Firms’ Investment – Cash Flow Relationship In The Context Of State Ownership And Banking System Reform In Vietnam

MINISTRY OF EDUCATION AND TRAINING OF VIETNAM

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

[Company name]

[Document title]
TU THI KIM THOA

[Document subtitle]

Firms’ Investment – Cash Flow Relationship
In The Context Of State Ownership And
Banking System Reform In Vietnam

DOCTORAL THESIS

Kim Thoa Tu Ho
Thi Chi Minh City, June 2020
[Date]


i

MINISTRY OF EDUCATION AND TRAINING OF VIETNAM

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

DOCTORAL THESIS
Specialization: Finance and Banking
Code: 9340201

Supervisors:
VU VIET QUANG, Ph.D.
NGUYEN THI UYEN UYEN, Ph.D.

Kim Thoa Tu Thi
[Date]
Ho Chi Minh City, 2020


ii

STATEMENT OF AUTHORSHIP

I hereby declare that this submission is my own work and except where due
reference is made; this thesis contains no material previously published or written by
another person(s).
This thesis does not contain material extracted in whole or in part from a thesis
or report presented for another degree or diploma at University of Economics Ho Chi
Minh City or any other education institution.

Tu Thi Kim Thoa
June 2020

iii

ACKNOWLEDGEMENTS

First and foremost, I would like to express deepest gratitude to my supervisors,
Dr. Vu Viet Quang and Dr. Nguyen Thi Uyen Uyen, for their continual guidance and
mentorship, invaluable support, remarkable patience, useful feedback, and spiritual
encouragement during the completion of my thesis. My thesis can not be completed
without their supervisions, which provided me with much precious advice to expedite
my thesis completion.
I would like to thank the University of Economics Ho Chi Minh City for its
generous financial support of my PhD studies. I also wish to thank all the colleagues
at the UEH School of Finance, School of UEH Graduates and others for their great
and continuing encouragement and full support during my PhD candidature.
My gratitude also goes to my colleagues at UEH who have constantly given a
great help, support and encouragements to me not only during but also before the
completion of my thesis.
Finally and most importantly, I would like to thank my friends and family for
their unconditional love, immense, constant and endless support and encouragements
during my life. I would have been unable to finish the thesis without their supports
and encouragement. And I also wish to dedicate this thesis to my late mother who is
always in my heart.


i

TABLE OF CONTENTS
ABBREVIATIONS............................................................................................ i
LIST OF TABLES ............................................................................................ ii

LIST OF FIGURES........................................................................................... v
ABSTRACT ..................................................................................................... vi
CHAPTER 1: INTRODUCTION ..................................................................... 1
1.1. Thesis motivations ........................................................................................... 1
1.2. Thesis objectives .............................................................................................. 5
1.3. Firm’s investment – cash flow relationship in the context of state ownership
in Vietnam ................................................................................................................... 5
1.3.1. Objectives and hypotheses ..................................................................... 5
1.3.2. Data ........................................................................................................ 6
1.3.3. Methodology ........................................................................................... 6
1.3.4. Empirical findings .................................................................................. 7
1.3.5. Contributions .......................................................................................... 7
1.4. Firm’s investment – cash flow relation in the context of banking system reform
in Vietnam ................................................................................................................... 8
1.4.1. Objectives and hypotheses ..................................................................... 8
1.4.2. Data ........................................................................................................ 9
1.4.3. Methodology ........................................................................................... 9
1.4.5. Contributions ........................................................................................ 10
1.5. Thesis structure .............................................................................................. 10

CHAPTER 2: OVERVIEW ON VIETNAM’S ECONOMIC REFORMS .... 11
2.1. Overview on Vietnam’s economy ................................................................. 12
2.2. Overview on equitization of state owned enterprises of Vietnam ................. 20
2.3. Overview on Vietnam’s banking system reform ........................................... 24
2.4. Chapter summary ........................................................................................... 29


ii

CHAPTER 3: FINANCIAL CONSTRAINTS AND INVESTMENT: A

THEORETICAL FRAMEWORK AND LITERATURE REVIEW .............. 31
3.1. Theories of investment .................................................................................. 33
3.1.1. The Modigliani-Miller Theorem (MM) ................................................ 34
3.1.2. Neo-classical model ............................................................................. 34
3.1.3. Sales accelerator model ....................................................................... 35
3.1.4. Tobin’s Q model ................................................................................... 36
3.1.5. The Euler model ................................................................................... 38
3.2. Financial constraints and investment: a literature review ............................. 39
3.2.1. Financial constraint and investment .................................................... 39
3.2.2. State Ownership and Investment–Cash Flow Relations ...................... 48
3.2.3. Banking system reform and investment – cash flow relation ............... 50
3.2.4. Financial leverage, growth opportunity and investment relation........ 51
3.3. Chapter summary ........................................................................................... 53

