The impact of state ownership and bank loans on investment decisions of companies in Vietnam

CHAPTER 1. TOPIC INTRODUCTION

1.1. Reasons for choosing the topic

The study of the impact of financing decisions on investment decisions is an important topic in corporate finance. According to the theory of Modigliani and Miller (1958), in a perfect capital market, financing decisions and investment decisions are independent, so capital structure does not affect the value of the enterprise. But in reality, with market imperfections such as taxes, agency costs, information asymmetry, etc., investment decisions will be affected by financing decisions. The conflict between corporate managers, shareholders and bondholders will create barriers due to agency problems and can lead to under-investment or over-investment problems. According to the study of Myers (1977), in high-growth companies with debt-financed projects, corporate managers for the benefit of shareholders may abandon projects with positive NPV for fear that the benefits from these projects will go to bondholders. Therefore, companies with high levels of financial leverage in their capital structure are less likely to exploit valuable growth opportunities than companies with low levels of financial leverage in their capital structure because the cost of external financing and low liquidity will easily push the company into financial distress, which, without the supervision of creditors, will lead to underinvestment. According to Jensen (1986) and Stulz (1990), in low-growth companies with high free cash flow, debt will effectively limit overinvestment because debt will make companies commit to regular payments of interest and principal, and for companies with few growth opportunities, this will reduce the abuse of managerial power over the company's free cash flow. Without debt, managers tend to expand the size of the firm and may invest in projects with negative NPV, so a high degree of financial leverage used in the capital structure will tend to increase the monitoring role of bondholders and help limit the problem of overinvestment.

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Thus, debt has both positive and negative impacts on firm value. According to the pecking order theory, in external financing, debt financing is always considered first because the cost of capital is lower than the cost of financing by issuing new shares. However, if the project is ineffective, the use of debt can amplify the loss of the enterprise much larger than when not using debt. In addition, in economies where the financial market is dominated by the banking system, research on the impact of financial leverage in general and funding from bank loans in particular on the implementation of investment decisions of companies always receives the attention of policy makers and researchers.

On the other hand, according to Janos Kornai (1986), in a socialist economy, the situation of “soft capital constraints” is often related to the “paternalistic policy” of the State towards economic organizations owned by the State. Accordingly, companies with State ownership will receive more incentives during their operations, so they will be less likely to consider using loans to invest effectively. This shows that the impact of bank loans on investment decisions is different between companies with different State ownership ratios.

There are many studies on this issue in the world in both developed and developing markets such as Denis (1993); Lang et al. (1996); Ahn et al. (2006) in the US; Aivazian et al. (2005) in Canada; Firth et al. (2008) in China. In Vietnam, there have also been many studies related to these issues, but from different perspectives, the studies have not linked the relationship between bank loans and investment decision making in companies with differences in growth rates, State ownership ratios, characteristics of corporate governance factors and loans with different terms.

Most recently, Jiang and Zeng (2014) published a study on the correlation between state ownership and bank loans on investment decisions of Chinese companies and presented many important evidences. Therefore, to

To study this correlation in the context of Vietnam, the author inherited the research of Jiang and Zeng (2014) and proceeded to choose the topic " The impact of state ownership and bank loans on the implementation of investment decisions of Vietnamese companies " as the research topic for his Master's thesis in economics with the desire to expand the scope of research on this topic to Vietnam - an emerging market country as well as contribute to helping Vietnamese companies have a basis to make more effective investment and financing decisions.

1.2. Objectives and research questions

The study was conducted with the aim of examining the impact of state ownership and bank loans on investment decisions of listed companies on the Vietnamese stock market. To achieve this research objective, the study will address the following research questions:

First , do bank loans affect the investment decisions of listed companies in Vietnam? If so, does this correlation differ between companies with different State ownership ratios and between companies with bank loans with different short-term and long-term loan maturities?

Second, is there any difference in the relationship between bank loans and investment decisions among firms with different growth opportunities? If so, does this relationship differ among firms with different levels of state ownership and between firms with bank loans of different short-term and long-term maturities?

