UNIVERSITY OF ECONOMICS HO CHI MINH CITY
International School of Business
------------------------------
Phan Nguyễn Hải Đăng
IMPACT OF FREE CASHFLOW
POSITION AND OWNERSHIP
STRUCTURE ON OVERINVESTMENT: EVIDENCE FROM
VIETNAM
BACHELOR OF BUSINESS
Ho Chi Minh City – Year 2025
UNIVERSITY OF ECONOMICS HO CHI MINH CITY
International School of Business
------------------------------
Phan Nguyễn Hải Đăng
IMPACT OF FREE CASHFLOW
POSITION AND OWNERSHIP
STRUCTURE ON OVERINVESTMENT: EVIDENCE FROM
VIETNAM
BACHELOR OF BUSINESS
SUPERVISOR: Dr. Lê Thị Ngọc Mai
Ho Chi Minh City – Year 2025
IMPACT OF FREE CASHFLOW POSITION
AND OWNERSHIP STRUCTURE ON OVERINVESTMENT: EVIDENCE FROM VIETNAM
Abstract
This study investigates the relationship between over-investment and free cash flow positions of Vietnam
public-listed companies. The data sample cover the period from 2009 to 2023 with the over-investment
derived from positive residual values of the model to forecast new investment using Tobin’s Q ratio.
Furthermore, the interaction of free cash flow and ownership structure on over-investment is also
revealed. In details, results indicate that Vietnamese companies tend to mitigate the over-investment in
both positive and negative free cash flow position, which is partly explained by availability of financing
source. Meanwhile, companies with more state ownership are likely to decrease less over-investment in
both free cash flow conditions. In contrast, foreign ownership can play a pivotal role in difficult time to
manage investment efficiency and prevent over-investment.
Key words: Over-investment, Free cash flow, ownership structure.
1
Table of contents
1 INTRODUCTION ............................................................................................... 6
1.1 Research motivations ................................................................................... 6
1.2 Research purposes ....................................................................................... 6
1.3 Research gaps .............................................................................................. 7
1.4 Research contributions ................................................................................. 7
2 LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT ....................... 8
2.1 Over-investment and free cashflow ............................................................... 8
2.2 Interaction of ownership structure and free cash flow .................................... 9
3 METHODOLOGY ............................................................................................ 11
3.1 Basic models of over-investment and free cash flow ..................................... 11
3.2 The interaction between free cash flow and ownership structure .................. 12
4 DATA ................................................................................................................ 15
4.1 Data sources .............................................................................................. 15
4.2 Descriptive statistics ................................................................................... 15
4.3 Correlation ................................................................................................ 20
5 EMPIRICAL RESULTS .................................................................................... 20
5.1 Over-investment and free cash flow ............................................................ 20
5.2 The interaction of free cash flow and ownership structure. ........................... 25
6 CONCLUSIONS ................................................................................................ 27
6.1 Findings summary ..................................................................................... 27
6.2 Implications............................................................................................... 28
2
6.3 Limitations ................................................................................................ 29
6.4 Recommendations for further papers .......................................................... 30
3
List of figures and equation
No
Descriptions
Table 1
Decomposition of total investment and new investment
Table 2
Theoretical model
Equation 1
Model to derive the new investment forecast and capture the overinvestment via its residual values
Equation 2
Model to investigate connections between over-investment and cashflow
positions
Equation 3
Model to investigate impacts of ownership structure on connections
between over-investment and free cash flow
4
List of tables
Table
Descriptions
1
Descriptions of variables
2
Descriptive statistics of model to derive new investment and its residuals
3
Descriptive statistics of model to investigate connections between overinvestment and cashflow positions, and the interaction of ownership structure and
free cashflow
4
Correlation of variables in the model to forecast new investment
5
Correlation of variables in the model to model to investigate connections between
over-investment and free cashflow, and the interaction of ownership structure and
free cashflow
6
Model to derive new investment and its residuals
7
Model to investigate connections between over-investment and free cash flow,
and the interaction of ownership structure and free cash flow
5
1 INTRODUCTION
1.1 Research motivations
Investment behaviors during different cashflow positions emerge as an intriguing theme for researchers.
In which, studies also find that companies with high levels of cash-generating are likely to engage in
over-investment and some governance structure can be effective in limiting this issue (Richardson, 2006).
However, when there is cashflow uncertainty, firms tend to be reluctant to make new investment, which
can vary based on the extent of financing source (Hirth & Viswanatha, 2011). Furthermore, it is stated
that East Asian companies are also inclined to make over-investment if entrenched managers have
absolute rights over using excessive cash (Wei & Zhang, 2008). This study also drives the attention to the
divergence of cashflow rights and control rights of the largest holders. If the divergence increase, it can
lead to increasing sensitivity of firms’ capital investment to cashflow, which thus improve investment
efficiency and prevent over-investment. However, if the cash flow rights more tend to belong to the
biggest shareholders, it can decrease the sensitivity and therefore drive more over-investment.
1.2 Research purposes
Along with the context of Vietnam’s growing economy, enterprises make more investments to enjoy the
favorable conditions from manufacturing shifts and rising political positions. Although in early stages,
some corporates also have intentions to make giant investments into building factories and supply chain
globally. Even some firms with cutting-edge technologies’ capabilities also make great attempts to
improve their expertise, knowledge and products’ quality by conducting long-term plans with huge
resources to take part in the high-level stages of value-added chain. To do so, Vietnamese corporates not
only need a sustainable source of funds but also the engagement and participation of foreign investors.
