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UNIVERSITY OF ECONOMICS
HO CHI MINH CITY
VIETNAM
ERASMUS UNVERSITY ROTTERDAM
INSTITUTE OF SOCIAL STUDIES THE
NETHERLANDS
VIETNAM – THE NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS
THE EFFECT OF CASH FLOW SENSITIVITY
ON ENTERPRISES’ CASH HOLDINGS:
EVIDENCE FROM VIETNAM
BY
LE KHA TU
MASTER OF ARTS IN DEVELOPMENT ECONOMICS

UNIVERSITY OF ECONOMICS
HO CHI MINH CITY
VIETNAM
INSTITUTE OF SOCIAL STUDIES
THE HAGUE
THE NETHERLANDS
VIETNAM - NETHERLANDS
PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS
THE EFFECT OF CASH FLOW SENSITIVITY
ON ENTERPRISES’ CASH HOLDINGS:
EVIDENCE FROM VIETNAM
A thesis submitted in partial fulfilment of the requirements for the degree of MASTER
OF ARTS IN DEVELOPMENT ECONOMICS
By
LE KHA TU
Academic Supervisor:
Dr. NGO MINH HAI

ABSTRACT
Cash holdings have long been a particular concern when studying the financial
policies of enterprises. The global financial crisis in 2008 has impacted many
economies in the world; Vietnam was one of the few emerging economies in
Southeast Asia being less affected by the crisis. However, the crisis has negative
impacts on the macroeconomy of Vietnam. Low GDP growth rates, booming inflation
and escalating interest rates made Vietnamese enterprises’ situation more difficult.
Along with the Central bank's tightening monetary policy to curb inflation,
commercial banks simultaneously restricted the issuance of large loans, which were
more difficult for firms to access more capital. In that context, the efficient use of cash
holdings is the key to business success. To use effectively the cash flow of the firms, it
is important to study the factors that affect the cash holdings of firms. Thus, the author
chose the topic "The effect of cash flow sensitivity on enterprises’ cash holdings:
Evidence from Vietnam" to study the effect of financial factors on firms’ cash
holdings in Vietnam. The main objective of the study was to find empirical evidence
on the effects of cash flow sensitivities on cash holdings in the world and to seek
evidence of this in Vietnam. The study uses data from financial statements of 274 non-
financial firms listed on Hanoi Stock Exchange (HNX) and Hochiminh Stock
Exchange (HOSE) between 2009 and 2015. In Vietnam, cash flow sensitivities have a
real impact on the cash holdings of firms, which is greater for firms with negative cash
flows. The financial constraint also affects the relationship between cash flow
sensitivity and cash holdings, but the agency problem does not show any significant
influence on this relationship. Based on the results of the study, the paper offers some
recommendations to help businesses make better cash management options. At the
same time, the paper also outlines some of the remaining limitations of research and
future research.
Keywords: Cash flow sensitivity, cash holdings, financial constraint, agency problem,
asymmetric
i

ACKNOWLEDGEMENT
The first word I would like to send my sincere thanks to all Vietnam – Netherlands
Programme professors, who have taught and imparted me valuable knowledge during
the time of study and research, enabling me to complete this thesis. You all not only
gave me the knowledge but also created the best conditions for me in the data
collection and thesis writing process. Friendly and kind Vietnam – Netherlands
Programme staff were always willing to help me on physical facilities as well as
references.
I would like to sincerely and gratefully thank Dr. Ngo Minh Hai, my supervisor, for
his great assistance, principal and valued advice, guiding me from the smallest steps to
help my thesis complete.
I would like to express my deep gratitude to all my friends, families, who have always
been with me, cheered and supported me all the time.
Despite all the effort, due to limited knowledge and time, the problems presented in
this thesis will certainly have many shortcomings. I look forward to receiving
feedback, evaluations and comments from the professors.
ii

CONTENTS
CHAPTER 1: INTRODUCTION ................................................................................ 1
1.1 The problem statement ...................................................................................... 1
1.2 The research objectives ..................................................................................... 2
1.3 Research contribution ....................................................................................... 2
1.4 The thesis structure ........................................................................................... 3
CHAPTER 2: LITERATURE REVIEW .................................................................... 4
2.1 Introduction ....................................................................................................... 4
2.2 Studies on the effects of cash flow sensitivity on cash holdings ...................... 4
2.2.1 The impact of change in cash flow on cash holdings ..................................... 4
2.2.2 The relationship between financial constraints and cash holdings of a
company ................................................................................................................... 7
2.3 Summary of previous findings .......................................................................... 9
CHAPTER 3: RESEARCH METHODOLOGY ...................................................... 13
3.1 The analytical framework ............................................................................... 13
3.2 The econometric models ................................................................................. 14
3.2.1 Model the effect of cash flow sensitivity on cash holdings ........................... 14
3.2.2 The effect of cash flow sensitivity on cash holdings is under financial
constraints .............................................................................................................. 15
3.2.3 The effect of cash flow sensitivity on cash holdings is in the agency problem
................................................................................................................................
17
3.3 The data .......................................................................................................... 20
3.4 Fixed Effects and Random Effects ................................................................. 20
3.5 GMM4 estimations ......................................................................................... 21
3.6 Expectations on research results ..................................................................... 22
3.6.1 Effects of cash flow sensitivity on cash holdings .......................................... 22
3.6.2 Effects of cash flow sensitivity on cash holdings under financial constraints
................................................................................................................................
23
3.6.3 Effects of cash flow sensitivity on cash holdings under agency problem ..... 23
CHAPTER 4: RESEARCH RESULTS ..................................................................... 24
4.1 Data description .............................................................................................. 24
iii

4.2. Regression results and discussions .................................................................... 28
4.2.1 Effects of cash flow sensitivity on cash holdings .......................................... 28
................................................................................................................................
37
4.2.3 Effects of cash flow sensitivity on cash holdings under agency problem ..... 42
CHAPTER 5: CONCLUSIONS ................................................................................. 45
5.1 Conclusions ..................................................................................................... 45
5.2 Policy implications .......................................................................................... 46
5.3. Limitations ...................................................................................................... 47
REFERENCE ............................................................................................................... 49
APPENDIX ................................................................................................................... 51
iv

LIST OF TABLES
Table 4. 1: Sample statistics .........................................................................................24
Table 4. 2: Variable description ...................................................................................25
Table 4. 3: Compare the mean of variables..................................................................25
Table 4. 4: Pearson and Spearman correlation coefficients .........................................27
Table 4. 5: The results of Almeida (2004) ...................................................................29
Table 4. 6: Estimation results of the model..................................................................31
Table 4. 7: Results of the asymmetry sensitivity of cash flow.....................................34
Table 4. 8: Cash Flow and Cash of FPT Corporation for the period 2009 – 2015 ......36
Table 4. 9: The number of observations of companies by year divided into three
categories......................................................................................................................38
Table 4. 10: The summary statistics for the cash holdings of the two groups of
companies by the three classification criteria...............................................................39
Table 4. 11: Estimation results for financial constraints..............................................40
Table 4. 12: Estimation results of the model for agency problem ...............................43
v