Third, how does the disciplinary role (1) of Banks in short-term loans and long-term loans differ in the investment decisions of different companies? And is there any difference in the disciplinary role of Banks in companies with different State ownership ratios?

(1) Disciplinary role: is considered as the supervisory role of banks when financing companies in implementing investment decisions.

1.3. Research method

The research data was collected by the author from non-financial companies listed on the Ho Chi Minh City Stock Exchange (HSX) and the Hanoi Stock Exchange (HNX) over an 8-year period from 2008 to 2015. After eliminating companies with incomplete data, the research sample remained at 319 companies with 2,552 observations. The data of the companies were collected from audited financial statements on the websites cafef.vn and cophieu68.vn.

The research sample used by the author to carry out the research objective is the balanced panel data format (Panel balance data) processed on Stata software to run regression models using the OLS (Ordinal Least Square), Fixed-Effect (FEM) and 2SLS (Two Stage Least of Square) two-stage regression methods.

1.4. Research significance of the topic

From the research results of the topic, the author expects to have important contributions in terms of academics, practical values and research methods as follows:

Academically : the author expects the results of the study to add more empirical evidence on the impact of State ownership and bank loans on the implementation of investment decisions of Vietnamese companies, expand the research results on this topic in the world, and serve as a basis for further research to be conducted later. The research results show that: bank loans have an impact on the implementation of investment decisions of companies and there are differences in this correlation between companies with different growth prospects, between companies with different State ownership ratios and between companies with bank loans with different loan terms. In particular, the topic provides evidence on the disciplinary role of banks in short-term and long-term loans, the difference in this disciplinary role between companies with high State ownership ratio (over 50%) and companies with low State ownership ratio or no State ownership (from 0-50%). In practice : With the research results, the author expects the topic will help Vietnamese companies with different characteristics in terms of growth opportunities, State ownership ratio, and different bank loan terms to have a basis for making investment decisions and financial decisions.

more effective support to increase corporate value. Furthermore, the topic is also expected to be a reference source to help macroeconomic managers make policies to control lending activities at banks and investment activities of state-owned enterprises more and more effectively.

In terms of research methods : the topic is based on a data set updated to 2015. Furthermore, to increase the stability of the research results, the topic uses all 3 research methods: OLS, FEM and 2SLS. Thus, the expected results obtained from the topic are quite stable and up-to-date in terms of time.

1.5. Structure of the topic

In addition to the summary, list of tables, list of abbreviations, appendix, references, the thesis consists of 5 chapters, including:

Chapter 1: Introduction to the topic. In this chapter, the author presents the reasons for choosing the topic, objectives and research questions, research methods, research significance as well as the structure of the topic.

Chapter 2: Overview of previous studies. In this chapter, the author systematizes previous studies in the world and Vietnam. Based on this empirical evidence, the author builds a model and conducts testing with data collected from Vietnamese companies.

Chapter 3: Research methodology. In this chapter, the author presents data sources, data collection and processing methods, models, descriptions of variables used in the study as well as research methods.

Chapter 4: Research results. In this chapter, the author presents the results of empirical testing for 319 Vietnamese companies in the period 2008 - 2015 on the impact of state ownership and bank loans on investment decisions of companies in Vietnam. Compare the results obtained with previous empirical studies.

Chapter 5: Conclusion . In this chapter, the author summarizes the research problem, recommendations for Vietnamese companies, limitations of the thesis and suggests future research directions.

CHAPTER 2. THEORETICAL FRAMEWORK AND OVERVIEW OF PREVIOUS STUDIES

2.1. Theoretical framework

2.1.1. Pecking order theory

According to Myers and Majluf (1984), to minimize the costs associated with information asymmetry in seeking external financing, companies tend to use financing for investment projects in the following order: retained earnings are the first source of financing used by companies, followed by debt, and finally financing by issuing new shares. The use of retained earnings first is due to the short time to mobilize this source of capital and the low cost of capital. When this source of financing has been used up, companies will use external financing in the form of debt and then issue new shares. The reason why companies prioritize using debt financing before financing by issuing new shares is because debt financing tends to incur lower costs due to information asymmetry (Al-Najjar, 2013). In addition, the costs associated with issuing new shares are often very high. Furthermore, company managers often have more information than outside investors, so the company may not sell shares at the right price. For these reasons, companies can avoid the costs of information asymmetry by keeping enough cash in reserve to finance future investment opportunities.

