Financial development and firms’ financing constraints: a study of manufacturing firms in Vietnam

Abstract

Using panel data from the Vietnamese Enterprise Survey (VES) from 2006-2012, this thesis aims to analyze the relationship between financial development and financing constraints of firms in Vietnam. The Euler equation approach is applied to model firms' investment. Investment sensitivity to cash-flow is employed as the variable to test for the existence of financing constraints. To control for endogeneity and firm heterogeneity, I utilize the first difference GMM estimation proposed by Arellano and Bond (1991). There is robust evidence that Vietnamese manufacturing firms face financing constraints and that financial development significantly relaxes firms' dependence on internal funds for investment. In addition, although smaller firms suffer more severe financing constraints, their constraints are alleviated more than those of larger firms in the presence of financial development.