CHAPTER 1: INTRODUCTION
1.1 The problem statements
The 2008 financial crisis was the worst economic disaster since the Great Depression
of 1929, having a strong impact on the world in general and Southeast Asia in
specific. However, Vietnam was one of the few economies that were less affected by
the recession caused by this crisis. Nevertheless, the GDP growth rates for seven
consecutive years (from 2009 to 2015) were in low level, showing that the crisis still
had negative impacts on Vietnamese economy. Moreover, in the period of 2009-2015,
Vietnam’s inflation was abnormal (a sudden increase to 19% in 2011 and then
declining), bad debts became a serious problem and getting worse. Vietnamese
enterprises were directly affected by the crisis, the number of enterprises reporting
losses was increasing and many businesses were forced to dissolve. In that context,
cash holdings were paid more attention, since cash management is the key to a success
business as accessing capital markets is difficult. For effective cash management, the
first problem is what factors affect the firm's cash holdings.
Prior literature has widely studied the effects of cash flow on cash holdings and got
certain conclusions. Almeida et al. (2004), Khurana et al. (2006) found cash flow
sensitivity was positive. Meanwhile, Riddick and Whited (2009), Bao, Chan and
Zhang (2012) found that cash flow sensitivity was negative.
The study of cash flow sensitivity of cash holdings may help firms proposing a better
cash management model, thereby firms use cash more efficiently. However, in
Vietnam, the effect of cash flow sensitivity on cash holdings has yet to be studied
extensively, and there are disputations on this problem in the world. For this reason,
the author chose the research topic "The Effect of Cash Flow Sensitivity on Cash
Holdings: Evidence from Vietnam", examining whether or not the effect of cash flow
sensitivity on cash holdings in Vietnamese enterprises.
1

1.2 The research objectives
The main purpose is examing the effect of cash flow sensitivity on cash holdings, the
paper includes two basic objectives:
- Examining the effect of cash flow sensitivity on cash holdings in Vietnamese
enterprises
- Verifying the nonlinear relationship between cash flow sensitivity and cash holdings.
To accomplish two research objectives, the paper will solve the following research
problems:
- Is there any evidence in the world about the effect of cash flow sensitivity on cash
holdings?
- Which method is appropriate to test the effect of cash flow sensitivity on cash
holdings in Vietnam?
- What factors affects the cash flow sensitivity on cash holdings?
- What is the effect of cash flow sensitivity on cash holdings in case the firm has
positive cash flow and negative cash flow?
1.3 Research contribution
Research on the effect of cash flow sensitivities has a very important meaning,
especially for firms. Financially, cash flow sensitivity can represent a company's risk,
because cash flow sensitivity is the level of change in the company's cash when cash
flow changes. If a company has high cash flow sensitivity, this can affect corporate
financial policies such as dividends and capital structure. A company with high cash-
flow sensitivity is difficult to maintain a capital structure with high debt ratios due to
insecure liquidity and the company is hard to implement a good dividend policy when
cash always has instability. Thus, finding the impact of cash flow sensitivity can help
firms understand how cash flow affects their cash holdings, so they can provide better
cash management and better implementation of dividend payment and capital
mobilization policies. The results of the study will also contribute to the global debate
on how cash flow sensitivity affects cash holdings.
2

1.4 The thesis structure
The research is organized in the following chapters:
Chapter 1: Introduction. This chapter presents the reasons for choosing topics,
research objectives, research methods, research contribution and thesis structure.
Chapter 2: Overview of previous studies on the impact of cash flow sensitivity on
cash holdings. This chapter presents the results of the previous study on the effect of
cash flow sensitivity on cash holdings, findings, arguments and limited issues in these
studies.
Chapter 3: Research Methods. This chapter will detail the research model, variables in
the model, data as well as expectations about the research results.
Chapter 4: Research Results. This chapter presents and discusses the results of the
study on the effect of cash flow sensitivity on cash holdings of firms in Vietnam, the
results of examination with financial constraints and agency problem.
Chapter 5: Conclusions and limitations of the study. This chapter presents the
contributions of the research, the next research direction, and the limitations.
3

CHAPTER 2: LITERATURE REVIEW
2.1 Introduction
There are many reasons for the company to hold cash. The most basic reason is that
the company holds cash to pay off debts and finance its investments. When a company
is not limited to accessing a capital market, the company's cash holdings will be less.
But the mobilization of external funding is often associated with high capital
expenditure. Thus, firms always give priority to using cash held by the company itself
to avoid the burden of costs. One of the important cash-flowing channels for the
company is through cash flow from its revenues. The change in this cash flow will
cause the change in the company's cash holdings. Some researchers have focused on
this aspect when studying cash holdings.
2.2 Studies on the effects of cash flow sensitivity on cash holdings
2.2.1 The impact of change in cash flow on cash holdings
Almeida et. al. introduced a model of a firm’s liquidity demand that formalizes
Keynes’ intuition. The model hypothesizes that firms with capital constraints tend to
have cash holdings from cash inflows. Almeida et al argue that firms that were not
constrained in their access to funding would not show cash incentives, when the
firm’s cash flow changed, their cash holdings would not be affected while financially
constrained firms would be affected by changes in cash flow.
To test their hypotheses, Almeida et. al. used a database of manufacturing firms
between 1971 and 2000, and used OLS regression to estimate the model. The
hypothesis of the model predicted that a change in cash holdings would correspond to
the cash flow shock. The hypothesis also predicted that the cash holdings of
financially constrained firms would be affected by the attraction of future investment
opportunities. Therefore, Almeida et. al. use the Q variable to capture unobserved
information about the value of long-term growth options.
The OLS regression showed that for the limited-capital-access firms, when the cash
flow was positive, the firm would increase cash holdings and vice versa. Variable Q
had a positive and significant coefficient for financially constrained firms. With future
4

investment opportunities, the limited capital access firms would increase their cash
holdings.
Riddick and Whited (2009) validated cash flow sensitivity with different theories and
models from Almeida et. al. Riddick and Whited argued that in the Almeida model the
cash flow was positive because Almeida thought that an increase in cash flow did not
correspond to higher yield of fixed assets. So, when a company has a positive cash
flow, the company will not have incentive to transfer its highly liquid assets to fixed
assets, so the company will use increased cash flow to supplement its cash holdings.
The results of Riddick and Whited differed from the results of Almeida et. al. It was
caused by correction of the measurement error in the Tobin's Q variable. Greene
(1997, p. 440) argued that the measurement error in Tobin's Q variable could affect
cash flow variable because of the measurement error. In a regression variable it affects
all coefficients of variables in regression if this regression variable correlates with
other variables.
Riddick and Whited used the fourth-order GMM estimation to overcome the problem
of measurement errors in Tobin's Q. The results showed that when a company has
positive cash flow, its cash reserves would fall. This happens because when there was
a positive yield shock that increased cash flow and margin profit of capital, the
substitution effect would cause the company to use cash reserves to purchase more
productive tangible assets and use cash to invest, so their cash reserves will decrease.
Bao, Chan and Zhang (2012) also used the GMM4 estimation with additional
empirical model to confirm the results of Riddick and Whited. Bao, Chan and Zhang
added to the experimental model of Riddick and Whited several limited control
variables such as firm size, capital expenditure, non-cash flow, and short-term debt.
The results confirmed the results of Riddick and Whited that the relationship between
cash flow sensitivity and cash holdings is negatively correlated.
At the same time as testing the impact of cash flow sensitivity on cash holdings,
researchers also concern that the relationship between cash flow and cash flow sensitivity
is linear or nonlinear. The linear relationship between a change in cash flow and cash
flows suggests that regardless the cash flow change is positive or negative,
5

