Firms’ investment – cash flow relationship in the context of State ownership and banking system reform in Vietnam

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 cannot 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.