State Ownership and the Relationship between Investment and Cash Flow: The Case of Vietnamese Listed Firms

ABSTRACT

The article examines 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 Vietnam’s stock exchanges, we find 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, low-growth state-owned companies have higher cash flow sensitivity of investment than those without state ownership, suggesting inefficient investment by the former.

KEY WORDS:

• relationship between investment and cash flow
• state ownership
• Vietnam

JEL:

• G30
• G31
• G32

Acknowledgments

We specially thank Dr. Duc Vo for his critical comments and helpful correction that greatly improve the quality of the article.

Notes

1. http://vietstock.vn/2016/12/da-co-phan-hoa-hon-4500-doanh-nghiep-nha-nuoc-746-508480.htm.

2. According to Guariglia (2008, 1802), 0.82% is calculated by (1.611/0.412) × 10% × 0.021.

3. According to Guariglia (2008, 1802), 1.144% is calculated by (2.154/0.422) × 10% × 0.0224.

4. According to Guariglia (2008, 1802), −0.058% is calculated by (0.243/0.387) × 10% × (−0.009).

5. Given that the means of IK and CFK are 0.337 and −1.91 for the SOE subsample, and 0.340 and −0.753 for the non-SOE subsample, respectively, when cash flow is negative, a 10% increase in negative cash flow leads to a 2.64% decrease in investment by SOEs but a 0.029% increase in investment by non-SOEs.

Additional information

Funding

This work was supported by the University of Economics Ho Chi Minh City: [Grant Number CS-2016-29].