Investment-cash flow sensitivity under monetary policy surprises in Vietnam: not all firms are the same

Abstract

This thesis explores the impact of monetary policy surprises (MPS) on investment–cash flow sensitivity (ICF) among Vietnamese listed firms during 2010– 2023, addressing a significant gap in existing research. The context of Vietnamese firms is unique due to their complex, multi-instrument monetary framework, bankbased financial system, dominant state ownership, and transitional economy status, which together create distinctive firm financing behaviors and heterogeneous responses to policy surprises. The findings indicate that increasing monetary policy surprises significantly influence corporate investment behavior in Vietnam, primarily through unexpected money supply growth. This growth enhances firms’ access to external capital, prompting them to expand investment beyond initial expectations. Additionally, it reduces reliance on internal cash flows, suggesting that ICF disappears as monetary policy surprises increase. For state-owned enterprises (SOEs), investment decisions remain dependent on internal cash flows despite monetary policy surprises, consistent with the pecking order theory. In contrast, foreign-owned enterprises exhibit no significant ICF under monetary policy surprises, implying that non-state and foreign firms can leverage lower interest rates to access external capital more effectively. SOEs’ privileged access to favorable borrowing conditions—supported by political connections and implicit government guarantees—shapes monetary policy transmission. The thesis also finds that Vietnamese firms adopt a "wait-and-see" approach by increasing cash holdings in response to monetary policy surprises. However, SOEs and foreigninvested firms do not exhibit this behavior, as their investment strategies and capital allocations are largely predetermined. Furthermore, firms tend to reduce financial investments when monetary policy surprises increase, due to declining interest rates and lower returns in the capital market. This thesis also introduces new instrumental variables (IVs) for monetary policy surprises, ensuring statistical reliability and enhancing the understanding of Vietnam’s monetary policy dynamics. The findings offer valuable insights for policymakers, investors, and corporate leaders, helping them navigate macroeconomic shifts and evolving firm conditions effectively.