a vector of control variables that potentially affect firm investment,
including the SGi,t-1 (firm’s sales growth); SIZE (firm size); LEVi, t-1
(financial leverage); AGEi,t (firm age); BETAi,t (beta coefficient).


10
In the second approach, following Firth et al. (2012), the cash
flow (CFK) of the basic model is separated into positive cash flow
(CFKPOS) and negative cash flow (CFKNEG) by using the dummy
variables POS and NEG. POS takes a value of 1 if CFK is greater than
0, and 0 otherwise. Similarly, NEG takes a value of 1 if CFK is less
than 0, and 0 otherwise.
𝐼𝐾𝑖,𝑡 = 𝛼0 + 𝛼1 𝐶𝐹𝐾𝑃𝑂𝑆𝑖,𝑡 + 𝛼2 𝐶𝐹𝐾𝑁𝐸𝐺𝑖,𝑡 + 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝑖,𝑡 + 𝑣𝑖 + 𝑣𝑡 + 𝑒𝑖,𝑡 (2.2)

A significant change in the sign of the coefficients of CFKPOS
and CFKNEG shows a nonlinear relation between investment and cash
flows. A U-shaped curve has a significantly positive sign for CFKPOS
and significantly negative sign for CFKNEG. An inverse-U-shaped
curve has a significantly negative sign for CFKPOS and significantly
positive sign for CFKNEG.
2.3.2. Testing the impact of state ownership on investment–cash
Flow Relations
To test the impact of state ownership on investment–cash flow
relations, I use two different proxies for state ownership (SC):
 First, SC (= STATE) is measured by a dummy variable that
takes a value of 1 if the percentage of state ownership in firm i in year
t is at least 50% of total voting shares and 0 otherwise. This method
compares the investment behavior of two groups: state-owned (SOEs)

and non state-owned (non-SOEs) firms.
 Second, SC (= GOV) is measured by the percentage of state
ownership in firm i in year t. This method measures the extent of
government influence on firm investment behavior.
The two SC proxies are sequently interacted with CFKPOS and
CFKNEG. The regression model is as follows:


11
𝐼𝐾𝑖,𝑡 = 𝛼0 + 𝛼1 𝐶𝐹𝐾𝑃𝑂𝑆𝐼,𝑡 + 𝛼2 𝐶𝐹𝐾𝑁𝐸𝐺𝐼,𝑡 + 𝛼3 𝐶𝐹𝐾𝑃𝑂𝑆_𝑆𝐶𝐼,𝑡 +
𝛼4 𝐶𝐹𝐾𝑁𝐸𝐺_𝑆𝐶𝐼,𝑡 + 𝛼5 𝑆𝐶𝐼,𝑡 + 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝑖,𝑡 + 𝑣𝑖 + 𝑣𝑡 + 𝜀𝑖,𝑡

(2.3)

2.3.3. Testing the impact of state ownership on investment–leverage
relations
The following model is used to test H2.3. Two different proxies
for state ownership (SC) described in section 2.3.2 are used to interact
with leverage (LEV) as follows:
𝐼𝐾𝑖,𝑡 = 𝛼0 + 𝛼1 𝐶𝐹𝐾𝑖,𝑡 + 𝛼2 𝐿𝐸𝑉𝑖,𝑡−1 + 𝛼3 𝑆𝐶𝑖,𝑡 + 𝛼4 𝑆𝐶𝑖,𝑡 ∗ 𝐿𝐸𝑉𝑖,𝑡−1 +
𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠𝑖,𝑡 + 𝑣𝑖 + 𝑣𝑡 + 𝜀𝑖,𝑡

(2.4)

All the tests are conducted for full-sample, SOEs and non SOEs
subsamples, and high growth and low growth subsamples.
2.3.4. Data
An unbalanced panel data in 2009-2015 for non-financial
companies listed on the HOSE and the HNX is used. Both financial and
market data are extracted from the Thomson Reuters database.