the magnitude of change in cash reserves is unchanged. According to Faulkender and
Wang (2006), lacking cash would diversify the company's cash reserves. This
suggests that there are grounds to believe that the impact of cash flow sensitivity on
cash flow will be different in the two cases where the firm has positive cash flow and
the company has negative cash flow.
Research results from Almeida et al. (2004) indicated that firms were limited in their
abilities to access funding, i.e. the firms that were financially constrained, had positive
cash flow sensitivity, but did not show the difference in the effect of cash-flow
sensitivity on cash flow in two cases: the firm has positive cash flow and the firm has
negative cash flow.
Riddick and Whited (2009, p. 1793) also pointed out briefly that medium and large
firms exhibit negative nonlinear relationships in cash flow sensitivity, however, the
study of Riddick and Whited did not focus on the nonlinear relationship between cash
flow and cash flow sensitivity. Riddick and Whited pointed out firms with an increase
in cash flow tended to hold cash on investments because positive cash flow was the
evidence that tangible assets were more productive. In addition, as cash flows
increased, firms used cash reserves to invest in highly profitable projects. Conversely,
when a company had negative cash flow, this indicated that the tangible fixed assets
were of low productivity, or the company had projects with negative NPV. Then the
company would immediately stop these projects to save cash. Hence, according to
Riddick and Whited, whether a company has a positive or negative cash flow, the
relationship between cash flow sensitivity and cash holdings remains negative.
Bao, Chan and Zhang (2012) argued that a company could not immediately stop the
negative NPVs projects when the company has negative cash flow for three reasons.
First, some projects were accompanied by binding contracts and the company could
not stop these projects immediately, this was common when these were tender
projects. The second reason was indicated by Kothari et. al. (2009) that managers had
an incentive to hide bad information. If a company immediately terminates a bad
project, then maybe the market will realize the problem in that company. So, some
managers may choose to keep bad projects to minimize bad news. By delaying the
6

release of bad news, managers expect to be able to extend the time until there is good
information to neutralize the impact of bad news. Therefore, when a company faces
negative cash flow, the company may not end up ineffective projects. The third was
the agency problem, Jensen and Meckling (1976), Jensen (1986) pointed out that
managers had an incentive to invest excessively and therefore they could keep some
projects with negative NPV to maximize personal profit. This is similar to the risk
transfer in case of financial exhaustion, so when the company has negative cash flow,
the cash reserves of the company may not increase but may decrease as managers
continue to bring cash to invest in projects with negative NPV.
Because of three above reasons, a company facing negative cash flow may not
immediately stop all bad projects, when the company has negative cash flow, the
company's cash reserves may not increase. Using the samples of manufacturing firms
from 1972 to 2006, Bao, Chan and Zhang examined animpact of cash flow sensitivity
on cash flows including the viability of the nonlinear relationship corresponding to a
change in cash holdings between the two cases where the firm had positive cash flow
and the firm has negative cash flow. Empirical evidence suggested that cash flow
sensitivity would be negative when the firm had positive cash flow, in line with
Riddick and Whited (2009), but the sensitivity of cash flow would be positive when
the firm had a positive cash flow, this supports the hypothesis of Bao, Chan and Zhang
that the influence of cash flow sensitivity on cash holdings is asymmetrical.
2.2.2 Relationship between financial constraints and cash holdings of a company
Two areas of important research in corporate finance are the impact of financial
constraints on corporate policy and how firms manage finance. These two areas have
a close relationship. If a company has unlimited access external funding, which means
the firm is not financially constrained, the company does not need to have cash
reserves for future investment. On the contrary, if a company is limited in accessing
external funding because of high cost, cash reserves are necessary to cover the needs
of the company.
According to Kaplan and Zingales (1997), the most accurate and most widely used
definition of financial constraints firms was that these firms distinguish the internal
7

and external capital expenditure. However, by definition, every company seems to be
financially constrained. A small transaction cost of using external funding is sufficient
to rank the company into financial constraints. Fazzari, Hubbard and Petersen (1988)
and many other researchers considered that the cash-flow sensitivity of the higher
investment was the evidence for larger financial constraints.
In their study, Almeida et. al. (2004) demonstrated that the relationship between
financial constraints and the company's payment needs could help determine whether
financial constraints were an important determinant of corporate behavior or not.
Almeida argued that holding cash was expensive, as higher cash savings would
require cuts from profitable investment projects. Therefore, financially constrained
firms choose an optimal cash policy to balance the returns of present and future
investment projects. This policy is the opposite of firms that are not financially
constrained: firms which are not financially constrained neither use cash nor face the
cost of cash holdings.
Almeida uses five methods to classify firms into two group of financially constrained
and un-constrained firms: dividend payment policy, asset size, bond ratio, percentage
of commercial papers and KZ (based on Kaplan and Zingales (1997)).
Almeida et. al. (2004) concluded that changes in cash flow affected cash holdings
only when firms were constrained in access to capital, for firms with no financial
constraints, changing cash flows would not affect cash holdings. This may be caused
by financially constrained firms tending to hold cash, because of the limited capital
access, while financially un-constrained firms do not.
Riddick and Whited (2009) predicted that firms with higher external capital
expenditure would have a greater negative correlation coefficient. The results of the
regression of Riddick and Whited did not support the opinion of Almeida et al. in
which financial constraint firms did not have cash flow sensitivities of holding cash,
and even did not support Riddick and Whited’s prediction stated above.
The research results of Bao, Chan and Zhang (2012) supported Riddick and Whited
(2009) that cash-flow sensitivity was stronger for medium- and large-sized firms
because these firms had no financial constraints.
8

2.3 Summary of previous findings
Although previous studies use different empirical models and methods, most of the
studies conclude that cash flow sensitivity has an effect on cash holdings. The
discussed problem is how this effect tends to be. Almeida et. al. (2004) used the OLS
method for data taken from US manufacturing firms in the period 1971-2000. The
positive relationship between changes in cash holding and cash flow indicates that
firms decrease (or increase) cash reserves when they have negative (or positive) cash
flows. A change of cash flow only affects cash holdings for firms with financial
constraints. Almeida et. al. found that their findings were consistent with their
argument and argued that only financially constrained firms, because of their
restricted access to external capital markets, saved cash out of cash flow, while
unconstrained firms did not. In the same direction of research with Almeida, Khurana
et al. (2006) also drew the same conclusion.
In normal intuition, the conclusion of Almeida et al. seems to be right, when a firm
has a positive cash flow i.e. profitable business operations, the firm will bring that
profit back into its cash reserves. However, some researchers disagree with Almeida's
argument. Riddick and Whited (2009) argued that the results of Almeida showed
positive cash flow sensitivity because in Almeida's model, the increase in cash flow
did not correspond to the increase in productivity of physical assets. Riddick and
Whited contended that a firm with an increase in cash flow tended to turn cash
reserves into investments because the positive cash flow shock indicated higher
productivity of physical assets. Riddick and Whited thought the positive cash flow
sensitivity was not appropriate because of the OLS method. Riddick and Whited
pointed out that due to the measuring error of Tobin's Q variable, using the OLS
method would affect the coefficient of other variables in the estimation, especially the
cash flow variable. Hence, Riddick and Whited used a general method of moment
(GMM) estimation, proposed by Erickson and Whited (2000), to estimate the model.
The results were consistent with Riddick and Whited's original hypothesis, the cash
flow sensitivity was negative, which meant that firms with an increase in cash flow
tended to turn cash reserves into investments, reducing firm's cash holdings. On the
other hand, the results of Riddick and Whited also rejected other conclusion by
9