Especially, limiting agency cost is one of the most significant factors that foreign investors pay much
attention and want to mitigate (Miletkov et al., 2014). Therefore, the gradually increasing focuses on
corporate investment management to expand effectively emerge as the most interesting. In which,
managing over-investment in different cashflow conditions is one of the key points in the whole
framework to drive the most efficient new project investment. In addition, how other factors, especially
ownership structure, affect to managing investment effectiveness also plays more important role. Because
6
incorporating new objects from international markets in the shareholders’ structure can expose the whole
corporate to the conflicts due to differences in conceptions and investment behaviors, it also needs to be
investigated to provide a clear path for both foreign and state investors to collaborate effectively in
conducting investment processes during different market conditions.
1.3 Research gaps
Although there are results about over-investment and free cash flow, these studies focus on developed
market or giant countries (Richardson, 2006; Shi, 2019). There is still a gap in understanding investment
behavior in emerging and frontier market, which have intriguing opportunities to capture the alpha factor
in diversifying portfolio. Especially in the point of view from foreign investors, when they want to
manage their investments, they always present short-termist pressure to distort investment decisions
which can drive public companies to be less responsive to investment opportunities and make less
substantial capital allocation (Asker et al., 2014). Furthermore, understanding investment behaviors of
corporates during different times can be crucial since there is a connection between corporate investment
and financing option under asymmetric information which can harm investors’ interest (Morellec &
Schuerhoff, 2011). In addition, ownership structure can be a essential mean to protect investors from
agency cost due to excessive risk taking by state ownership (Ho et al., 2021). After all, it is necessary to
understand the reactions of different types of investors to managing capital allocation efficiently during
companies’ life cycles (when they can or cannot generate cash internally).
1.4 Research contributions
This research paper makes contributions in crafting investment behaviors of Vietnam companies during
different cashflow positions. This not only bridge the gap of observations between developed and
developing economies but also derive results from one of the fastest growing economies in the world
right now, Vietnam, which also have favorable macro transitions and in the rising golden period.
Furthermore, the study also provides findings about how ownership structures affect investment behavior
during different conditions. It also emphasizes pivotal role of foreign ownership to Vietnam corporations,
especially in managing investments during the difficult times. While state ownership still provides
benefits for the development of enterprises, it also leads to agency cost by creating bureaucracies and
7
bringing other goals, in terms of political aspects, for firms which deter maximizing shareholders’ value.
Taking a thoughtful understanding of unique influences by each type of investors could provide insights
to build frameworks that drive the best collaboration between foreign and state investors; and apply this
interaction to conduct better governance as well as improving investment efficiency.
2 LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT
2.1 Over-investment and free cashflow
The paper by Richardson (2006) clarifies the agency cost by presenting evidence about over-investment
of free cash flow. Furthermore, he also shows that non-financial companies over-invest 20 percent of its
available free cash flow from 1988 to 2002 and make 41 percent of them into short-term financial
investments which therefore limited the chance of distributions to shareholders. Although governance
structures can be applied to mitigate this problem, it still proves weak evidence by empirical results. The
study (Shi, 2019) also makes specifically in-depth investigations into listed public energy companies in
China and finds that while growth opportunities play partly role in driving their unexpected investments,
free cash flow, which comes from subsidies policy and energy-finance integration, has significant positive
impacts on over-investment. Furthermore, the agency cost even also exaggerate in circumstances of cash
flow shortages, therefore, driving it to emerge as an important problem in corporate governance. The
findings of Fu, F. (2010) indicated that companies tend to have worse financial performance after
seasoned equity offerings (SEOs) because managers have substantial cash proceeds and overinvest them
into projects in their benefits. Furthermore, the deteriorated operating performance is also reflected by
the underperformance by companies’ stocks following inefficient investments’ decisions. There are some
research focusing on how to mitigate the over-investment when generating cashflow internally with
significant empirical results. In which, Kwon et al. (2021) proves that positive greater voter premium and
hedge fund activisms can constrain more efficiently the rising unexpected investment made by overconfident CEO. Meanwhile, the stock market does not always prevent over-investments but can be
effective in curbing overstated investment. In addition, D’Mello, R., & Miranda, M. (2010) suggest that
issuing debt can mitigate the overinvestment thanks to the debt servicing obligations which put pressure
on managements in controlling the investment decisions. However, in case of Vietnamese public-listed
8
enterprises, it is found that they have limited financing options without bank borrowings. In Vietnam,
there is a small number of listed firms, which can finance easily through equity issuing because of their
prestige, healthy financial performance, top-tier projects and dominant positions in the industry.
