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  1. 1. Nguyen Van Duy., Pham Thi Lan Huong & Le Minh Tu. (2015), Impact Of Leverage On Firm’s Investment Decision Of Food - Beverage Industry, International Conference on Emerging Challenges: Managing to Success, 1, 325-331 1 IMPACT OF LEVERAGE ON FIRM’S INVESTMENT DECISION OF FOOD - BEVERAGE INDUSTRY. Nguyen Van Duy1* , Pham Thi Lan Huong2 , Le Minh Tu3 1. Viet Nam Quantitative Analysis Joint Stock Company 2. Bachelor of National Economics University 3. School of Economics and Management, Hanoi University of Science and Technology, Hanoi * Author's contact information: Email: duynguyen.qa@gmail.com Abtract Researching impacts of leverage on firm’s investment decision is very important to business. The author estimates the leverage with factors: firm’s performance (Tobin’s Q, ROA), cash flows (CF), sales growth (Sale) and liquidity (Liq) on firm’s ivestment decision (I) of Food – Beverage (F&B) industry which are listed on Vietnam Stock Exchange on period of 2008-2014. The researching method using GMM model (Generalized method of moments) indicates that leverage has only immediate impacts and has affects on lag 1 to investment decisions. Besides, the factors of cash flow and sales growth also have impacts on investment decision. The other factors do not have affects on firm’s ivestment decision of food - beverage industry.. Từ khóa: GMM Model, Investment Decision, Leverage. 1. INTRODUCTION In the context of the Trans-Pacific Partnership (TPP) and the Asian Economic Community (AEC) is being deployed to signing period for Vietnam, domestic enterprises are facing opportunities and challenges after joining the economic alliance. Thus, the enterprise belongs to food & beverages industry (F & B) also gets significant impacts by this agreement. For the current situation, companies in the F & B are promoting investment in expanding business model, diversifying commodities to create strongly steps for joining the TPP [1] By the end of 2014 there are twenty eight F & B enterprises listed on Stock Exchange. The statistical data of the whole industry shows three companies: Vietnam Dairy JSC (VNM); Kinh Do Corporation (KDC) and Masan Group (MSN) account for 92.23% of net profits of the whole industry [2]. In particular, net profit of VNM takes account for 72.74%, MSN is the second largest (12.95%) and the third is the KDC (6:54%). [3] Studying on how debt (Leverage) and debt maturity structure influences on the investment decisions of the company is the fundamental problem in corporate finance [4]. To achieve the growth in performance and productivity, leverage needs being well managed. In the era of global competition, companies need to make major investments in tangible fixed assets and other intangible assets in order to enhance enterprises’ competitiveness. Besides, the capital and debt are main resources for this investment category. [5] However, there have been various discussions on Leverage and investment decisions of businesses. Accordingly, in perfect competitive environment, the policies including debt ratio has
  2. 2. Nguyen Van Duy., Pham Thi Lan Huong & Le Minh Tu. (2015), Impact Of Leverage On Firm’s Investment Decision Of Food - Beverage Industry, International Conference on Emerging Challenges: Managing to Success, 1, 325-331 2 not significant meaning on affecting investment decisions of businesses. Besides, in non-perfect competitive market, the issues of leverage will cause an impact on investment decisions (leverage can cause underinvestment or overinvestment. [6] There have be many researchers, who make studies with different approaching methods, also give various oppinions. If debt matures after the expiration of the firm's investment option, it reduces the incentives ofthe shareholder-management coalition in control of the firm to invest in positive net-present-value investment projects since the benefits accrue, at least partially, to the bondholders rather than accruing fully to the shareholders. [7] According to Jensen, the assets of large companies will create investment opportunities which will bring better value (investments in projects with positive net present value). In case if the debt ratio occupies a large proportion in the capital structure of the company, it will push managers to make investment decisions by using debt as the fund (possibly, this debt is being used in the project with a negative NPV, or