CHAPTER 4: FIRM’S INVESTMENT – CASH FLOW RELATIONSHIP IN
THE CONTEXT OF STATE OWNERSHIP IN VIETNAM ........................ 54
4.1. The study introduction ................................................................................... 55
4.2. Literature review and hypothesis development ............................................. 57
4.2.1. Relation between investment and cash flow ......................................... 57
4.2.2. State Ownership and Investment–Cash Flow Relations ...................... 60
4.2.3. State Ownership and Investment–Leverage Relation .......................... 62
4.3. Research design ............................................................................................. 63
4.3.1. Testing Investment–Cash Flow Relation .............................................. 63
4.3.2. Testing the Impact of State Ownership on Investment–Cash Flow
Relations .................................................................................................................... 66
4.3.3. Testing the Impact of State Ownership on Investment–Leverage
Relations .................................................................................................................... 67
4.3.4. Data ...................................................................................................... 67
4.4. Empirical results ............................................................................................ 68

iii

4.4.1. Descriptive Statistics ............................................................................ 68
4.4.2. Empirical Results ................................................................................. 70
4.4.3. Robustness Check ................................................................................. 83
4.5. Conclusion ..................................................................................................... 92
4.6. Chapter summary ........................................................................................... 93

CHAPTER 5: FIRM’S INVESTMENT – CASH FLOW RELATIONSHIP
UNDER THE CONTEXT OF BANKING SYSTEM REFORM IN
VIETNAM ...................................................................................................... 94
5.1. The Stuty Introduction ................................................................................... 95
5.2. Literature review ............................................................................................ 98
5.2.1. Investment – cash flow relation............................................................ 98
5.2.2. Effect of banking system reform on investment – cash flow relation . 100
5.3. Research methodology................................................................................. 101
5.3.1. Hypothesis development and model specification ............................. 101
5.3.2. Data .................................................................................................... 106
5.4. Empirical results .......................................................................................... 107
5.4.1. Descriptive statistic ............................................................................ 107
5.4.2. Correlations ....................................................................................... 109
5.4.3. Regression results .............................................................................. 111
5.4.4. Robustness check ................................................................................ 129
5.5. Study conclusion .......................................................................................... 130
5.6. Chapter summary ......................................................................................... 131

CHAPTER 6: CONCLUSION...................................................................... 133
6.1. Introduction .................................................................................................. 133
6.2. Firm’s investment – cash flow relationship in the context of state ownership

in Vietnam ............................................................................................................... 133
6.2.1. Research findings ............................................................................... 133
6.2.2. Research contributions, implications and policy recommendations . 134
6.2.3. Research limitations and future research directions ......................... 136


iv

6.3. Firm’s investment – cash flow relationship in the context of banking system
reform in Vietnam ................................................................................................... 137
6.3.1. Research findings ............................................................................... 137
6.3.2. Research contributions , implications and policy recommendations 138
6.3.3. Research limitations and future research directions ......................... 140

LIST OF AUTHOR’S PUBLICATIONS ..................................................... 141
REFERENCES .............................................................................................. 142
APPENDIX ................................................................................................... 148


i

ABBREVIATIONS
Agribank

Vietnam Bank for Agriculture and Rural Development

ASEAN

Association of Southest Asian Nations

ATFA

ASEAN Free Trade Agreement

BIDV

Bank for Investment and Development of Vietnam

CPI

Comsumer Price Index

FDI

Foreign direct investment

GDP

Gross Domestic Products

HCMC

Ho Chi Minh City

HNX

Hanoi Stock Exchange

HOSE

Ho Chi Minh City Stock Exchange

JSCB

Joint-stock commercial bank

JVB

Joint – venture bank

MM

Modigliany and Miller Theorem

SBV

State Bank of Vietnam

SOCB

State-owned commercial bank

SOE

State owned enterprise

US

United States of America

VCB

Bank for Foreign Trade of Vietnam

Vietinbank

Vietnam Industrial and Commercial Banks

WTO

World Trade Organization


ii

LIST OF TABLES

Table 2.1

Main economic indicators of Vietnam, 1986 – 2018

19

Table 2.2

Stages of SOE equitization in Vietnam (1992 – 2018)