2.1.2. Agency theory

Both overinvestment and underinvestment theories are based on behavioral finance explanations of managers whose fundamental causes lie in agency problems and information asymmetry between shareholders, managers and creditors.

Underinvestment

Underinvestment occurs due to conflicts between shareholders, managers, and bondholders. The use of debt by a company can reduce shareholder benefits when managers decide to invest in positive NPV projects, because the benefits are shared with bondholders rather than entirely with shareholders. Therefore, highly leveraged companies, i.e., companies with high debt ratios, are less likely to exploit investment opportunities than

Firms with low levels of financial leverage in their capital structures tend to have difficulty raising capital to finance valuable projects because bondholders often impose high rates of return, which increase the cost of debt and cause firms to forgo growth opportunities. As a result, highly leveraged firms are less likely to take advantage of valuable investment opportunities than are low leveraged firms.

Overinvestment

Overinvestment is a situation where a company invests too much in projects, especially projects that do not benefit shareholders and create conflicts between managers and shareholders. This argument argues that managers tend to expand the size of the company even when it is implementing projects with negative NPV and reducing shareholder benefits. Thus, to limit this action of managers, shareholders can force managers to implement a policy in which funding sources are limited and accept bondholder supervision, which is the use of debt. Borrowing will force managers to fulfill their commitments to pay interest and principal, so they cannot implement inefficient investment projects. Moreover, when cash flow is tight, managers must be cautious in investing. Therefore, the use of financial leverage as a means to overcome the problem of overinvestment and this shows a negative correlation between financial leverage and investment decision making in firms with low growth opportunities.

2.1.3. Free cash flow theory

According to Jensen (1986), free cash flow is the surplus cash flow needed to finance all positive NPV projects. However, in reality, the company's managers can use this surplus cash flow to invest in negative NPV projects instead of paying dividends to shareholders. Therefore, by increasing debt, the company's managers will be pressured by future payment obligations. And companies with high free cash flow and low growth opportunities will use debt to control the activities of managers to avoid overinvestment.

2.1.4. Investment theory

Investment decisions are considered one of the most important decisions of a business because they create value for the company. Financial managers need to determine how to allocate cash, receivables, and inventories because each asset has its own characteristics in terms of conversion rate and profitability. Therefore, to maintain a reasonable asset structure, financial managers not only make investment decisions but also make decisions to cut and replace assets that are no longer of high economic value. These decisions will directly affect the profitability and risk of the company. A correct investment decision will contribute to increasing the value of the business, thereby increasing the value of assets for the owner, conversely, a wrong investment decision will reduce the value of the business and damage the assets of the business owner.

The Relationship Between Financial Leverage and Investment

Myers (1977) argues that financial leverage may be negatively correlated with investment performance due to the agency problem between shareholders and bondholders, in which managers may forgo positive NPV projects because some or all of the benefits from the investment will go to debt holders. This will lead to underinvestment.

On the other hand, the theories of Jensen (1986) and Stulz (1990) propose an opposite effect of financial leverage on investment based on the agency problem between shareholders and managers. Jensen (1986) and Stulz (1990) argue that high levels of financial leverage in the capital structure of firms with few growth opportunities will make management not interested in inefficient projects due to the pressure to repay debt, thereby minimizing the management's abuse of the firm's free cash flow and minimizing investment.

The Relationship Between Financial Leverage, Investment, and Growth Opportunities

Growth opportunities are often measured by the Tobin'q index (2) . Tobin's q is a quotient proposed by economist James Tobin in 1969. Tobin defined q as

(2):𝑇𝑜𝑏𝑖𝑛 ′ 𝑞 = 𝐺𝑖𝑡𝑟𝑡𝑟𝑡𝑟𝑡𝑟𝑡𝑟𝑖𝑛

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