Otherwise, banks and real estate developers make up majority of the bond market, with more 90%. Also,
only a limited quantity of companies can access to the international capital market or foreign strategic
investors through investment bankers’ networks. In the context of scarce source of funds, along with due
diligence by state-owned and commercial banks in Vietnam, it is believed that public-listed enterprises
can effectively make investment decisions. Therefore, in accordance with the arguments, hypotheses 1a1b are suggested as follows:
Hypothesis 1a: Positive free cash flows can significantly decrease over-investment
Hypothesis 1b: Negative free cash flows can significantly decrease over-investment
2.2 Interaction of ownership structure and free cash flow
In Vietnam, it is stated that a portion of SOEs operate less effectively than firm governed primarily by
foreign ownership or domestic private investors. This is due to an enduring period which some important
firms managed by state made giant investment but still experienced loss and even default. Therefore, the
governance factor can is important to managing firms’ investment effectively in areas including CFO
gender (Liu et al., 2022), directors' and officers’ liability insurance (Chiang & Chang, 2021), ownership
structure (Wei & Zhang, 2008). In which, ownership structure emerges as the most important driver to
over-investment and even the financial performance of firms. Xu and Li (2024) indicated that
governmental role conflicts play a key role on the overinvestment of the local SOEs. In addition,
specifically to the extent of energy industry, Yu et al. (2019) found a connection between political
connection, which can be driven by the state ownership, and over-investment. Chinese energy firms tend
to over-invest thanks to government subsidies which can be driven by politicians. Furthermore, studies
(Doan et al., 2020; Tran et al., 2021) also point out that state ownership can deteriorate SMEs’ financial
performance in uncertain economic conditions and even decrease positive effects of human and structural
capitals. S. Chen et al. (2010) also prove that governments’ intervention by incorporating the majority of
9
ownership and constructing political links with top executives can alleviate the investment efficiency in
the context of SOEs. Meanwhile there is no evidence that government makes adverse impacts on
investment behaviors of non-SOEs, which explain why non-SOEs show better results in managing
investment.
In contrast, there are more supportive views about the role of international investor in executing
management and operational strategies. Foreign ownership both mitigate severe economic uncertainties’
impacts and amplifies the capitals’ impact on financial results of companies. Wei et al. (2005) proves that
foreign ownership is even associated with higher firm values, while state ownership present the contrast
effect, but it can drive up back the valuation if state investors decrease dramatically their stakes and enable
diverse investors’ blocks to engage in the development of companies in the future. Furthermore, in the
circumstance of young capital market like Vietnam, foreign investors conduct more intensive oversights
and execute their influences fiercely by voting rights, network and activism activities to limit agency cost
and drive the company on the suitable path for development (Denis and McConnell, 2003; Han et al.,
2022). However, Boubakri et al. (2012) also found a connection that state ownership is negatively related
to corporate risk-taking while the FO is incontrast, which can lead to over-investment. Furthermore, there
is evidence to support for the view that SOEs tend to be less affected negatively by the financial crisis
than non-SOEs since governments can direct recovery and stimulation policies for them before
considering others (Bo et al., 2014). Since old results are contradictory to each other, this paper is decided
to test the impacts of ownership structure on connection of over-investment and cash flow:
Hypothesis 2a: State ownership can make decreasing impact of positive free cash flows on overinvestment less effective
Hypothesis 2b: State ownership can make decreasing impact of negative free cash flows on overinvestment less effective
Hypothesis 2c: Foreign ownership can make decreasing impact of negative free cash flows on overinvestment more stronger
10
3 METHODOLOGY
3.1 Basic models of over-investment and free cash flow
Total capital expenditure (ITOTAL,t) is due to two components including: maintenance capex (IMAINTENANCE,t)
and growth capex (INEW,t) which is for new project. In which, the proxy for IMAINTENANCE,t is depreciation
and amortization at time t. Furthermore, the factor growth capex (INEW,t) is due to two factor: expected
new capex (I*NEW,t) and unexpected (or abnormal) new capex (IɛNEW,t). The detail formula is expressed
below:
Figure 1: Decomposition of total investment and new investment
ITOTAL,t = IMAINTENANCE,t + INEW,t
I*NEW,t
IɛNEW,t
The unexpected (or abnormal) new capex (IɛNEW,t) can be negative or positive. While this factor is negative
meaning under-investment, it is positive signaling over-investment. In the context of this research, since
it wants to investigate the connection of over-investments and free cash flow, it only focus on positive
IɛNEW,t value.
The research paper applies the model of Richardson (2006) to derive the new investment to drive
businesses’ growth. In which, I*NEW,t+1 is the fitted value and IɛNEW,t+1 is the residual value (Details in
Figure 2). The function of new investment is expressed partly via growth opportunities conception by
market. In details, the literature review commonly applies Tobin’s Q which can be proxied for the market
perceptions about companies’ growth opportunities by comparing the book value with the intrinsic value
believe. According to Penman (1996), the book to market ratio (BM) and earnings to price (EP) can be
utilized to measure the growth conceptions of markets to firms. In the context of this research, it opts
book to market ratio as a proxy for growth opportunities of companies because it assumes all earnings
are finally converted into cash flows for firms. Furthermore, this model also includes firms’ control
variables. They are degree of financial leverage, age, size, cash, the most recent stock performance and
11
the latest investment. While the ratios remain, all cash flows, capital expenditure and kinds of investment
are scaled by the average of the total asset.
After getting the positive residual value from the model to express for over-investment data, the next step
is to investigate the connection between over-investment and free cashflow position (Details in Figure 3).
The research run regression between positive unexpected investment (over-investment) with situations
including negative and positive free cash flow positions. It also includes macro controls in this model
which are GDP and CPI. The variable PoFCF (NeFCF) receives its positive value (negative value) or
zero otherwise. Therefore, if PoFCF (NeFCF) is likely to mitigate over-investment in next year, the α1
(α2) has negative value (positive value).