causing damage to shareholders and overinvestment is increasing burden of debt). Therefore, it shows clearly that the debt ratio had a negative impact on the value of the company. [8] There are many researchers who study on impacts of financial leverage on the investment decisions of the business all over the world. Among them, Aivazian is the typical author who gave an important report by doing research on US financial company on Compustat in the period 1982 to 2002. The results showed that long-term debt ratio has reduced the impact of investment in companies with high growth. Nevertheless, leverage factor has not significant meaning in affecting investment decisions of lower growth enterprises. [4] An experimental study in the Republic of Mauritius Odit & Chitoo shows that Leverage has both positive and negative effects on investment decisions of twenty-seven companies listed on the exchange Mauritius (SEM) 1990 - 2004. The author separates those companies into two groups: high-growth companies and low-growth companies. The research shows that the debt ratio negatively impacts on investment decision of low-growth firms (the bigger the debt ratio is, the less the investment is) while this trend becomes a positive factor in promoting investment in high-growth companies. These high-growth companies seems to invest more when the debt ratio is bigger (financial leverage has a positive impact). [5] Studies of Firth, Lin and Wong are done in China market also indicates negative impacts of debt on investment decisions for firms listed on the Shanghai Stock Exchange or the Shenzhen Stock Exchange in China from 1991 - 2004. [9].The other study results also give the same conclusions as Firth, Lin and Wong’s. The researches of Yuan and Motohashi also point out reverse relationship existing between financial leverage and investment decisions [10]. Or even as the most recent research did by Naeemullah Khan also refer the opposite relationship between Leverage and investment decisions of companies listed in Pakistani. [11] In Vietnam market, at present, there are studies by Nguyen Thi Ngoc Trang and Trang Thuy Quyen who research on relationship between financial leverage and investment decisions of the public companies listed on Vietnam's stock exchanges during 2009 - 2011. the authors values financial leverage affects on investment decisions at the significant level of 10% [12]. However, because the time factor used in research is quite short (only 3 years) and research methods do not have appropriate testing (the authors used Pooled effect, Fixed effect and random effect model), research results do not achieve high reliability. Although there have been studies on impact of financial leverage on investment decisions, no studies have been made for food and beverage industry. In Vietnam market, due to limitations of studies by Trang and Quyen, a study with expanding the number of researching year and more-closely research method is required to be conducted. Therefore, the authors conducted a study "Impact of Investment Firms Levrage on
  3. 3. Nguyen Van Duy., Pham Thi Lan Huong & Le Minh Tu. (2015), Impact Of Leverage On Firm’s Investment Decision Of Food - Beverage Industry, International Conference on Emerging Challenges: Managing to Success, 1, 325-331 3 decission of Food - Bererage Companies" in the period of 2008-2014. 2. RESEARCH METHOD 2.1 Research Model Basing on researching model Avizian 2005, this research is conducted to estimate the impact of financial leverage and immediate impact on investment decisions; and this research is salso considered the impact of the performance variables (Tobin's Q, Cash Flow (CF), Sale, Liquidility and Return on total assets on investment decision (I). Models are presented as below: Hình 1 Research Model Regression Estimation: Ii,t / Ki, t-1 = (CFi,t / Ki, t-1) + β1Qi, t-1 + β2LEVi, t-1 +β3SALEi, t-1 + β4ROAi,t-1 + β5LIQi,t-1 + uit With: Ii,t: Net Investment of the company i at the time t Ki, t-1: Net tangible fixed assets. CFi,t: Variable cash flow of the company i at the time t. Tobin’s Q i, t-1: variable Tobin’s Q, representing for company’s growth opportunity. LEVi, t-1: Variable Leverage represents for leverage at time t-1. SALEi, t-1: represents for growing in sales. ROAi,t-1: Variable Profitability, return on total assets. Variable LEV (called Leverage): long-term or short term debt ratio on total assets. Tobin’s Q: stands for growth opportunity. Authors’ expectation about results when using this model is as below: Table 1. Authors’ expectation Variable Symbol Expectation 1 Net Investment Ii,t / Ki, t-1 2 CF CF=CFi,t/Ki,t-1 + 3 Tobin’s Q Qi, t-1 + 4 Leverage LEVi, t-1 - 5 Net revenue on tangible fixed assets SALEi, t-1 + 6 Return on total assets ROAi,t-1 + 7 Thanh khoản Liquidity LIQi,t-1 + 2.2 Data-analyzing method. Because the unique characteristics of this research is proceeded on time data (2008-2014) and space data (in F&B companies), regression equation with panel data is made of use is an entirely reasonable choice .