21

Table 2.3

Credit institutions of Vietnam, 2010 - 2017

26

Table 2.4

Foreign banks’ branches in Vietnam

27

Table 3.1

Summary of Financial Constraint Proxies

47

Table 4.1

Sample structure

68

Table 4.2

Variable descriptive statistic

69

Table 4.3

Differences between non state-owned and state-owned

70

enterprises
Table 4.4

Analysis of relation between investment and cash flow

73

Table 4.5

Impact of state ownership on investment – cash flow

76

relation
Table 4.6

Impact of state ownership on relation between investment

78

and cash flow under different growth opportunities
Table 4.7

Impact of state ownership on the investment and leverage

81

relations
Table 4.8

Impact of state ownership on the relations between
investment - leverage under different growth opportunities

82


iii

Table 4.9

State ownership and relations between investment and cash

84

flow under different growth opportunities: GMM
estimation method
Table 4.10

Classification of state-owned and non-state-owned

87

enterprises using the threshold of 33.15 percent
Table 4.11

State ownership and relations between investment and cash

90

flow under different growth opportunities in which high
growth opportunity is classified by quartile
Table 5.1

Sample structure

107

Table 5.2

Variable descriptive statistic

108

Table 5.3

Pearson and Spearman correlation matrix

110

Table 5.4

Analysis of investment - cash flow relation

115

Table 5.5

Effect of banking system reform on investment – cash flow

119

relation
Table 5.6

Effect of banking system reform on investment –cash flow

122

relation of state – controlled listed companies by different
growth opportunities.
Table 5.7

Effect of banking system reform on investment –cash flow
relation of non state – controlled companies by different
growth opportunities

124


iv

Table 5.8

Effect of banking system reform on investment – leverage

126

relation
Table 5.9

Effect of banking system reform on investment – leverage

128

relation for both low and high growth opportunities
Table 5.10

GMM estimates of investment – cash flow sensitivity

129


v

LIST OF FIGURES

Figure 2.1

Annual GDP growth rate for the period of 1986 – 2018 (%)

13

Figure 2.2

Vietnam’s Inflation (% change of CPI), 1986-2018

15

Figure 2.3

Vietnam’s volume of imports and exports (% of GDP),

16

1986-2018
Figure 2.4

Vietnam’s Foreign Direct Investment, net inflows (% of

18

GDP)
Figure 2.5

Progress of SOE equitization, 1992 – 2018

22

Figure 2.6

Number of SOEs, 1995 - 2017

24

Figure 5.1

Fitted value of investment (IK) on cash flow (CFK) on a

112

full sample of Vietnamese listed firms for the period of
2009 – 2014
Figure 5.2

Fitted value of investment (IK) on cash flow (CFK) on a

113

subsample of Vietnamese State controlled firms for the
period of 2009 - 2014
Figure 5.3

Fitted value of investment (IK) on cash flow (CFK) on a
subsample of Vietnamese Non - state controlled firms for
the period of 2009 - 2014

114


vi

ABSTRACT

This thesis applies the style of a series of papers in the field of corporate
finance, which mainly composes of the two stand-alone essays.

The first essay investigates the effect of state ownership on the relationship
between investment and cash flow in Vietnam, a small transitional economy. Using
a sample of companies listed on the both Ho Chi Minh City Stock Exchanges (HOSE)
and Hanoi Stock Exchange (HNX) during the period 2008 to 2015, the U- shaped
investment–cash flow relations for both state-owned and non-state-owned firms are
found. In addition, state-owned companies (SOEs) have higher cash flow sensitivity
of investment, which perhaps is due to their socioeconomic and political
responsibilities, poor corporate governance and agency problem. Their growth
opportunities also affect the sensitivity.
The second essay examines the effect of banking system reform, which is
defined by the presence of foreign banks, on investment-cash flow relation in a
context of a small transition economy. I find evidence that the presence of foreign
banks in Vietnam results in decreasing in firm’s dependence on local banks and has
changed their financial constraint. Company investments are less reliant on internal
cash flow in the post reform period. Although overinvestment of state controlled
firms can not be reduced but underinvestment problem of non- state -controlled listed
firms is mitigated due to better accessibility to bank loans. The investigated relation
between investment and leverage is robust for this conclusion.
JEL classification: G30, G31, G32
Keywords: financial constraints, investment – cash flow relations, state ownership,
banking system reform, small transition economy.