Equation 1: Model to derive the new investment forecast and capture the over-investment via its residual
values
INEW,t+1 = β Q + β Leverage, + β Cash, + β Age, + β Size, + β Stock Returns, + β I
1
t
2
t
3
t
4
t
5
t
6
t
6 NEW,t
+ ∑Year Indicator +
IɛNEW,t+1
I*NEW,t+1
Equation 2: Model to investigate connections between over-investment and free cash flow
IɛNEW,t+1 = α1PoFCF,t + α2NeFCF,t + α3GDP,t + α4CPI,t + ɛ
3.2 The interaction between free cashflow and ownership structure
To investigate the impact of ownership structure on the connection between over-investment and free
cash flow (hypotheses 2a, 2b and 2c), the research applies the model below:
Equation 3: Model to investigate impacts of ownership structure on connections between over-investment
and free cash flow
12
IɛNEW,t+1 = α1PoFCF,t + α2NeFCF,t + Ownership Structure,t x (φ1 +
φ2PoFCF,t + φ3NeFCF,t) + α3GDP,t + α4CPI,t + ɛ
All variables are defined in table 1. The intensity of ownership-structure on the connection between overinvestment and free cash flow is expressed via the coefficients of interaction terms Ownership structure
x PoFCF and Ownership structure x NeFCF. Furthermore, this research follow Boubakri et al. (2012)
and John et al.(2008) to determine the ownership occupied by the state and foreign investor at the end of
year before making new investment. Hence, φ can explain whether state ownership and foreign ownership
can promote or shrink impacts of free cash flow position on over-investment. If the state ownership
(foreign ownership) amplifies (mitigate) the impacts of free cash flow positions on over-investment in
comparison with the situations which firms are not governed by state or foreign investors, φ2 (φ3) would
be forecasted to be significant and bring the positive (negative) value.
Figure 2: Theoretical model
Free cash flow
positions
H1
Over-investment
H2
Ownership structure
Control variables:
- GDP
- CPI
13
Table 1: Descriptions of variables
Variable
Description
Sources
ITOTAL
The ratio of capital expenditure (after minus sale PPE) to
average total assets.
Author calculations
based on FiinPro
IMAINTENANCE
The ratio of depreciation and amortization to average total
assets.
Author calculations
based on FiinPro
INEW
The difference between ITOTAL and IMAINTENANCE.
Author calculations
I*NEW
The fitted value from the model in Figure 2. It is the
expected new investments.
Author calculations
IɛNEW
The residual value from the model in Figure 2. It is the
unexpected (abnormal) new investments.
Author calculations
Q
Tobin-Q ratio, which is a measure of growth opportunities.
It is defined as the ratio of the market value to the book
value of asset.
Author calculations
based on FiinPro
Leverage
The ratio of total debt to total equity.
Author calculations
based on FiinPro
Cash
The ratio of sum of cash & cash equivalents and short-term
financial investment to the total asset.
Author calculations
based on FiinPro
Age
The log of the number of years the firm has been listed on
Vietnam stock exchange.
Author calculations
based on FiinPro
Size
The log of total asset.
Author calculations
based on FiinPro
Stock Returns
The stock return at the year before making investments.
Author calculations
based on FiinPro
PoFCF
It is equal to FCF for value greater than zero and zero
otherwise. Then, it is scaled by the average of total assets.
Author calculations
based on FiinPro
NeFCF
It is equal to FCF for value less than zero and zero
otherwise. Then, it is scaled by the average of total assets.
Author calculations
based on FiinPro
14
SO
It is the state ownership ratio in companies.
FiinPro
FO
It is the foreign ownership ratio in companies.
FiinPro
GDP growth
The yearly growth of Vietnam’s gross domestic product.
FiinPro
CPI
The annual inflation rate of Vietnam.
FiinPro
4 DATA
4.1 Data sources
The research applied the yearly financial data of all public companies listed on Vietnam stock exchanges
including HSX, HNX and Upcom from 2009 to 2023. The data were from the Fiinpro platform. Since
excluding companies operating in the financial services and banking sector due to its different business
nature and financial reporting, the initial sample data has 1,489 companies which created 16,069
observations during the above period. After that, since the research applied panel data, required the latest
forecasted investment at year of 2023 (which mean trimming observations in 2023) and excluded outliers
(1% lowest values and 1% highest values), the final sample has 1,447 firms and 9,800 observations. In
the model to investigate connection of over-investment and free cash flow, since just focusing on positive
residuals’ value, the sample data in the model… shrinks the number of observations to 4,418.
4.2 Descriptive statistics
Table 2 provides descriptive statistics for total new investment, Tobin’s Q ratio and firms controls to
derive coefficients for modelling expected new investment. The ratio of total new investment (growth
capex) to the average total asset ranges from -11.15 to 25.03 times with its median at nearly 0.
Furthermore, the Tobin’s Q ratio have mean and median at 1.26 and 1.04, respectively, which show that
15
averagely, firms have their assets’ replacement cost higher than market values, which can also signal the
low growth opportunities. In terms of firm control variables, the log of the number of years the firm has
been listed on Vietnam stock exchange is between 0.30 and 1.34 which means that companies have from
2 to 22 years listed. Overall, companies listed on Vietnam stock exchanges have the ratio of debt to equity
and cash to total average asset at 1.04 and 0.15, respectively. Furthermore, in the period from 2009 to
2023, the sample data show the average returns of all Vietnamese public-listed companies at 21%.