Observations with missing data are omitted, and outliers that may
influence the results are also excluded by winsorizing 1% of the two
tails for each variable.
2.4. Summary of the study results
The study investigates the impact of state ownership on the
relation between investment and cash flow in Vietnam, a small
transition economy. The results also show higher cash flow sensitivity
of investment at SOEs, implying higher financial contraints, compared
with non-SOEs because the former have social and political
responsibilities. At SOEs, sensitivity is higher when cash flows are
positive than when cash flows are negative. Our results also show that
privately owned companies increase investment more when they have


12
a positive rather than negative cash flow, but the investment behavior
of state-owned companies is the opposite. They reduce investment
more when they have negative cash flow than when cash flow is
positive. Furthermore, the study finds that bigger as well as riskier
companies make less investment than smaller or less risky ones.
Table 4.4. Summary of regression result testing the U-shape investment and
cash flow relation
Panel A: Regression with square of cash flow (CFKSQR)
State-owned
Non-state-owned
enterprises
enterprises
CFK
0.002***
-0.005

0.002***
(2.69)
(-0.64)
(2.87)
CFKSQR
0.00001***
0.002***
0.00001***
(34.72)
(7.43)
(34.06)
Panel B: Regressions separating CFK into CFKPOS and CFKNEG
State-owned
Non-state-owned
Full sample
enterprises
enterprises
CFKPOS
b1
0.026***
0.067***
0.026***
(16.95)
(15.00)
(20.56)
CFKNEG
b2
-0.002
-0.105***
0.0005

(-1.42)
(-6.18)
(0.64)
joint test
(b1=b2)
0.000
0.000
0.000
R-sq.
0.564
0.498
0.562
Fixed Effect
Year and Industry
Year and Industry
Year and Industry
No. of Obs.
2734
773
1961
Full sample

Different investment behaviours are found by companies with
high versus low growth opportunity. Investment by both SOE and nonSOE high growth companies is less dependent on internal cash flow.
High growth SOEs have higher cash flow sensitivity of investment
than non-SOEs. However, low growth SOEs have higher cash flow
sensitivity of investment than non-SOEs, suggesting that the social
and political investments by the former may be inefficient.

13
Table 4.5: Impact of state ownership on investment – cash flow relations
CFKPOS

b1

CFKNEG

b2

CFKPOS_SC

b3

CFKNEG_SC

b4

SC
Joint test (p-value)
b1=b2
b1+b3=0
b2+b4=0
b1+ b3=b2+b4
R-sq.
Fixed Effect
No. of obs.

SC = STATE
0.0234***

(15.24)
0.00005
(0.07)
0.048***
(7.28)
-0.119***
(-13.52)
0.015
(1.21)
0.000
0.000
0.000
0.000
0.570
Year and Industry
2734

SC = GOV
0.028***
(24.47)
0.002***
(8.27)
-0.029***
(-7.63)
-0.039**
(-2.28)
0.029
(1.36)
0.000
0.668

0.029
0.037
0.572
Year and Industry
2734

Moreover, I also find that previous-period leverage has a
positive effect on SOEs. High growth SOEs have a soft budget
constraint, but both high growth non-SOEs and low growth SOEs are
more reliant on internal cash flows to finance their investments.
Our study provides additional evidence on the impact of state
ownership on corporate investment–cash flow relations, especially in
a small transition economy, which may be useful for future research
on a similar topic in a similar context. However, the research only
investigate the impact of the Vietnam’s state ownership among various
forms of ownership, which could be further exploited in future studies,
on the investment- cash flow relation.


14
Chapter 3
FIRM’S INVESTMENT – CASH FLOW RELATIONSHIP
UNDER THE CONTEXT OF BANKING SYSTEM REFORM
IN VIETNAM
3.1. Study motivation:
This study examines the effect of banking system reform which
is measured by foreign bank’s presence on investment-cash flow
relation in a context of a small transition economy. The study is
motivated by the fact that in Vietnam, financial system has been going
through many reforms to improve its efficiency as well as to integrate

into the world economy, including accepting the presence of foreign
banks. Tsai et al. (2014) document that presence of foreign banks
would reduce corporate investment-cash flow sensitivities in China.
To my best knowledge, there is quite few studies on this topic. So,
case of China may not be generalized for other small developing
countries with unmature financial market like Vietnam although
Vietnam shares some political, cultural, social and economic
similarities with China.
3.2. Literature review
Among studies on impact of foreign banks, Detragiache,
Tressel, and Gupta (2008) find evidence that foreign banks are less
sensitive to political pressure, and they have less pressure of lending
relation partners, who are capable of breaking relation barriers.
Political and non-economic motivations are not top priorities of
domestic banks now. Therefore, state-owned commercial banks are
transformed from politically – incentive organization to modern
corporate governance – oriented ones. Therefore, reforming bank