1

CHAPTER 1
INTRODUCTION

This thesis applies the style of a series of papers in the field of corporate
finance, which mainly composes of the two stand-alone essays. This chapter

summarizes the content of the thesis, which brieftly presents the thesis’ motivations,
objectives, methodologies, contributions and structure. Section 1.1 presents the thesis
motivations on impact of financial constraints, particularly state ownership and
banking system reform on firm’s investment – cash flows of a transition economy,
Vietnam. Section 1.2 introduces the research objectives. Section 1.3 and Section 1.4
respectively summarize the two essays: firm’s investment – cash flow relation under
the context of state ownership in Vietnam and firm’s investment – cash flow relation
under the context of banking system reform in Vietnam. Finally, Section 1.5 presents
the structure of the thesis.

1.1. Thesis motivations
The thesis was inspired by the following motivations:
Firstly, investment is one of the most important decisions in corporate
financial decisions. The company managers will make all of efforts to conduct
positive NPV investment opportunities because these investmens are expected to
increase the firm value. Beside availability of positive NPV investment opportunities,
the availability of financing funds (internal or/and external) is another important
factor affecting the firm’s investments. Therefore, relationship between investment
and cash flows, especially in the context of financial constraints have attracted


2

interests of many scholars. Fazzari, Hubbard, Petersen, Blinder, and Poterba (1988)
show that financially contrained firms have high investment – cash flow sensitivities
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 (U-shaped) 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, the relation has not
been under-investigated for Vietnam context.
Secondly, 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. In the context of transition economy like China and
Vietnam, the role of state ownership on financial constraints has been unclear. Many
studies shows evidence that state-ownership does have impact on firm financial
constraints, i.e. investment – cash flow relation (Firth et al., 2012; Haider, Liu, Wang,
& Zhang, 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.
Vietnam used to follow the centrally-planned economy which was entirely
dominated by state-owned enterprises (SOEs). This mechanism led the country into
crisis and backward, which required a broad and in–depth renovation of the whole
economy. A comprehensive program which is well-known as Doi moi was introduced
in 1986 to transform the economy from a socialist to a market oriented. As one of the
components of the Doi moi policy, an equitization (privatization per-se) program
launched in the early 1990s has transformed a number of state-owned companies into
joint-stock companies beside for the first time allowing existence of private
companies. A number of private companies (both equitized and non-equitized) has


3

been constantly increasing. However, 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. Sun and Tong (2003)
report that the privatization program in China improved earnings, sales, and workers’

productivity at Chinese SOEs but not profitability. Du and Boateng (2015) assert that
shareholder value is significantly affected by state ownership, formal institutional
distance, and reforms in the foreign currency approval system. However, G. Chen,
Firth, and Xu (2009) find that firm performance is enhanced by certain types of state
ownership. SOEs have slow, even negative growth whereas the rapidly growing
private sector significantly contributes to economic growth (Allen, Qian, & Qian,
2005). It finds that SOEs with a soft budget constraint can easily access external
financing, resulting in lower dependence on internal cash flows than is the case at
privately owned firms (Allen et al., 2005; Cull & Xu, 2003). Firth et al. (2012) also
report that state ownership has an impact on the relation between investment and cash
flow. R. R. Chen, El Ghoul, Guedhami, and Nash (2018) assert that an increase in
state ownership leads to an increase in corporate cash holdings, which means a
positive relation between government ownership and corporate cash holdings. More
specifically, SOEs have higher investment–cash flow sensitivity than privately
owned firms, especially when cash flow is negative. So, whether state ownership has
any impact on corporate financial constraint, specifically, investment – cash flow
relation of Vietnamese companies is still an unanwered question.
Thirdly, 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

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


4

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 transforming the
economy from centrally – planned to market oriented, Vietnam also has conducted a
number of financial system reforms as a component of overal economic reform. One
of them is to allow the entry of foreign banks to do business in Vietnam. This does
not only come from the reality but from entrance requirements of international free
trade agreements such as WTO also. 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, it also motivates me to
conduct this thesis.
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


5

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.