Table 2: Descriptive statistics of model to derive new investment and its residuals
Variable
Count
Mean
SD
Median
Min
Max
INEW,t+1
9800
0.01
0.48
(0.00)
(11.15)
25.03
Q,t
9800
1.26
0.89
1.04
(1.59)
4.55
Leverage,t
9800
1.04
11.60
0.36
(-23.69)
60.04
Cash,t
9800
0.15
0.16
0.09
0.00
0.97
Age,t
9800
0.77
0.26
0.78
0.30
1.34
Size,t
9800
11.76
0.69
11.71
9.53
14.76
Stock Returns,t
9800
0.21
1.17
-
(0.92)
62.30
INEW,t
9800
0.01
0.41
-
(11.15)
12.54
Table 3 show descriptive statistics of the model to investigate connections between over-investment and
free cash flow. Since this model focuses on over-investment, it only includes unexpected new investments
(residuals of the above model) which has positive values. Therefore, it shrinks the number of the
observations to 4,418. In details, the ratio of over-investment to the total average asset ranges from 0.03
16
to 20.04 with the median at 0.03. Furthermore, the proxy for positive and negative free cash flow have
median at 0.03 and 0, respectively. These listed public companies also average have 15% ownership
govern by state while approximately 4% of their stake is owned by foreign investors. Macro control
factors including GDP and CPI also are incorporated in the model.
Table 3: Descriptive statistics of model to investigate connections between over-investment and free cash
flow, and the interaction of ownership structure and free cash flow
Variable
Count
Mean
SD
Median
Min
Max
Over,t+1
4418
0.09
0.49
0.03
0.00
20.04
PoFCF,t
4418
0.11
0.59
0.03
-
17.83
NeFCF,t
4418
(0.06)
0.50
-
(29.01)
-
SO,t
4418
0.15
0.25
-
-
1.00
FO,t
4418
0.04
0.10
-
-
0.99
GDP,t
4418
5.91
1.94
6.69
2.55
8.12
CPI,t
4418
4.14
3.41
3.22
0.63
18.68
17
1
-0.027***
-0.1987***
-0.0076
-0.0822***
-0.1155***
-0.0192*
(1) Q,t
(2) Leverage,t
(3) Cash,t
(4) Age,t
(5) Size,t
(6) Stock
Returns,t
(7) INEW,t
0.0004
0.0035
0.0194*
0.0124
-0.0482***
1
(2)
-0.0067
-0.0036
-0.1102***
0.0141
1
(3)
-0.0029
0.0091
0.0798***
1
(4)
-0.003
0.0262***
1
(5)
Significant at the 10% level.
*** Significant at the 1% level.
** Significant at the 5% level.
*
Notes: This table provides the correlation coefficient for the model to forecast new investment . The definition of these
variables is available in Table 1.
(1)
Variable
Table 4: Correlation of variables in the model to forecast new investment
18
0.0142
1
(6)
1
(7)
19
0.0213**
0.0232**
-0.0143
0.0144
-0.0226**
(2) NeFCF
(3) SO
(4) FO
(5) GDP
(6) CPI
0.0118
-0.0029
0.0194*
0.0152
1
-0.1379***
-0.3061***
0.0565***
1
-0.0634***
-0.1134***
1
0.0732***
1
Significant at the 10% level.
*** Significant at the 1% level.
** Significant at the 5% level.
*
Notes: This table provides the correlation coefficient matrix for the main independent variables in the model to
investigate over-investment. The definition of these variables is available in Table 1.
1
(1) PoFCF
between over-investment and free cash flow, and the interaction of ownership structure and
Variable
(1)
(2)
(3)
(4)
(5)
Table 5: Correlation of variables in the model to model to investigate connections
1
(6)
4.3 Correlation
Table 4 shows pairwise correlation values of variables in the model to forecast new investment and then
derive the unexpected investment. The Tobin’s Q ratio have negative correlation with all of the rest
independent variables. Its correlations with Leverage, Cash, Size and Stock Returns are significant at 1%
and the connection with INEW is significant at 10%. Meanwhile, the connection with Age is insignificant.
If the book value is higher than the market value, it not only signals lower growth opportunities but also
mitigate financial leverage and amount of cash on hand. Furthermore, it also partly drives worse stock
performance. In addition, companies which have bigger size, tend to be listed longer on the stock market,
produce more return for shareholders and retain less cash. Table 5 also show the correlation coefficient
matrix among variables in the model to derive the over-investment. Companies having higher free cash
flow also tend to have higher state ownership and less foreign ownership. While the first connection is
significant at 5%, the latter correlation is insignificant. Meanwhile, the correlation between negative cash
flow with state and foreign ownership are both positive, but just only the connection of negative free cash
flow position with more international stakeholders is significant at 10%.
5 EMPIRICAL RESULTS
5.1 Over-investment and free cash flow
Table 6 reports the result of the model to estimate the new investment in the next year. In details, the
Tobin’s Q ratio is significantly at 1% and has a negative impact on the new investment. If the Tobin’s Q
ratio increase by 1 unit, the ratio of new investment to the total average asset is expected to decrease by
-0.019 unit. It also indicates that a firm with higher to Tobin’s Q, meaning higher book value than market
value and signaling lower growth opportunities, tend to make less new investments to drive its expansion
in the future. This is consistent with findings of Anjos (2010) when there is a connection between
valuations perceived by the market with investment commitments on growth projects. Also, the result by
Bolton et al. (2011) state that investment decisions of corporates depend on its Tobin’s Q ratio because of
the sensitivity of investment to marginal Q (the derivative of the firm's value with respect to its capital)
fluctuates according to firms’ primary funding source. Furthermore, cash ratio also play an important role
20
in financing decisions, which lead to investment options. In model III, the portion of cash in total asset
has a positive effect on new investment size, which is significant at 1%. Companies which make new
investment in the current year also tend to have bigger expansion capital expenditure in the next year,
which express a period of capital commitment on long-term growing projects. Therefore, after conducting
regression on forecasting new investments, the paper can recalculate the over-investment from residuals
of this model with the focus on positive residual values.