Almeida et al.. Almeida said that firms were not financially constrained, their cash
was not affected by changes in cash flow, Riddick and Whited proved that firms
without financial constraints had cash flow sensitivity, and even the cash flow
sensitivity of these firms was greater than that of financially constrained firms.
Sharing the same empirical method with Riddick and Whited (2009), suggesting that
the fourth-order GMM (GMM4) was more suitable than OLS, Bao, Chan and Zhang
(2012) performed a reassessment of the effect of cash flow sensitivity on cash
holdings and the research results support the outcome of Riddick and Whited.
However, Bao, Chan, and Zhang went further than Riddick and Whited to pay
attention to a nonlinear relationship between cash flow sensitivity and cash holdings.
Bao, Chan and Zhang argued that cash flow sensitivity was not negative in all cases,
particularly when the firm had negative cash flow. Riddick and Whited argued that
when a firm had negative cash flow it meant the productivity of the firm's physical
assets was decreasing or the firm was investing in ineffective projects. Then the firm
would stop funding projects or stop procuring assets, which would increase the firm's
cash. Bao, Chan and Zhang in their study gave some main reasons why the firm could
not immediately stop ineffective projects, therefore, when firm had negative cash
flow, the negative cash flow sensitivity may not be sustainable. The empirical results
confirmed the predictions of Bao, Chan and Zhang.
Besides the studies on the effects of cash flow sensitivity on cash holdings, studies on
impacts of agent costs on the effect of cash flow sensitivity on cash holdings had
certain results. Dittmar, Mahrt-Smith, and Servaes (2003) argued that if firms have a
larger agency problem, firms would hold more cash. Bao, Chan and Zhang (2012)
found a link between external control and the effect of cash flow sensitivity on cash
holdings. If the firm's shares were held by institutional investors, i.e. the firm had a
large external control and a lower agency, the effect of cash flow sensitivity on cash
holdings would be smaller.
10

CHAPTER 3: RESEARCH METHODOLOGY
3.1 The analytical framework
Firm
performance
Increasing
investment
Increasing tangible
assets
The sensitivity
of Cash flow
Agency problem
Cost of holding
money
Investment
Financial opportunities
constraint
The difficulties in
accessing capital
External capital
cost
Cash holdings
13

3.2 The econometric models
Based on research objectives, the paper has three problems to clarify. The first is the
influence of cash flow sensitivity on cash holdings, the second is the impact of
financial constraints the last is the agency cost. Therefore, the research paper uses
three models to solve the above problems.
3.2.1 Model the effect of cash flow sensitivity on cash holdings
Based on the model of Bao, Chan and Zhang (2012), the paper uses the following
model to test the hypothesis that cash flow sensitivity affects cash holdings and this
effect is different in case the firm has negative and positive cash flow:
ΔCashHoldingsit = α0 + α1CashFlowit + α2Negit + α3Cashflowit * Negit + α4Qit +
α5Sizeit + α6Expenditureit + α7Acquisitionit + α8ΔNCWCit + α9ShortDebtit-1 + εit (1)
Where:
CashHoldings: is calculated as the cash in company divided by total asset.
ΔCashHoldings: the difference of cash between year t and year t−1 over total assets
CashFlow: is the profit after interest, dividends and taxes payments plus depreciation
over total assets.
Neg: is the indicator variable. Neg equals zero if in that year the firm has positive cash
flow and one otherwise.
Q: represents the market capitalization of the company. Q is calculated by total of the
market value of the capital and the book value of assets minus the book value of the
capital and divided by the book value of assets.
Size: represents the scope of the company, calculated as the natural logarithm of total
assets.
Expenditure: the ratio of capital expenditures to total assets.
Acquisition: the indicator variable. If the company has no acquisition in that year,
Acquisition equals one and zero otherwise.
14

NCWC: is calculated as net non-cash working capital which equals working capital
minus cash divided by total assets.
ΔNCWC: is the difference of NCWC between year t and year t−1.
ShortDebt: is the debt in short-term weighted by total assets.
i and t refers to firm and year respectively, ε is random error term.
3.2.2 The effect of cash flow sensitivity on cash holdings is under financial constraints
After examining the effect of cash flow sensitivity on cash holdings, the study
examines how cash flow sensitivity varies between financially constrained and un-
constrained firms. For that purpose, the paper uses three measures to divide the
sample into two groups.
Firstly, the paper uses the KZ index, which is based on the results of Kaplan and
Zingales (1997). The study uses the KZ index as the data for this metric corresponds
to the data in Vietnam. The KZ index is calculated as follows:
KZindex = -1.002 x CashFlow + 0.283 x Q + 3.139 x Leverage - 39.368 x Dividends -
1.315 x CashHoldings
Where:
over total assets.
Q: represents the market capitalization of the company. Q is calculated by total of the
market value of the capital and the book value of assets minus the book value of the
capital and divided by the book value of assets.
Leverage: represents the capital structure of the firm which is calculated as the ratio of
the total debt and total assets.
Dividends: represents the dividend policy of the company which is calculated as the
cash dividends divided by total assets.
15

The study evaluates firms via the KZ index based on Almeida et al. (2004), within a
year, firms ranked among the 33% of the highest KZ index are considered as in the
financial constraint group.
Secondly, the study uses an additional index to assess the financial constraints among
firms. This index is based on the research by Whited and Wu (2006) and is called the
WW index. Bao, Chan, and Zhang (2012) argued that the WW was more appropriate
than the KZ as firm’s characteristics in the WW were more related to the firm's
financial constraints than the KZ. The WW is more relevant than the KZ since the
WW does not include Tobin's Q. The data for calculating the WW are also consistent
with the data in Vietnam. The WW index is calculated as follows:
WWindex = -0.091 x CashFlowit - 0.062 x DIVPOSit + 0.021 x TLTDit – 0.044 x Sizeit
+ 0.102ISGit – 0.035 x SGit
Where:
over total assets.
DIVPOS: the indicator variable. If firm i pays dividend by cash in year t, DIVPOS is
consider as one and zero otherwise.
TLTD: is the debt in long-term weighted by total assets.
Size: represents the scope of the company, calculated as the natural logarithm of total
assets.
ISG: the industry's revenue growth rate.
SG: the growth rate of the company.
According to Bao, Chan and Zhang (2012), in a year, firms in the top 25% of the
highest WW index were considered as firms in the financial constraint group.
Finally, the study assesses whether firm is assigned to the financially constrained
group or not based on dividend payments. If a firm does not pay dividends during the
year, then the firm is considered financially constrained firms and vice versa.
16

After dividing the sample into two groups, the equation (1) is adjusted to examine the
effect of financial constraints on the firm's cash holdings. The study is modified
equation (1) into equation (2) as follows:
ΔCashHoldingsit = β0 + β1CashFlowit + β2Negit + β3Cashflowit * Negit +
β4Constraintit + β5CashFlowit * Constraintit + β6Constraintit * Negit + β7CashFlowit *
Constraintit * Negit + β8Qit + β9Sizeit + β10Expenditureit + β11Acquisitionit +
β12ΔNCWCit + β13ShortDebtit-1 + εit (2)
The variables in equation (2) are defined as in equation (1)
In equation (2), there is a constraint dummy variable (value of one if the firm is
considered financially constrained) and Constraint's interactive variables with
CashFlow variable, Neg dummy variable.
3.2.3 The effect of cash flow sensitivity on cash holdings is in the agency problem
To consider the impact of the agency problem, the study uses the following model:
ΔCashHoldingsit = γ0 + γ1CashFlowit + γ2Negit + γ3Cashflowit * Negit + γ4Instit +
γ5CashFlowit * Instit + γ6Instit * Negit + γ7CashFlowit * Instit * Negit + γ8Qit + γ9Sizeit
+ γ10Expenditureit + γ11Acquisitionit + γ12ΔNCWCit + γ13ShortDebtit-1 + εit (3)
Where: Inst equals one if the number of shares held by institutional shareholders is in
the top 10% of the company.
The variables in the model are calculated as follows:
Cash holdings, in the study of Almeida et al. (2004) on cash flow sensitivity, Almeida
et al. defined the firm's cash holdings including cash and marketable securities divided
by total assets. Bao, Chan and Zhang (2012) defined cash as the firm’s total cash
holdings divided by total assets. With data taken from Vietnameses firm’s financial
statements, the study calculates cash holdings as cash and cash equivalents on the
balance sheet, i.e. the largest liquid asset item, divided by the total assets of the firm.
ℎ ℎ
ℎ =
17

