Banking system reform and investment–cash flow relation: the case of Vietnam

Abstract

Becoming the 150th member of theWorld Trade Organization (WTO) in Jan 2007, Vietnam has step by step opened the door of its financial system to the world. The banking industry, which was dominated by state-controlled banks, was the main source of financing for inefficient state-owned enterprises while non-state-controlled enterprises found it difficult to access bank loans. The growing presence of foreign banks in Vietnam has resulted in decreasing in dependence on local banks and changed investment behavior. Using a sample of listed companies in both stock exchanges in Vietnam, HOSE and HNZ, this research investigates the effect of banking system reform which is measured by foreign bank’s presence on investment-cash flow sensitivity for the period of 2009–14. We found evidence that banking system reform had certain effects on investment behavior of listed firms. After the reform, they are less dependent on their internal cash flow for investments. Underinvestment issues of non-state-controlled listed firms were also mitigated due to better accessibility to bank loans.