Then, the paper run regression on over-investment by independent variables including free cash flow
positions and macro control variables. The results show that the impact of positive and negative free cash
flow on over-investment is all both significant at 5% and help to mitigate this issue. If the ratio of positive
and negative free cash flow to total average asset increases by one unit, it is expected to decrease overinvestment by 0.024 and 0.049 unit, respectively. This is partly consistent with findings by Richardson
(2006) that Vietnamese public-listed companies not having free cash flow (or negative free cash flow)
tend to mitigate its over-investment since they are required to seek sources of funds from capital markets
with even strict covenants and controls. Results (D’Mello, R., & Miranda, M., 2010) also emphasize the
role of long-term debts in managing the over-investment since companies are likely to reduce the overinvestment after being levered thanks to debt service obligation and dramatic declining in cash ratio.
Meanwhile, before issuing debts, some firms retain giant amount of cash which are even redundant in
accordance with their conditions. Findings by Hirth and Viswanatha (2011) explain that companies, with
low cash on-hands or facing of cash flow risks in the future, are likely to be reluctant to make investments
since struggling with rising financing cost pressures. Moreover, the research’s results are consistent with
findings from Alnahedh et al. (2019) which emphasize the role of cashflow position risks on investment
decisions. It suggests that if a company has 1% increase in cashflow uncertainty, it tends to decrease the
investment in tangible and intangible assets by 0.62% and 1.39%, respectively. This connection is even
stronger in economic depressing conditions. Hence, corporates without cash flow are expected to mitigate
the over-investment.
However, the other side of this results is inconsistent with findings by Richardson (2006) since
Vietnamese public-listed companies are still expected to prevent over-investment in the context of
positive free cash flow. One of the key reasons is that companies there have limited source of financing
21
and only small group of conglomerates can access to international capital market with giant volume of
issuance. In addition to mostly access to only bank loans, these debts of Vietnamese public-listed
companies are also strictly governed by banks and even always in bank’ accounts and are just distributed
to projects’ suppliers, contractors or other stakeholders. It is stated that 62% of the total number of SMEs,
which account for the majority of Vietnam economy, cannot access to capital to expand their factories or
install new equipment, that even force them to utilize their house for production site (Nguyen, 2024).
Thus, a major percentage of SMEs number remain in micro size without seizing any opportunities to
make huge investment and transfer to the new size tranche. As mentioned above, since companies in the
sample data face risks of cashflow, they are reluctant to make growth long-term investments and manage
better capital efficiency. However, in some extreme circumstances, the cashflow uncertainty also prevent
cash-rich (or cash-generating) companies to make investment since concerns about the outlook (Alnahedh
et al., 2019). There are evidence proving that even when internally generating cash and facing no
compulsory agreement in terms of fund usage, some managers still accumulate abnormally high net
working capital and financial slack in preparation for less favorable markets about liquidity conditions
(Hovakimian & Hovakimian, 2008). In addition, although in the recovery phase from economic
depression period, companies still need 3–4-year span to recover fully investment activities which still
help to control over-investment. In conclusion, Vietnamese public-listed companies still mitigate overinvestment in the conditions of internally generating cash flow.
22
Table 6: Model to derive new investment and its residuals
Predicted
sign
Variable
Model
I
II
III
INEW,t+1 = β Q + β Leverage, + β Cash, + β Age, + β Size, + β Stock Returns, + β I
1
t
2
t
3
t
4
t
5
t
6
t
-0.019***
(-2.59)
6 NEW,t + ∑Year Indicator
ɛ
+ I NEW,t+1
-0.013*
(-1.82)
Q,t
-
Leverage,t
+
0.000
(0.09)
0.000
(0.00)
Cash,t
+
0.110***
(2.78)
0.110***
(2.77)
Age,t
-
-0.041
(-0.79)
-0.040
(-0.78)
Size,t
-
-0.039*
(-1.72)
-0.033
(-1.41)
Stock Returns,t
+
0.000
(0.07)
-0.001
(-0.34)
INEW,t
+
0.395***
(31.99)
0.395***
(31.94)
Year Fixed Effects
Yes
Yes
Yes
Observations
9,800
9,800
9,800
Note: definition of these variables is available in Table 1. The values of the z-statistics are in the parentheses below the
coefficients.
• Significant at the 10% level is indicated by *
23
• Significant at the 5% level is indicated by **
• Significant at the 1% level is indicated by ***
Table 7: Model to investigate connections between over-investment and free cash flow, and the
interaction of ownership structure and free cash flow
Variable
Model
I
II
PoFCF
-0.048*** -0.024**
(-3.86)
(-2.24)
NeFCF
0.092***
(3.94)
III
IV
V
VI
VII
-0.071***
(-7.10)
0.049**
(2.37)
0.253***
(9.38)
1.133***
(27.76)
SO* PoFCF
1.180***
(28.74)
SO* NeFCF
-0.590***
(-9.70)
-1.002***
(-13.46)
FO* NeFCF
1.454***
(3.05)
-0.503
(-0.98)
GDP
-0.003
(-0.71)
-0.003
(-0.94)
-0.004
(-0.92)
0.001
(0.23)
-0.004
(-1.01)
0.002
(0.51)
-0.000
(-0.11)
CPI
0.004
(0.51)
0.004
(0.48)
0.004
(0.49)
-0.001
(-0.15)
0.002
(0.27)
-0.001
(-0.17)
-0.000
(-0.03)
Year Fixed
Effects
Yes
Yes
Yes
Yes
Yes
Yes
Yes
4,418
4,418
4,418
4,418
4,418
4,418
Observations 4,418
Note: definition of these variables is available in Table 1. The values of the z-statistics are in the parentheses below the
coefficients.