Cash flow, Almeida et al. (2004), Bao, Chan and Zhang (2012) defined the firm’s cash
flow as earnings before extraordinary items and depreciation divided by total assets. .
Extraordinary items or expenses are stated in the income statement. However, with
data collected in Vietnam, there are no extraordinary items in the firms' income
statement. Therefore, the study takes the variable definition according to Bates et al.
(2009), in which CashFlow variable is the profit after interest, dividends and taxes
payments plus depreciation. By this definition, the CashFlow variable is calculated as
follows:
ℎ =
Where: depreciation is taken from the depreciation of fixed assets on the indirect cash
flow statement.
Price to book value, known as the margin value q, was developed by Tobin (1969). In
this study, Tobin defined the margin value q as the ratio between the market value and
the replacement value of the asset. However, since the margin value q can not be
observed, the study uses the value of Tobin's Q to replace the margin value Q, which
is used in many empirical studies in the world such as Bates et al. (2009), Bao, Chan
and Zhang (2012). The value of Tobin's Q is calculated by comparing the firm’s
market capilization value with the respective book value.
+
=
Book value of debts is taken from liabilities item on balance sheet.
Market capilization equals P/B multiplied by book value of the capital ie equals
outstanding shares multiplied by price at that time.
Total book value of assets is taken from total assets item on balance sheet.
18

Capital expenditure, Riddick and Whited (2009) argued that as firm's cash flow
increased, it corresponds to an increase in the productivity of firm's tangible fixed
assets. Firms do not accumulate cash, they return cash to invest. It means firms use
cash to purchase more fixed assets when they have positive cash flow. The amount of
money a firm spending on procuring fixed assets for investment projects is called
capital expenditure, which suggests that capital expenditures may represent
investment opportunities. Based on this argument, the study calculates capital
expenditures as the difference between the firm's fixed assets in year t and t -1 plus the
fixed asset depreciation in year t and t - 1.
+
=
Non-cash working capital, based on the definition of Bao, Chan and Zhang (2012),
non-cash working capital is calculated as working capital minus cash divided by total
assets. Working capital equals short-term assets minus short-term debts. Cash
holdings equal cash and cash equivalents.
ℎ − ℎ − Cash and cash equivalents
=
ΔNCWC: is the difference of NCWC between year t and year t−1.
Short-term liabilities, according to Bao, Chan and Zhang (2012), ShortDebt variable
is calculated by taking short-term debts in year t-1 divided by total assets in year t.
ℎ
ℎ =
Size, Bates et al. (2009) argued that there was economic benefit to the size of cash
holdings. In this study, Bates defined firm size as the natural logarithm of the firm's
total assets. This definition is also used in many other studies, such as Almeida et al.
(2004), Bao, Chan and Zhang (2012).
= ln( )
19

3.3 The data
Based on previous studies on cash holdings, the study selected data including 274
firms from the Hanoi Stock Exchange (HNX) and Hochiminh Stock Exchange
(HOSE). Selected firms are non-financial. The study excludes firms in the financial
sector, such as the real estate, securities and banking, insurance due to special
accounting standards, according to Shadi Farshadfar and Reza Monem (2013).
Sampling period is from 2009 to 2015. The data is presented panel data with 1918
observations. Data is collected from the financial statements of the firms which are
taken from Vietstock, CafeF.
3.4 Fixed Effects and Random Effects
The study uses the OLS regression method for the data panel as Fixed effects and
Random effects. The study ran two quantitative methods simultaneously with the
collected data. After running the regression, the study will use the Hausman test to
examine the results from the two methods to find the better results.
Hausman's test examines the results between the two regression models Fixed effects
and Random effects by examining the difference in the regression coefficient and the
null hypothesis assuming that the difference is not systematic. That is, if accepting the
hypothesis H0, the random effects are better. In contrast, rejecting the null hypothesis,
the Fixed effects are better.
If the Hausman test‘results indicated that FEM is better REM, the study will use the
results of the FE model. However, to eliminate the heteroskedasticity, the study will
use Robust and Cluster for the FE model.
Robust, when there is the heteroskedasticity, OLS estimation is still an unbiased
estimator. However, estimates are no longer effective because the variance is no
longer the smallest. Furthermore, the variance estimates will be biased, so that
significance level and confidence interval tests based on t and F are no longer reliable.
Derived from the idea that the OLS estimation when there is the heteroskedasticity,
the regression coefficient is correct, only the standard error is deviated, with the
20

Robust adjustment method, the regression coefficient will be retained, and the
variance will be adjusted to achieve the smallest value.
Cluster, to fix the autocorrelation, the study uses cluster-adjusted. By fixing the id
value (representing for companies), this measure will fix the autocorrelation
phenomenon in the variance.
When estimating with FE adding Robust and Cluster, the results will be better, and the
forecasting will be better.
3.5 GMM4 estimations
One of the methods to solve the problem of error in variable estimation is to use
instrumental variables in the model. When the model has endogenous variables, or the
variables in the model are correlated with the error of the model, the use of
instrumental variables is necessary to eliminate the variance in the estimation of the
model. Instrumental variables must be correlated with endogenous variables in the
model and not be correlated with model errors. Therefore, in this paper, the author
will use another method proposed by Erickson and Whited (2000), which is high-
order GMM estimation.
Erickson and Whited proposed a method for estimating models including accurately
measuring variables and measurement errors, without the use of tool variables, which
was the use of available information in high order moments of variables in the model.
If F is a random variable, and k is a natural number, then E (Fk
) is called kth
order
moment of F, and the quantity E (F - E (F)) k
is called kth
order center moment of F.
Each moment of the random variable represents a distributed characteristic of the
random variable. The first-order moment of F is the expected value of the variable; the
second-order center moment of F is the variance.
The idea of the high-order GMM estimation is to use the information contained in the
high-order moment of the explanatory variables to calculate the regression
coefficients, rather than directly using the value of the variable to calculate, to avoid
deviation due to variable measurement error. The effectiveness of the GMM4
estimation was demonstrated by the Monte Carlo simulation model of Erickson and
21