15
system by allowing foreign banks holding ownership at domestic
state-owned banks could reduce policies favoring politically –
oriented investments of state – controlled companies. With presence
of foreign investors, credit granting would be more prudential, in that
way careless loans as well as politically-oriented loans could be
mitigated. With this research, Detragiache et al. (2008) use foreign
ownership in domestic bank as proxy for banking system reform and
this research is supported by Berger, Klapper, Peria, and Zaidi (2008).
Berger et al. (2008) report that after reform, foreign ownership in
domestic banks, especially state-controlled banks can change their

lending practice, from politically – oriented to commercially-oriented
banks. Non state-controlled listed companies are considered more
transparent, more commercially-oriented and more efficient than
state-controlled listed companies. Therefore, after reform, non-statecontrolled listed companies have more channels to access bank loan
and underinvestment problem of non-state- controlled listed
companies are reduced.
Tsai et al. (2014) in their study on effect of bank system reform
on investment – cash flow sensitivity measures banking system reform
by presence of foreign bank at region where company had
headquartered or branches. The research finds evidence that with
presence of foreign banks, politically-oriented investments at state
controlled listed companies are reduced because state-owned banks
transform from more politically – oriented to more commercially –
oriented financing. Problem of underinvestment at non state –
controlled listed companies seems to be mitigated due to an increase
in their bank loan accessibility. The study also documents a reduction


16
of distortion of investment in state controlled listed companies as well
as reduction on financial constraints at non state – controlled listed
companies.
3.3. Research methodology
3.3.1. Hypothesis development and model specification
3.3.1.1. Effect of banking system reform on investment–cash flow
relation
It is common to have problem of “flexible” budget constrain in
the centrally-planned economy, which refers to the favorable policies
for state-controlled organizations. Due to being owned by
government, these organizations are often bailed out if they are in

trouble, normally in form of subsidy, tax deduction or exemption, set
low input cost, set high output price, low cost financing, etc.
Therefore, state – owned enterprises in Vietnam normally can access
bank credit much easier and normally at lower cost than private ones,
that leads to the situation of overinvestment. Moreover, like China,
overinvestment problem in state-controlled companies are mainly
caused by politically- oriented investments (Firth et al., 2012) because
officials in these companies also have incentives to achieve social and
political objectives for their promotion (Liu & Lu, 2007). Meanwhile,
non-state-controlled companies are not favored with these privileges,
so they have to rely on their own internal cash flow to finance their
investment opportunities (Tsai et al., 2014).
With the presence of foreign bank, credit market become more
competitive and transparent. State-owned banks may have to change
its lending practices from politically-oriented to commerciallyoriented, so non-state controlled companies have more chance to


17
access bank financing, so underinvestment problem of these company
could be reduced.
H3.1: Banking system reform mitigates overinvestment
problem at state – controlled companies
H3.2: Banking system reform mitigates underinvestment
problem at non state – controlled companies
Following Firth et al. (2012), the impact of foreign bank
presence on investment cash flow sensitivity is tested by following
model:
𝐼𝐾𝑖,𝑡 = 𝛼0 + 𝛼1 𝐶𝐹𝐾𝑃𝑂𝑆𝐼,𝑡 + 𝛼2 𝐶𝐹𝐾𝑁𝐸𝐺𝐼,𝑡 + 𝛼3 𝐶𝐹𝐾𝑃𝑂𝑆𝐵𝐴𝑁𝐾𝐼,𝑡 +
𝛼4 𝐶𝐹𝐾𝑁𝐸𝐺𝐵𝐴𝑁𝐾𝐼,𝑡 + 𝛼5 𝐵𝐴𝑁𝐾𝐼,𝑡 + 𝛼6 𝑆𝑎𝑙𝑒𝑠𝐺𝑟𝑜𝑤𝑡ℎ𝑖,𝑡−1 + 𝛼7 𝑆𝐼𝑍𝐸𝑖,𝑡 +
𝛼8 𝐿𝐸𝑉𝑖,𝑡 + 𝛼9 𝐴𝐺𝐸𝑖,𝑡 + 𝛼10 𝐵𝐸𝑇𝐴𝑖,𝑡 + 𝑣𝑖 + 𝑣𝑡 + 𝜀𝑖,𝑡