24
• Significant at the 10% level is indicated by *
• Significant at the 5% level is indicated by **
• Significant at the 1% level is indicated by ***
5.2 The interaction of free cash flow and ownership structure.
Results from table 7 also reveal that the interaction variable of state ownership with positive and negative
cash flow are all both significant at 1%. However, companies with more state ownership, tend to mitigate
the decreasing impacts of both positive and negative free cash flow on over-investment. If a company
have one percent of state ownership, the mitigating effect on over-investment by free cash flow is
expected to decrease by 0.0113 and 0.0059 unit for conditions of positive and negative internally cashgenerating, respectively. This can be explained by the fact that SOEs also bring socio-economic goals, it
is required for them to make new investment in the circumstances of not internally generating cash or
cash-rich (Firth et al., 2012), which therefore mitigate the decreasing impact on over-investment of
cashflow positions of public-listed companies in Vietnam. Findings also suggest that although investment
opportunities sound not prosperous, SOEs still tend to make higher investment compared to that of
previous year than private owned firms. Hence, it is inclined for government-owned firms to have overinvestment when experiencing negative free cash flow positions. Chen et al. (2014) indicate that more
state ownership is associated with deteriorating investment efficiency because of different level of
information asymmetry and agency problems. In another point of view, a finding proves that there is Ushaped connections between state ownership and investment activities, especially R&D (T. Fu et al.,
2021). Research indicate that minority state ownership can be optimal for research and development
activities, but when overcoming a certain point, any incremental state ownership can eliminate investment
efficiency due to bureaucratic inefficiencies, reduced managerial autonomy, and less incentive for
innovation, thereby hindering R&D activities, which also amplifies over-investment. In transitional
countries, direct governments’ intervention or proxied by executives with backgrounds from state has
negative influences on investment efficiency since political goals set by government are prioritized
instead of shareholder’s maximizing value purpose only (S. Chen et al., 2010). Ho et al. (2021) also finds
that government ownership is positively associated with excessive risk-taking of Vietnamese companies
25
because they can engage in inefficient investment projects and neglect risk-management duties. It can be
explained by the facts that risky project ensured by state ownership still receive capital or direct subsidy
from government when facing financial distress without punishment on managers. Thus, companies with
more state ownership tend to have lower decreasing effect of free cash flow position on over-investment.
Meanwhile, the model VI show that more foreign ownership is expected to accelerate the impact of
negative free cash flow position on over-investment in the circumstance of Vietnam public-listed firms.
The variable FO* NeFCF is significant at 1% with the positive coefficient which mean that if a company
has increase 1% of foreign ownership, the mitigation impact of negative free cashflow on over-investment
increase by far 0.015 unit. One of the reasons is that the foreign ownership tends to be positive with
investment efficiency. Moreover, this relation is even stronger when government give up its majority
control and in countries with poor institutions (R. Chen et al., 2014). In additions, more foreign ownership
is associated with the shift in managers’ risk aversion (Boubakri et al, 2012) which force agency to
prioritize maximizing shareholder value (Wei et al., 2005). In some certain circumstances, foreign
investors also exert their influence on companies’ strategic policies and exercise their strict monitoring,
which finally prevent over-investment by limiting risk-taking activities (Denis and McConnell, 2003).
Đặng et al. (2021) also indicated that Vietnamese companies with more than 29% foreign ownership
threshold, are expected by the foreign investors in conducting risk-taking policies. In the current context,
although State Securities Commission (SSC), government, ministry of finance and domestic financial
institutions have made great efforts to upgrade the market to emerging status by working closely with
rating agencies such as MSCI, FTSE,…; and even issuing proposals to plan Ho Chi Minh city to become
a global financial hub, Vietnam stock market is still in frontier status, does not apply the IFRS for the
whole listed companies and presents high level of information asymmetry. Therefore, it is this condition
to drive foreign investors to conduct better governance practices through their investments by prevent
agency cost which benefit for managers (Han et al., 2022). The results also point out that although varying
among level of state ownership in each company, influences of foreign investor is to enforce more strict
market discipline and enhance the corporate transparency. It not only protects better for all shareholders
but also improves operational efficiency of corporates, especially in enhancing investment efficiency.
Also, there is evidence that foreign ownership can help to manage better liquidity and leverage as well as
26
improving firms’ output (Wang & Wang, 2015). Hence it explains the reason for in case of without
internally generating cash, more foreign ownership firms in Vietnam can manage investment better and
then mitigate over-investment.
6 CONCLUSIONS
6.1 Findings summary
The research brings a detail view of investment behavior in the context of Vietnam public-listed
companies. Although there is a view of over-investment in companies with high levels of free cash flow,
public-listed companies in Vietnam have show a contrast conclusion because both positive and negative
free cash flow position force company to cut down over-investments. This is explained by the limited
option of financing which drive to networking capital and financial slack accumulation in preparation for
the unfavorable liquidity conditions, even during internally cash-generating period (Hirth and
Viswanatha, 2011; Alnahedh et al., 2019). When generating negative cash, companies also bear pressures
from borrowing covenants due to long-term debt servicing obligations (D’Mello, R., & Miranda, M.,
2010), and cashflow risks of on-going project (Alnahedh et al., 2019), which force them to strictly manage
better investment by limiting imperative and huge size capital allocation in both tangible asset and
intangible asset.