Whited (2000), as well as in some recent studies. The high-order GMM estimation is
considered to be able to overcome the problem of measurement errors of Tobin's Q. In
this study, the author will use FEM, REM and fourth-order GMM as the estimation
method for the research model. Based on the results of the regression with data taken
from Vietnam, the paper will select a suitable method to be the main estimation for
the research model.
3.6 Expectations on research results
3.6.1 Effects of cash flow sensitivity on cash holdings
In the test equation for the effect of cash flow sensitivity on cash holdings:
ΔCashHoldingsit = α0 + α1CashFlowit + α2Negit + α3Cashflowit * Negit + α4Qit +
α5Sizeit + α6Expenditureit + α7Acquisitionit + α8ΔNCWCit + α9ShortDebtit-1 + εit (1)
Based on the results of previous studies, α1 coefficient of the CashFlow variable is
expected to be positive in the OLS regression, consistent with the results of Almeida
et al. (2004), Almeida believed that firms would save cash when the company had a
positive cash flow to prepare for future needs. With the GMM4 regression, the results
of previous studies agreed that the α1 coefficient would be negative, indicating that
cash flow sensitivity is negative. However, given the fact that Vietnam's data in the
study is in the post-crisis period, within short sampling period, the study suggests that
the negative impact of cash flow may not be the case for firms in Vietnam. Thus,
expectation of the study on the α1 coefficient can be negative or positive. The α3
coefficient is expected to be positive, as firms with negative cash flow will use cash
reserves to continue financing current projects. A positive and significant α3
coefficient in the case of a negative α1 coefficient would indicate an imbalance in the
impact of cash flow sensitivity on cash holdings.
The coefficients of the two control variables Expenditure and Acquisition are expected
to bear a negative sign as capital spending and mergers will reduce the company's
cash holdings. The coefficient of the ShortDebt variable can be either positive or
negative, as this variable shows the cash flow going out during the year, which can
reduce the cash or increase the cash flow of the manager.
22

ΔCashHoldingsit = β0 + β1CashFlowit + β2Negit + β3Cashflowit * Negit +
β4Constraintit + β5CashFlowit * Constraintit + β6Constraintit * Negit + β7CashFlowit *
Constraintit * Negit + β8Qit + β9Sizeit + β10Expenditureit + β11Acquisitionit +
β12ΔNCWCit + β13ShortDebtit-1 + εit (2)
The β1 coefficient is expected to be negative or positive, the β3 coefficient is expected
to be positive due to the effect of cash flow sensitivity on cash and asymmetry of cash
flow sensitivity is expected to remain under control of the financial constraints. The β5
coefficient is expected to be positive because financial constraints are assumed to be
due to limited access to capital, which will ignore good investment opportunities in
order to increase cash savings when the firm has positive cash flow. As a result, the β7
coefficient is expected to be negative as financial constraint firms will find it difficult
to maintain existing projects with cash reserves rather than financial unconstraint
firms.
3.6.3 Effects of cash flow sensitivity on cash holdings under agency problem
ΔCashHoldingsit = γ0 + γ1CashFlowit + γ2Negit + γ3Cashflowit * Negit + γ4Instit +
γ5CashFlowit * Instit + γ6Instit * Negit + γ7CashFlowit * Instit * Negit + γ8Qit + γ9Sizeit
+ γ10Expenditureit + γ11Acquisitionit + γ12ΔNCWCit + γ13ShortDebtit-1 + εit (3) Inst
variable represents the volume of institution’s shares in firms. The volume of share
holding of institutions in large firms represents low representation. In this equation,
the γ1 coefficient is expected to be negative or positive, while the γ3 coefficient is
expected to be positive because the effect of cash flow sensitivity on cash holdings is
expected to hold in the presence of the agency cost. The γ5 coefficient is expected to
be negative because firms have more outside control, which corresponds to lower
agency costs; when there is positive cash flow, the company will not accumulate cash
but will use more cash to finance the projects. While the γ7 coefficient is expected to
be negative, for firms with negative cash flows, more organizations holdings will
prevent managers from over-investing in inefficient projects to seek personal profit, so
the cash holdings of these firms tend to increase.
23

CHAPTER 4: RESEARCH RESULTS
4.1 Data description
Table 4. 1: Sample statistics
Industry Quantity Percentage
Rubber 9 3.28%
Travel services 9 3.28%
Pharmacy – medical 14 5.11%
Mineral 7 2.55%
Energy 19 6.93%
Steel 14 5.11%
Oil and Gas 15 5.47%
Plastics – Packaging 15 5.47%
Food 15 5.47%
Seafood 15 5.47%
Transportation 23 8.39%
Construction 19 6.93%
Trade 15 5.47%
Manufacturing 23 8.39%
Telecommunications technology 9 3.28%
Fertilizer 12 4.38%
Building materials 41 14.96%
274 100%
(This table shows the number of firms in each industry as well as the percentage
of firms in each industry in the sample)
24

Table 4. 2: Variable description
N Mean Median Std dev Q1 Q3
ΔCashHoldings 1,918 0.030 0.011 0.109 -0.014 0.065
Cashholdings 1,918 0.117 0.076 0.124 0.028 0.165
CashFlow 1,918 0.103 0.091 0.098 0.048 0.151
Q 1,918 1.044 0.951 0.473 0.825 1.148
Size 1,918 13.361 13.415 1.961 12.489 14.410
Expenditure 1,918 0.018 0.023 0.137 -0.022 0.048
Acquisition 1,918 0.051 0.000 0.219 0.000 0.000
ΔNCWC 1,918 0.162 0.018 0.416 -0.048 0.124
ShortDebt 1,918 0.385 0.388 0.212 0.212 0.541
Table 4. 3: Compare the mean of variables
Constraint Unconstraint Difference t statistics
ΔCashHoldings 0.024 0.032 -0.008 1.352
CashFlow 0.072 0.114 -0.042*** 8.134
Q 0.92 1.085 -0.165*** 6.7016
Size 11.6 13.942 -2.342*** 26.37
Expenditure 0 0.024 -0.024*** 3.238
Acquisition 0.044 0.053 -0.009 0.741
ΔNCWC 0.162 0.162 0 -0.033
ShortDebt 0.325 0.389 -0.064 1.504
***, **, * significant at 1%, 5%, 10%
(This table presents the descriptive statistics of the variables in the model and
compares the mean of variables between the two groups of firms classified based on
the WW index. CashHoldings is calculated as the cash in company divided by total
asset, ΔCashHoldings is the difference of cash between year t and year t−1 over total
assets, CashFlow is the profit after interest, dividends and taxes payments plus
depreciation over total assets, Q is calculated by total of the market value of the
capital and the book value of assets minus the book value of the capital and divided by
25

the book value of assets, Size is the natural logarithm of the total asset, Expenditure is
the ratio of capital expenditures to total assets, Acquisition is an indicator variable
that equals one if the firm makes an acquisition in that year and zero otherwise,
ΔNCWC is the difference in non-cash working capital between year t and year t−1,
ShortDebt is the debt in short-term weighted by total assets)
Table 4.2 and 4.3 presents descriptive statistics of variables. Table 4.2 shows the
descriptive statistics of the variables in the model, while Table 4.3 compares the mean
of variables between the two groups of companies classified by the WW index. Table
4.2 shows that the mean and median of the ΔCashHoldings variables are respectively
0.030 and 0.011, indicating that only small changes in the cash holdings of the
companies in the sample. Cash accounts for an average of 11.7% of total assets of
companies. Meanwhile, short-term debt accounted for an average of 38.5% of total
assets, indicating that the debt ratio of Vietnamese companies was quite high. The
company's non-cash working capital changes a little with a mean of 0.162 and a
median of 0.018. The rate of mergers and acquisitions is quite low, only about 5.1% of
the companies in the sample have acquisitions or mergers.
In Table 4.3, the criteria such as cash holdings, acquisition, working capital and short-
term debt are not significant difference between. Financial unconstraint firms also
undertake more mergers and acquisitions, along with larger capital expenditures,
which are understandable because the group is easier to access funds than financial
constraint firms. The Q coefficients of firms that are not financially constrained also
show that they have more growth opportunities.
26