(3.1)

where i and t are firm and time, respectively; vi is the firm-fixed
effects; vt is the year-fixed effects, and eit is the error term. IKit is the
investment ratio. CFKi,t is the annual internal cash flow ratio. Controls
is a vector of control variables that potentially affect firm investment,
including the SalesGrowthi,t-1 (firm’s sales growth); SIZE (firm size);
LEVi,

t-1

(financial leverage); AGEi,t (firm age); BETAi,t (beta

coefficient). POS, NEG and BANK are interaction variables which
POS takes a value of 1 if CFK is greater than 0, and 0 otherwise; NEG
takes a value of 1 if CFK is less than 0, and 0 otherwise. BANKi,t takes
the value 1 for firms located in a region where foreign banks are
allowed to do business in year t and afterwards, and 0 otherwise.
3.3.1.2. Effect of banking system reform on investment-leverage
relation
As many other transition economies, bank loans are still main
source of external funds in Vietnam where stock market is still young


18
and immature. Moreover, presence of foreign banks provides
additional credit channel for firms, resulting in mitigation of financial
constraints, as well as motivation for domestic banks to improve their
efficiency to be more competitive and to change lending practice to be

more commercially-oriented. So, to examine if banking system reform
have any impact on investment –debt relation, the following
hypothesis is developed:
H3.3: Banking system reform has a positive impact on firm’s
investment – debt relation:
Following model is used to test the hypothesis H4.3:
𝐼𝐾𝑖,𝑡 = 𝛽0 + 𝛽1 𝐶𝐹𝐾𝑖,𝑡 + 𝛽2 𝐿𝐸𝑉𝑖,𝑡−1 + 𝛽3 𝐵𝐴𝑁𝐾𝑖,𝑡 + 𝛽4 𝐵𝐴𝑁𝐾𝑖,𝑡 ∗ 𝐿𝐸𝑉𝑖,𝑡−1 +
𝛽5 𝑆𝑎𝑙𝑒𝐺𝑟𝑜𝑤𝑡ℎ𝑖,𝑡−1 + 𝛽6 𝑆𝐼𝑍𝐸𝑖,𝑡 + 𝑣𝑖 + 𝑣𝑡 + 𝜀𝑖,𝑡

(3.2)

Definitions of other variables are as above.
3.3.2. Data
The study uses an unbalanced panel data from the period 2009
to 2014 for non-financial companies listed on Ho Chi Minh City Stock
Exchange (HOSE) and Hanoi Stock Exchange (HNX). Financial firms
are excluded because of their different investment behaviors. Both
firm’s financial data and financial market information such as stock’s
adjusted market price and market index are taken from the Thomson
Reuter Database. Missing value observations and outliers are also
excluded.
3.3. Summary of the study results
This study focus on investigating investment cash flow
sensitivity in a context of Vietnam as well as if investment behavior
of Vietmamese companies is affected by banking system reform
which is measured by presence of foreign banks. The study again


19
confirms the U-shape relation between investment and cash flows,

both state controlled and non state controlled firms.
Table 5.5. Effect of banking system reform on investment – cash flow relation
CFKPOS

b1

CFKNEG

b2

CFKPOSBANK

b3

CFKNEGBANK

b4

BANK
joint test (p-value)
b1=b2
b1+b3=0
b2+b4=0
b1+ b3=b2+b4
R-sq
Year Dummy
Industry Fixed Effect
No. of Obs.