1.2. Thesis objectives
The general objective of the research is to investigate the impact of financial
constraints, which are measured by state ownership and banking system reform on
the relation between firm’s investment and internal cash flows in the context of small
transitional economy – Vietnam. The general objective is implemented by the two
essays which are separately presented in the following Sections of 1.3 and Section
1.4.

1.3. Firm’s investment – cash flow relationship in the context of state
ownership in Vietnam
1.3.1. Objectives and hypotheses
The study examines the effect of state ownership on the relationship between
investment and cash flow in Vietnam, a small transitional economy. The study
objectives are as follows:
-

Examine the nonlinear relationship (U-shape) between investment and cash
flows of Vietnamese listed companies.

-

Examine impact of state ownership on the investment – cash flow relation in
general, and for state controlled and non –state controlled firms.

-

Examine impact of state ownership on the investment – leverage relation in
general, and for state controlled and non –state controlled firms.

-

Propose some policy reccommendations to various related parties based on the
research findings
To achieve the research objectives, following research questions are set forth:


6

-

Does the investment and cash flow relation of Vietnamese companies
have U-shape?

-

Do state controlled companies have higher investment–cash flow
sensitivity than non-state controlled companies?

-

Does state ownership has a positive impact on a firm’s investment–
debt relations.

1.3.2. Data
The final sample of the study consists 3,366 firm-year observations of nonfinancial companies listed on the two stock exchanges of Vietnam, HOSE and HNX

for the period of 2009 – 20152. 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.
1.3.3. Methodology
The study applies quantitative method. First, the study tests if investment –
cash flow in Vietnam is U-shaped for Vietnamese firms in genternal, state controlled
and state uncontrolled firms, employing two different approaches. The first approach
follows Cleary et al. (2007) which includes square of cash flow method in the
standard investment regression equation developed by Fazzari et al. (1988), and the
second approach follows Firth et al. (2012) which separates cash flows into positive
and negative cash flows. Secondly, the impact of state ownership on the investment
– cash flow relationship is investigated by using both dummy and continuous
variables of state ownership. The investigation is conducted for the full sample, state

2

The period is chosen because there were just a limited number of listed equitized SOEs before 2008 and the
study was conducted in 2016.


7

controlled, state-uncontrolled subsamples as well as high and low growth
opportunities sub-subsamples. Thirdly, the investment-leverage relationship is also
examined in the same manner. All the regressions are estimated by using Generalized
Least Squared (GLS) method on a panel data samples to control for the
heteroscedasticity problem and robusted by Generalized Method of Moment (GMM)
for endogeneitity potential.
1.3.4. 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. Moreover, the investment of high-growth companies, both with and without
state ownership, has lower dependence on internal cash flow. Additionally, lowgrowth state-owned companies have higher cash flow sensitivity of investment than
those without state ownership, suggesting inefficient investment by the former.
1.3.5. Contributions
The following contributions are added into the current literature from different
perspectives. First, I shed further light on the implications of financial constraints by
investigating the association between state ownership and corporate investment–cash
flow in a small transitional economy such as Vietnam. Second, generally previous
studies examining this important issue have been conducted in the context of
developed countries or China (Cleary et al., 2007; Firth et al., 2012; Tsai et al., 2014).
The intensive literature review has indicated that the impact of state ownership on
investment relations in an emerging and transitional country such as Vietnam has
largely been under-examined.


8

1.4. Firm’s investment – cash flow relation in the context of banking system
reform in Vietnam
1.4.1. Objectives and hypotheses
The study examines the effect of banking system reform on investment-cash
flow relation in a context of a small transition economy. The banking system reform
is measured by presence of foreign banks or their branches, outlets, representative
offices at the location where the company locates its headquarter. Followings are the
study objectives:
-

Examine the U-shape relationship between investment and cash flow for
Vietnamese companies.

-

Examine impact of banking system reform on the investment – leverage
relation in general, and for state controlled and non –state controlled firms.

-

Examine impact of banking system reform on the investment – leverage
relation in general, and for state controlled and non –state controlled firms.

-

Propose some policy reccommendations to various related parties based on the
research findings

To achieve the research objectives, following research questions are set forth:
-

Is there a nonlinear investment – cash flow relation (U-shape) at Vietnamese
companies?