Table 4. 4: Pearson and Spearman correlation coefficients
ΔCashHoldings CashFlow Q Size Expenditure Acquisition ΔNCWC ShortDebt
ΔCashHoldings 0.043 0.171 0.040 -0.100 0.026 -0.096 -0.033
CashFlow 0.065 0.191 0.035 0.080 -0.029 -0.023 -0.133
Q 0.131 0.178 0.156 0.105 0.017 0.043 -0.003
Size 0.025 0.038 0.235 0.058 0.025 0.024 0.142
Expenditure -0.079 0.060 0.032 0.046 -0.032 -0.227 -0.009
Acquisition 0.030 -0.020 0.017 0.015 -0.021 -0.003 0.042
ΔNCWC 0.178 -0.029 0.049 0.060 -0.171 -0.008 0.104
ShortDebt -0.078 -0.150 -0.098 0.186 -0.046 0.037 0.047
(This table presents the correlation coefficients between the variables in the model. Correlation coefficients include the Pearson
coefficient (the part below the diagonal) and the Spearman coefficient (the part above the diagonal))
27

Table 4.4 presents Pearson and Spearman correlation coefficients between variables in
the model. The correlation coefficient between Q and CashFlow is 0.178, which is
greater than other variables. However, the correlation coefficient between Q and
CashFlow is not high, suggesting that the Q error would not significantly effect on the
coefficient of CashFlow on the OLS regression. The correlation coefficient of
ΔCashHoldings and CashFlow variables are positive and significant, indicating that
increases in cash flow tend to increase the cash holdings of companies. CashFlow and
Expenditure have a positive correlation, indicating that when the company has
increased cash flow, the company will invest in new projects, which will be further
verified in the model estimation results.
4.2. Regression results and discussions
4.2.1 Effects of cash flow sensitivity on cash holdings
To test the relationship between cash and cash flow sensitivity, the study will use the
Almeida et al. (2004) model to compare the results with the main model of the study.
Compared to the main model, Almeida et al. model has fewer control variables. The
model of Almeida et al. (2000) is as follows:
ΔCashHoldingsit = α0 + α1CashFlowit + α2Qit + α3Sizeit + εit
Riddick and Whited (2009) shown that when an explanatory variable has a
measurement error, the estimates of other explanatory variables in the model may be
affected. Toni and Whited (2000) developed a high-order GMM to overcome the
problem of measurement error in estimation. The study will apply FEM, REM and
GMM4 to estimate the model.
28

Table 4. 5: The results of Almeida (2004)
Dep.Var: ΔCashHoldings GMM4 FEM REM
CashFlow 0.065(0.33) 0.051 (1.45) 0.048* (1.86)
Q 0.028** (2.52) 0.03*** (3.38) 0.029***(5.27)
Size -0.0003 (-0.35) 0.007*** (3.12) -0.0003 (-0.27)
Const -0.002 (-0.08) -0.096*** (-3.36) -0.0004 (-0.02)
Observations 1918 1918 1918
F-value 9.82***
χ2 36.88***
Rho^2 0.020**
Hausman specification test between FEM and REM χ2 (df =3) = 18.23
(Samples include non-financial companies from 2009 to 2015. The dependent variable
ΔCashHoldings is the difference of cash between year t and year t−1 over total assets,
CashFlow is the profit after interest, dividends and taxes payments plus depreciation
over total assets, Q is calculated by total of the market value of the capital and the
book value of assets minus the book value of the capital and divided by the book value
of assets, Size is the natural logarithm of the total asset. ***, **, * are respectively
significant at 1%, 5%, 10%)
In the REM method, the CashFlow coefficient is positive and significant, consistent
with the results of Almeida et al. (2004), suggesting that when the cash flow of the
firm increases, the cash holdings also increased. The Q coefficient is positive and
significant, which is consistent with the results of Almeida et al., In Almeida's model,
the Q variable represents long-term growth options, when there is growth opportunity,
the cash holdings of the company will increase to prepare for new investment projects.
Using the Hausman test to determine the resultant choice between FEM and REM
models, the results were significant, and the null hypothesis was rejected, which
meant that the FEM model had better results. However, according to the FEM
method, the CashFlow variable was positive and not statistically significant.
29

The GMM4 method is used to estimate the model of Almeida et al. Riddick and
Whited found that the sensitivity of cash flow was negative when using the GMM4
estimation method to eliminate the measurement error in the Q variable. However, in
GMM4 estimation for the Almeida model with data in Vietnam, the sensitivity of the
cash flow was positive and not significant, similar to the results of the FEM method.
In order to test whether this is a characteristic of Vietnamese companies or because
the model of Almeida is not suitable, the study continues to estimate the equation (1)
to test the effect of sensitivity cash flow on cash holdings, temporarily disregarding
the asymmetric of the cash flow sensitivity by removing the dummy variable Neg and
the interaction variable CashFlow * Neg. GMM4, FEM and REM were used
concurrently. The equation (1) of the study does not take into account the existence of
a nonlinear relationship between cash flow sensitivity and cash holdings:
ΔCashHoldingsit = α0 + α1CashFlowit + α2Qit + α3Sizeit + α4Expenditureit +
α5Acquisitionit + α6ΔNCWCit + α7ShortDebtit-1 + εit
30

Table 4. 6: Estimation results of the model
Dep.Var: GMM4 FEM REM
ΔCashHoldings
CashFlow 0.106(0.34) 0.071**(0.035) 0.049*(0.026)
Q 0.023*(1.72) 0.025***(0.009) 0.025***(0.005)
Size 0.0001(0.11) 0.007***(0.002) 0.0002(0.001)
Expenditure -0.049*(-1.95) -0.043**(0.0195) -0.047***(0.018)
Acquisition 0.016(1.12) 0.019(0.013) 0.016(0.011)
ΔNCWC 0.044***(6.28) 0.046***(0.006) 0.044***(0.006)
ShortDebt -0.034(-1.44) -0.065**(0.026) -0.038***(0.012)
Constant -0.0008(-0.03) -0.076***(0.028) 0.004(0.017)
Observations 1,918 1,918 1,918
F-value 14.90***
χ2 117.80***
Rho^2 0.060**
(The sample includes non-financial companies from 2009 to 2015. The dependent
variable ΔCashHoldings is the difference of cash between year t and year t−1 over
total assets, CashFlow is the profit after interest, dividends and taxes payments plus
depreciation over total assets, Q is calculated by total of the market value of the
capital and the book value of assets minus the book value of the capital and divided by
the book value of assets, Size is the natural logarithm of total assets, Expenditure is
the ratio of capital expenditures to total assets, Acquisition is indicator variable 1 if
the company has acquisitions during the year, ΔNCWC is the non-cash flow difference
divided by total assets, ShortDebt is the debt in short-term weighted by total assets.
***, **, * respectively significant at 1%, 5%, 10%)
31