Full sample

0.044***
(3.10)
-0.240***
(-6.06)
0.044***
(2.77)
0.223***
(5.52)
0.013**
(2.12)

SOEs
0.062***
(3.12)
-0.179***
(-3.55)
0.091***
(3.48)
0.137**
(2.46)
0.029**
(2.35)

Non SOEs
0.036
(1.57)
-0.238***
(-5.26)
0.032
(1.3)

0.219***
(4.79)
0.010
(1.34)

0.000
0.000
0.065
0.000
0.166
Yes
Yes

0.000
0.000
0.065
0.000
0.118
Yes
Yes

0.000
0.000
0.055
0.000
0.164
Yes
Yes

2266

667

1601

Banking system reform measured by presence of foreign banks
has signigicant impact on investment behaviour of Vietnamese
companies. Underinvestment problem of uncontrolled firms is
mitigated by the reforms due to their better accessibility to external
financing. Unlike our expectation, overinvestment problem of state
controlled firms is almost not reduced which is different with findings
by Tsai et al. (2014)Tsai et al. (2014). It can be explained that foreign
bank presence in Vietnam is still very limited while state owned banks


20
are still playing dominating role on the credit market. Besides, both
high and low growth state controlled firms seem do not change their
investment behavior much after the reform. However, high growth
uncontrolled firms signigicantly increase their investment after the
reforms while low growth uncontrolled firms seems have to more rely
on their cash flows in the post reform period. Our results also shows a
significant change from negative to positive investment – leverage
relation from pre reform period to post reform period for both state
and non state controlled firms, meaning that firm investments are less
dependent on internal financing in the post reform period. This impact
are especially significant for low growth opportunity firms.
Chapter 4
CONCLUSION
In this thesis, I investigate the firm’s investment – cash flow

relationship under the two different contexts: state ownership and
banking system reform in a small transition economy – Vietnam. The
following two big conclusions are withdrawn:
- State ownership may increase firm’s financial constraints may be
due to its political and social responsibilities.
- Presence of foreign banks may reduce firm’s financial contraints
because their lendings are mainly based on commercial purposes.
Otherwise, this is also additional channel of financing, especially
for private sector.
From

the

above

implications,

reccommendations are suggested:

the

following

policy


21
o To accelerate equitization process both in term of quality and
quantity.
o Policy regulations should be set up in the way SOEs should focus

on the business functions. The political and social responsibilities
should be implemented via indirect tools such as tax.
o It is better to improve the competitiveness of the banking system
through the healthy banking operations and strict management of
bad debts.
o Step by step opening and liberalizing the financial sector to
integrate deeply and broadly with the world.
o Companies with good future investment opportunities may choose
a low level of financial leverage to avoid debt overhang.
The study’s findings can provide some useful impications for
academics, managers, investors and policy makers. Regarding
academics, the study can be used to be learning materials for finance
students. Managers and investors may refer the findings to make better
financial decisions. Policy makers may use the findings as reference
to make relevant policies to improve business environment which have
transparency, fair playground for all kinds of businesses as well as to
improve effectiveness of government stakes in companies.


22
THESIS-RELATED LIST OF AUTHOR’S PUBLICATIONS
A. Scientific jounals
1) Tu Thi Kim Thoa, Nguyen Thi Uyen Uyen (2017) Banking System

Reform and Investment - Cash flow Relation – Case of Vietnam,
Research In International Business and Finance, Vol. 41, October
2017, Pages 500-515. DOI: 10.1016/j.ribaf.2017.04.038.
2) Từ Thị Kim Thoa, Nguyen Thi Uyen Uyen (2017), Kiểm định mối
quan hệ giữa đầu tư và dòng tiền: trường hợp Việt nam, Tạp Chí Khoa
Học, 57(6), 49-63.

3) Tu Thi Kim Thoa and Nguyen Thi Uyen Uyen (2019), Stateownership and the Relationship between Investment and Cash
Flow:The Case of Vietnamese Listed Firms, Emerging Market
Finance and Trade, DOI: 10.1080/1540496X.2019.1610874.

B. Scientific researches
1)

University level (2016), “Ảnh hưởng của cải cách hệ thống ngân
hàng lên mối quan hệ phi tuyến giữa dòng tiền và dầy tư”, Code:
CS-2015 - 104 (Research leader). Excellent rated.

2)

Univeresity level (2017): “Mối quan hệ giữa đầu tư và dòng tiền,
vai trò kiểm soát của nhà nước – Trường hợp các doanh nghiệp
niêm yết Việt nam” Code: CS-2016-29. (research leader).
Excellent rated.