-

Does banking system reform mitigate overinvestment problem at state –
controlled companies?

-

Does banking system reform mitigates underinvestment problem at non state
– controlled companies?

-

Does banking system reform has a positive impact on firm’s investment –
debt relation?


9

1.4.2. Data
The final sample of the study consists 2,858 firm-year observations of nonfinancial companies listed on the two stock exchanges of Vietnam, HOSE and HNX
for the period of 2009 – 20143. Both financial and market data are extracted from the
Thomson Reuters database. Observations with missing data and outliers are excluded.
1.4.3. Methodology
The study applies quantitative method. First, the U-shaped investment – cash
flow relations in Vietnam are tested. The tests are conducted for the full sample, state
controlled and state uncontrolled subsamples, employing two different approaches.
The first approach follows Fazzari et al. (1988) and the second approach follows Firth
et al. (2012). Secondly, I investigate the impact of banking system reform on the
investment relationship for various groups of business such as state controlled, non
state controlled, high growth opportunity and low growth opportunity, etc. The
variable proxied for banking system reform is manually collected from company
annual reports. Thirdly, I examine the investment- leverage relationship under the
impact of state – ownership. All the regressions are estimated by using Generalized
Least Squared (GLS) method to fix the heteroscedasticity problem and robusted by
Generalized Method of Moment (GMM) for endogeneitity potential.

1.4.4. Empirical findings
The findings show the U – shape relation between investment and cash flow
for Vietnamese companies. I also find evidence that the presence of foreign banks in
Vietnam results in a decrease in dependence of corporate investments on local banks
and has changed corporate investment behaviors. Company investments are less

3

The period is chosen because there were just a limited number of listed equitized SOEs before 2008 and the
study was conducted in 2015.


10

reliant on internal cash flow in the post reform period. Although overinvestment of
state controlled firms is not reduced but underinvestment problem of non- state controlled listed firms is mitigated due to better accessibility to bank loans. The
investigated relation between investment and leverage is robust for this conclusion.
1.4.5. Contributions
This study contributes additional empirical evidence to the financial literature
on the topic of impact of banking system reform on investment – cash flow relation,
especially in a context of small transition country. Most of my findings are similar to
the previous study results except that overinvestment problem of state controlled
firms is not mitigated in the post reform period. Perhaps, in the post reform period
state controlled firms are still main customers of state-owned local banks who are
dominating the credit market. Moreover, presence and operation of foreign banks in
Vietnam is still limited.

1.5. Thesis structure
The remaining of the thesis is structured as follows. Chapter 2 presents the
overview on Vietnam’s economic reforms. Chapter 3 reviews related investment

theories and literatures on financial constraints, and its impact on investment – cash
flow relationship. Chapter 4 and Chapter 5 repectively presents two important studies
of the thesis: impact of state ownership and banking system reform on the firm’s
relationship between investment and cash flows. Finally, the thesis is concluded by
Chapter 6.


11

CHAPTER 2
OVERVIEW ON VIETNAM’S ECONOMIC
REFORMS

This chapter presents an overview on Vietnam’s economic reforms which are
repreresented by corporation reform – known as equitization programs, and banking
system reform. After the unificication of the whole country in 1975, Vietnam
followed the centrally planned economic mechanism in which the state government
dominated all of the aspects of the economy. Without the competitive motivations
together with many other reasons, the economy fell deep into recession for many
years, which forced Vietnam to reform the economy. In 1986, Vietnam officially
launched the comprehensive economic reform program, which is called Doi moi
policy, including economic, financial, corporation etc… reforms. The policy aims at
transforming the economy from centrally planned, which lacks motivations for
development, to market-oriented which allows the multiple forms of business
organizations, and openning the door to the world. The policy has made a great
impact on the economy as a whole. Economic structure has significantly changed
with the birth and increasing role of private sector in the economy, including foreign
investors. Two – tiered banking system was established, together with an increase in
entry and expansion of foreign banks. Many legal frameworks have been introduced
or revised to support the transformation and openness of the economy.

Under the Doi moi policy, the corporation reform which is known as
equitization or privatization program was the key component of the economic reform.
A large number of state – owed enterprised has been equitized via restructuring,
merger and aquistion, deinvestitures, ownership transfer, etc. The equitization