Furthermore, the research also investigates the interactions of ownership structure and free cash flow
position. In which, the state ownership tends mitigate the impact of both positive and negative free cash
flow on over-investments. A company with more state ownership tend to cut less over-investment during
period of positive or negative free cash flow. One of the key reasons for it is that state ownership can be
associated with bureaucratic inefficiencies, reduced managerial autonomy, and less incentive for
innovation (T. Fu et al., 2021). Furthermore, since companies with more state ownership can bring socioeconomic goals, it can make huge investment to stimulate other aspects (Firth et al., 2012), without
punishment for managers in charge if making loss (Ho et al., 2021).
Meanwhile, foreign ownership can play a pivotal role in driving companies through the tough time by
limiting the over-investment via exercising more monitoring on risk-taking policies and restructuring
27
investment efficiency. This can be further explained by the fact that since Vietnam is in frontier market
without applying IFRS and presenting high level of information asymmetry, it drives foreign investors to
exert strict governance practices and influence intensively on management (Han et al., 2022). Therefore,
it is expected to drive the shift in managers’ risk aversion (Boubakri et al, 2012) which force agency to
prioritize maximizing shareholder value (Wei et al., 2005). Furthermore, foreign investors are also
expected to make influences on strategic policies in tough time to control better financial health, including
leverage and liquidity, which all finally to mitigate over-investment.
6.2 Implications
In additions, government also set targets to both build a broad capital market, where companies can access
more source of funds and financial products, and still consolidate a strict framework to manage the
investment and agency cost more efficiently by forcing transparent monitoring from retail investor or
attracting more foreign investors. Zhu and Chen (2025) also indicate that there is an imperative need to
make available credit for corporations to enhance their innovation capabilities but still manage capital to
get effective result since over-investment can eliminate the positive impacts. Especially, although SMEs
are the object which usually have difficulties in accessing to capital markets, it need to intensify the
oversight of their investment process since it lacks control systems which drive more results if having
better governance in capital management. Besides that, to public companies, government also need to
research about equity lending supply to expose them to short-selling pressure which can limit agency and
information asymmetry problems (Tsai et al., 2021). Equity lending supply can reduce managerial
tendency to over-invest, especially when is unconstrained by financial conditions, and this impact tend
to be stronger for firms with ineffective governance and less transparency. However, a suitable framework
needs to be calculated thoroughly to deter short-selling risks which can harm or eliminate the positive
impact of equity lending supply on investment efficiency. Since the over-investment is significantly
driven by agency cost such as distributing excessive capital in case of cash-rich positions (Wei & Zhang,
2008), it is crucial to conducting intensive approaches to mitigate this issue. In which, there is evidence
showing that improving top management quality can drive less investment inefficiency including both
over-investment and under-investment (Lai & Liu, 2017). Companies can improve their top executives
28
by encouraging them to pursue higher education or focus on improving the number of people owning
MBA. Furthermore, enhancing the number of board members and preferring seasoned experts with longstanding experiences in prior firms or recruiting people who are also members of other companies’ BOD
can help to both enhance financial reporting quality and finally drive better investment efficiency.
In addition, while maintaining minority state ownership can benefit for research and development
activities of corporates, it can create adverse impact on overall corporate due to bringing other goals
instead of maximizing shareholders’ value (T. Fu et al., 2021; S. Chen et al., 2010). Because
understanding this aspect, policy makers should be more careful when conducting stimulation approaches
which are channeled by their corporations because of investment efficiency and even socio-economic
results. Research by (Zhou & Zhao, 2021) also indicates that special policies for any industries or
revitalization plan affect negatively to corporate investment efficiency by driving over-investment. One
of the important drivers for the inefficiency is substantially due managerial overconfidence. To account
for agency problems created by the state ownership, the role of foreign investors in stakeholders can
contribute significantly. Especially, as mentioned above, some companies can apply a threshold of foreign
ownership to both attract international capital and have a source of knowledge in improving risk-taking
policies as well as mitigating over-investment during challenging time (Đặng et al., 2021).
6.3 Limitations
Because the research can only access to the data of public-listed companies in Vietnam, it has certain
limitations in explaining overall for the whole businesses in Vietnam economy. Furthermore, since a large
percentage of GDP is driven by enterprises with mostly FDI or private equity while there are
approximately 2,000 enterprises which have been listed publicly on Vietnam stock exchanges, picking
up data from public-trading information can lead to representative bias. Furthermore, Vietnam is in
preparation for the new journey when different macro dynamics create both favorable conditions and
challenges. Therefore, using the historical data from 2009-2023 may not cover all the macro factors in
the future.
29
6.4 Recommendations for further papers
To address limitation mentioned above, further recommendations for other paper in the future is to
incorporate these entities into models. In which, using domestic group acquire by FDI as control group
is a solution (Wang & Wang, 2015). Research in the future also make attempts to access the data source
from bigger third-party providers. Furthermore, incorporating geopolitical risk in the model and
introducing framework to addressing this risk can partly improve this limitation and bring more useful
application in managing over-investment in a more interesting context (Shabir et al., 2023; Cao et al.,
2023; Alam et al., 2023).
30
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