[13] Regarding for table-data, there are three models can be used: (1) Pooled OLS; (2) Fixed effect Model; (3) Random Model; However; using panel data often causes defects due to endogenous variables which internally exist in this model. Hence, in case of meeting these defects, we apply the Generalized Method of Moments (GMM) developed by Arellano & Bond in 1991 [14]. This method first differences the data to eliminate the individual effect, and then utilizes all the lagged values of the regress as instruments. 3. RESULTS Leverage Tobin’s Q CF Growth LIQ Investment ROA
  4. 4. Nguyen Van Duy., Pham Thi Lan Huong & Le Minh Tu. (2015), Impact Of Leverage On Firm’s Investment Decision Of Food - Beverage Industry, International Conference on Emerging Challenges: Managing to Success, 1, 325-331 4 3.1 Descriptions Data Statistical result shows that the rate of net investment of all stages at average is as 0.18 times as tangible assets. The period of time which had the highest net investment rate 3.69 times was in 2008, this rate belongs to VHC stocks; while the lowest rate belongs to CLC stocks (-0.41). As for Leverage, it reached the highest point in 2012 (belonged to VTL stock – 76%) and fell at the lowest point in 2013 (belonged to SGC stocks-14%). Similarly, the indicators are described in the below statistical table: Table 2: Descriptions Data Variable Mean Std. Dev. Min Max I 0.19 0.58 -0.41 3.69 CF 1.02 1.04 -0.16 5.01 TobinQ 1.34 0.77 0.60 5.15 LEV 0.46 0.17 0.14 0.76 SALE 15.29 15.37 1.44 79.28 ROA 0.11 0.08 -0.07 0.34 LIQ 1.87 0.93 0.56 5.71 Source: Results of STATA software 3.2 Correlations The correlation coefficient indicates a two-way relationship between each pair of variables. The bigger coefficient is, the more tightly the pair of variables gets. The result presents that I- variable correlates the most strongly with CF (0.283), followed is with Leverage (0.205) and lowest correlates wit-0.021) (table 2). Table 3. Correlations matrix Corr I CF TobinQ LEV SALE ROA LIQ I 1 CF 0.283 1 TobinQ 0.031 0.075 1 LEV 0.205 -0.291 -0.405 1 SALE -0.108 0.646 -0.168 -0.019 1 ROA -0.021 0.305 0.654 -0.685 -0.042 1 LIQ -0.149 0.331 0.317 -0.770 0.100 0.621 1 Source: Results of STATA software 3.3 Result of estimating In the original model of Aivazian, he only uses variables with lag 1 year for researching. In this research, the author will evaluate two models using lag 1 year towards original model and evaluate immediate impacts of variables on investment decision: 3.3.1 Estimate immediate impacts: The result of Hausman test with p-value at 0.018 less than 0.05 shows that fixed effect model is more suitable than the random effect model. The author uses fixed effect model to analyze and implement the inspections. Besides, both heteroskedasticity test and autocorrelation test give p-value less than 0.05, Fixed effect model does not match reliability require to testing. Therefore; the author uses GMM model to address this phenomenon (remove the effects of endogenous variables in the model). Basing on the correlation coefficient and testing each independent variable as endogenous variables, the author obtains the most suitable endogenous variable is CF and LEV. AR(2) test with p-value 0.609 and Endogenous test (Sargan test) at 0.089 bigger than 0.05, VIF less than 10 shows that GMM model is an entirely suitable choice for estimating impacts of Leverage and other variable on Investment decisions. The regression result indicates Leverage as a positive effect on Investment decisions (p-value is 0.026 and Coefficient is 2.222). Furthermore; Variable CF also has positive impact on Investment decisions at significant level 5% (p-value is 0.000 and Coefficient is 0.367). Variable Sale has negative impact on Investment decisions (p-value is 0.000 and Coefficient is -0.027). Other variables: Tobin’s Q, ROA, LIQ is not statistically significant at 5% (p-value >0.05) Table 4. Regression Results: Independent Variable (Net Investment) Fixed effect GMM model Variable Coef sig Coef sig CF 0.54 0.000 0.367 0.000 TobinQ -0.191 0.258 -0.238 0.106
  5. 5. Nguyen Van Duy., Pham Thi Lan Huong & Le Minh Tu. (2015), Impact Of Leverage On Firm’s Investment Decision Of Food - Beverage Industry, International Conference on Emerging Challenges: Managing to Success, 1, 325-331 5 LEV 2.222 0.026 1.339 0.020 SALE -0.014 0.035 -0.027 0.000 ROA -2.025 0.134 -2.706 0.113 LIQ -0.097 0.514 0.191 0.122 _cons -0.515 0.448 -0.136 0.785 Hausman 0.018-> fixed effect Hetero 0.000-> heteroskedasticity Auto 0.000-> Autocorrelation AR(1) 0.669 AR(2) 0.609 Sargan test 0.089 VIF <10 Source: Results of STATA software 3.3.2 Estimate impacts at Lag 1. AR(2) test with p-value 0.768 and Endogenous test at 0.478 bigger than 0.05, VIF less than 10 shows that GMM model is totally suitable for estimating impacts of Leverage and other variables at lag 1 on Investment decisions. The research shows Leverage has a positive effect on Investment decisions (p-value is 0.044 and Coefficient is 1.176). Other variables: CF, Sale, Tobin’s Q, ROA, LIQ is not statistically significant at significance level 5% (p-value >0.05). Table 5. Regression Results: Independent Variable (Net Investment) Fixed effect GMM model Variables Coef sig Coef sig CF t-1 0.125 0.061 0.125 0.061 TobinQ t-1 0.024 0.786 0.024 0.786 LEV t-1 1.176 0.044 1.176 0.044 SALE -0.005 0.305 -0.005 0.305 ROA t-1 0.772 0.493 0.772 0.493 LIQ t-1 0.081 0.391 0.081 0.391 _cons -0.745 0.096 -0.745 0.096 Hausman 0.04094-> Random effect Hetero 0.1000-> No Heteroskedasticity Auto 0.000-> Autocorrelation AR(1) 0.000 AR(2) 0.768 Sargan test 0.478 VIF <10 Source: Results of STATA software 3.4 Discussion Leverage Statistical Data of F& B enterprises shows that leverage of these companies are at safe range. (The highest rate has just reached 76% of total asset of the business). This number indicates that F&B companies have taken a very high caution in investing by external loan. Besides, there are still companies using Leverage but at quite low rate 14%. This reality clearly reflected that companies are quite weak in deploying Leverage or in other words, they do not know how to raise capital by debt. By means that the Net investment only reaches 0.19 of tangible fixed assets at average, it refers that investment rate of F&B enterprise remained rather low. Still; there were periods when companies boosted up to 3.69 tangible fixed asset is on the first stage of operation. At this period, most of companies have a common trend to promote investment as well as extend company’s scale in order to create a long-term growth in the future. The regression results indicate that leverage affects Net investment in the same direction (immediate impact and last influence for one year later). This issue refers when Leverage has signs of decreasing motivation, F&B companies will limit their investment on fixed assets as well as other long-term assets. It can be considered that F&B industry seems rather hesitated in investing to increase their competitiveness in the period of pre-signing TPP agreements. Also, in an opposite assumption when leverage increases, the industry continues to promote Net Investment; this phenomenon occurs suggesting that the F& B sector is heavily depending on debt. Many companies do not have enough effort to fund projects, they are forced to use Leverage as the main source to investment. This outcome is similar to Lang’s research when he studied on Leverage, Investment and Firm Growth [14] and the research by John & Muthusamy when they did a research on Indian pharmaceutical companies during the period from 1998 to 2009. [16]
  6. 6. Nguyen Van Duy., Pham Thi Lan Huong & Le Minh Tu. (2015), Impact Of Leverage On Firm’s Investment Decision Of Food - Beverage Industry, International Conference on Emerging Challenges: Managing to Success, 1, 325-331 6 Growth in sales has opposite and immediate impacts on Net Investment once again reflected hesitation in investment decision of companies in F&B sector (although there is growth in sales but investment is still limited because they concerns about their current debt). It can be realized that F&B sector is facing enormous pressure from enlarging the scale as well as its competitiveness in economics. Among all variables, only variable CF has bright signs (CF has a positive impact on net investment). This sign, according to pecking order theory conducted by Myer, points out that the companies prefer using internal cash flow to external cash flow because this funds exist available. The remaining variables such as Tobin’s Q, ROA, and LIQ have not impacts on Net Investment in F&B sector. It shows that performance result or liquidity is not a cause deciding on Net Investment. 4. Conclusion By regression analysis, the paper finds out a positive relationship between Leverage and Net Investment, and this connection is immediate and at Lag 1. This result clearly implies that high caution leading to underinvestment means hesitancy in making investment decision in developing business systems; (2) Reserve assets are not big enough to fund for investment projects; firms are still using debts as main sources to investing and using reserve assets seems rather limited. This shows that companies are struggling for many difficulties in improving performance, enlarging scale, increasing competitiveness before integrating into the coming international playground. With this result, the authors also make recommendations for the F& B industry on business investment to enhance the competitiveness in the era of more and more powerful integration. In addition; companies also need to review their performance to raise their reserve assets, reduce dependence of investment projects on debts. 5. ACKNOWLEDGEMENTS First of all, I would like to express my thanks to the organizers of international conferences ICECH2015 who support us a lot in publishing our works. Finally, we would also like to thank to all members of the Quantitative Research Center who has distributed and encouraged me in finishing this thesis in the best way. 6. REFERENCE [1] A race among F&B industry, http://www.vcci.com.vn/tin-tuc/2015012110283 8522/soi-dong-cuoc-chay-dua-cuanganh-thuc-p ham-va-do-uong.htm [2] F & B industry, http://vietstock.vn/2015/03/nganh-thuc-pham- do-uong-2014-vnm-va-msn-chiem-86-lai-toan -nganh-737-408470.htm [3] Statistics on the Stock http://vietstock.vn/2015/03/nganh-thuc-pham- do-uong-2014-vnm-va-msn-chiem-86-lai-toan -nganh-737-408470.htm ; http://cafef.vn/ [4] Aivazian, V.A., Ge, Y & Qiu, J. (2005), “Debt Maturity Structure and Firm investment”, Financial Management, 107-119 [5] Odit, M.P., Chitoo, H.B. (2008), “Does Financial Leverage Influence Investment Decisions? The Case Of Mauritian Firms”, Journal of Business Case Studies, 4(9), 49-60) [6] Modigliani & Miller (1958), “The cost of capital, corporation finance and the theory of investment” The American Economic Review, 48(3), 261-297 [7] Myers, S. (1977), "Determinants of Corporate Borrowing," Journal of Financial Economics, 5, 147-175 [8] Jensen, M.C. (1986), “Agency Cost of the Free Cash Flow, Corporate Finance, and Take-overs”, American Economic Review, 76, 323-329 [9] Firth, M., Lin, C & Wong, S.M.L. (2008), “Leverage and investment under a state-owned bank lending Environment: Evidence from China”, Journal of Corporate Finance, 14(5), 642-653 [10] Yuan, Y & Motohashi, K. (2012), “Impact of
  7. 7. Nguyen Van Duy., Pham Thi Lan Huong & Le Minh Tu. (2015), Impact Of Leverage On Firm’s Investment Decision Of Food - Beverage Industry, International Conference on Emerging Challenges: Managing to Success, 1, 325-331 7 Leverage on Investment by Major Shareholders: Evidence from Listed Firms in China”, WIAS Discussion Paper, 1-28 [11] Khan, J & Naeemullah. (2015), “The Impact of Leverage on Firm’s Investment”, Research Journal of Recent Sciences, 4(5), 67-70 [12] Nguyen Thi Ngoc Trang & Trang Thuy Quyen (2013), “Relationship between Leverage and Investment”, Development and integration, 9(19), 10-15 [13] Nguyen Van Duy, Dao Trung Kien, Nguyen Thi Hang, Dao Thi Huong, (2014), “Impact of Capital Strutures, Firm size and Revenue Growth on the Performance of Fishery Companies Listed on the Vietnamese Stock Marke”t, International Conference on Emerging Challenges Innovation Managerment for SMEs, 623-628 [14] Arellano, M & Bond, S. (1991), “Some test of Specification for Panel data: Monte Carlo Evidence and an Application to Employment Equations”, Reviews of Economics Studies, 58, 277-297 [15] Lang, L. (1995), “Leverage, Investment, and firm growth”, NBER Working Paper, 51(65), 1-35 [16] John, F & Muthusamy, K. (2011), “Impact of Leverage on Firms Investment Decision”, International Journal of Scientific & Engineering Research, 2(4), 1-16