In the regression results of GMM4, FEM and REM, cash flow sensitivity was positive,
consistent with the finding of Almeida et al. (2004). Capital expenditure is negative,
which is a good thing because the company's cash will decrease when the company
spends for purchasing fixed assets. The coefficient of ShortDebt is negative, meaning
that in Vietnam, when the debt ratio increases, firm gross profit will be deducted by a
huge additional amount of interest because of high debt ratio. As a result, the company's
after-tax profit will be reduced, and cash will decrease accordingly. On the other hand,
if a company has a low short-term debt ratio, profit will be used less to pay interest, so
the cash holdings of the firm will also be higher. Normally, when an enterprise wants to
increase working capital, there are two ways in which an enterprise can increase its
short-term debt to increase its cash inflows or sell its long-term assets for investing in
short term assets. With the first option, increasing short-term assets by borrowing, in
the long run, will lead to short-term liabilities increase, then the increase of short-term
assets by debt does not seem to change working capital, even it also reduces the
liquidity of the company. Therefore, it is more appropriate for businesses to sell their
long-term assets for increasing their short-term assets. Sales of long-term assets will
increase the working capital of the business, and growth of non-cash working capital
will be faster than increases in cash holdings because with this option, the business
tends to invest in non-cash short-term assets such as inventory, tools, equipment ...
rather than to increase cash in the company.
However, the coefficient of CashFlow in the GMM4 estimator is not significant, which
may be a sign that the GMM4 is no longer a suitable estimation method for data in
Vietnam.
Using the FEM and REM method, the results show that the Q coefficient is positive and
statistically significant at 1%, the coefficient of CashFlow variable is positive and
statistically significant at the significance level of 5 % and 10%, indicating that the
FEM and REM methods are more appropriate than the GMM4 method for the data of
Vietnamese enterprises. Using the Hausman test to determine the resultant choice
between the two FEM and REM, the results were statistically significant, and the null
hypothesis was rejected, which meant that the FEM model had better results. The
32

coefficient of CashFlow variable in FEM regression is positive, in line with the initial
expectation of the study, which shows that in Vietnam, as cash flow increases, the level
of cash holdings also increases. The coefficient of CashFlow variable is quite small,
indicating that the effect of cash flow sensitivity on cash holdings is negligible.
However, this finding does not support the findings of previous studies, such as Riddick
and Whited (2009), Bao, Chan and Zhang (2012). Riddick and Whited argued that an
increase in the company's cash flow which indicated well-performing business, would
lead to low level of cash stocking due to spending on tangible assets and new
investment in profitable projects. In order to further clarify the effect of cash-flow
sensitivity on cash holdings in case of positive cash flows and negative cash flows, the
study will estimate the main model of the study, added the dummy variable denotes
negative cash flow (Neg) and the interactive variable CashFlow*Neg.
33

Table 4. 7: Results of the asymmetry sensitivity of cash flow
Dep.Var: ΔCashHoldings GMM4 FEM REM
CashFlow -0.074(-081) 0.121**(0.048) 0.074**(0.031)
Neg -0.129(-0.75) -0.013(0.019) 0.002(0.017)
CashFlow*Neg 0.053(0.50) -0.180*(0.096) -0.097(0.079)
Q 0.029***(2.86) 0.022**(0.009) 0.024***(0.005)
Size 0.0002(0.20) 0.008***(0.002) 0.0002(0.001)
Expenditure -0.044*(-1.91) -0.045**(0.02) -0.046**(0.018)
Acquisition -0.014(0.94) 0.02(0.013) 0.017(0.011)
ΔNCWC 0.044***(6.65) 0.046***(0.006) 0.044***(0.006)
ShortDebt -0.044***(-3.29) -0.063**(0.026) -0.037***(0.012)
Constant -0.044(0.99) -0.098***(0.0295) 0.001(0.018)
Observations 1913 1,913 1,913
F-value 12.22***
χ2 120.15***
Rho^2 0.054**
variable ΔCashHoldings is the cash difference in year t and year t-1 divided by total
assets, CashFlow is the income before extraordinary items. Neg is the indicator
variable of 1 if the company has negative cash flow and vice versa, Q is the total
market value of capital plus the book value of the asset minus the book value The sum is
the natural logarithm of the total asset, Expenditure is the capital expenditure divided
by the total assets, Acquisition is the indicator variable of 1 if the company has the
acquisition activity in year, ΔNCWC is the difference in non-cash flow divided by total
assets, ShortDebt is short-term debt divided by total assets. ***, **, * are respectively
34

Using the GMM4 method, the coefficient of CashFlow variable, the coefficient of
dummy variables and the interaction variables were not statistically significant,
indicating no difference in the impact of cash flow in the case of positive cash flow and
negative cash flow.
Using the Hausman test to determine the resultant choice between FEM and REM
models, the results were significant, so the null hypothesis was rejected, which means
that the FEM model had better results.
At the same time, the results of FEM regression show that the CashFlow variable is
positive and statistically significant at 5%, which is different from the results of Bao,
Chan Bao, Chan and Zhang (2012) and Riddick Whited (2009), when the findings of
the authors indicate that CashFlow is negatively correlated with CashHoldings. The
coefficient of Neg variables is negative and not statistically significant, so it can be
inferred that there is no difference in the change of cash holdings between firms with
negative cash flows and positive cash flows. The coefficient of the CashFlow*Neg
variable is negative and statistically significant at 10%, indicating that companies with
negative cash flow have an increase in cash holdings as the cash flow becomes weaker.
This is consistent with the results of Bao, Chan and Zhang (2012), who argued that
there was an asymmetry in the relationship between cash flow sensitivity and cash
holdings. The coefficient of CashFlow variable is positive, while the
CashFlow*Negative is negative, indicating that the influence of cash flow sensitivity on
cash holdings is relatively different in Vietnam between positive cash flows and
negative cash flows.
Why the impact of cash flow sensitivity on cash holdings in Vietnam is different from
previous studies, which can be explained through the data of the study. Research data
includes 274 non-finance companies listed on HOSE and HNX in the period from 2009
and 2015. 2008 was the year when the global financial crisis erupted. After two years of
2006, 2007, with impressive economic growth, Vietnam was named "The Tiger of
Asia" by international investors, along with the prospect thanks to WTO accession. The
crisis has occurred in 2008. The business situation of Vietnamese enterprises is also
deteriorating in the period of 2009 - 2015. The downside of the economy may have
35

forced businesses to cut back on investment. This is the reason why the cash holdings
of businesses increased. Moreover, in the economic crisis, business losses, preventive
motive force businesses to hoard cash as a buffer against the revenue shocks. In times
of crisis, the central bank has also implemented tightening monetary policy to cope with
rising inflation. This led to an increase in commercial lending rates. High cost of using
external capital has forced businesses to save cash to meet their payment needs. To
illustrate this argument, the case study for FPT Corporation. FPT is a big company; in
the post-crisis period of 2009 – 2015, the company still ensures profit and stable cash
flow. Although the company's cash flow in this period was positive, its cash holdings
did not diminish but instead increased, suggesting that the company tended to hoard
cash rather than investment. This is shown in the following table:
Table 4. 8: Cash Flow and Cash of FPT Corporation for the period 2009 – 2015
Year 2009 2010 2011 2012 2013 2014 2015
Cash
1,710,055 2,021,163 2,455,105 2,385,047 2,508,299 2,626,399 3,170,965
flow
Cash 2,310,510 1,436,128 2,902,383 2,318,915 2,750,971 4,336,282 3,584,709
Unit: Million Dong
From the table, the results of the study are consistent with the situation of companies in
Vietnam between 2009 and 2015, when companies have positive cash flows, companies
will tend to accumulate more cash than to invest, due to the limited availability of
financing resources at this stage.
The coefficient of CashFlow*Neg in FEM regression is negative and statistically
significant, indicating that companies with negative cash flow will have an increase in
cash as the cash flow becomes negative and vice versa. This contrasts with the findings
of Bao, Chan and Zhang (2012). According to the authors, companies with negative
cash flow could not increase their cash reserves as these companies cannot stop bad
projects immediately. Bao, Chan and Zhang argued that there were three reasons that
companies could not immediately cancel unprofitable projects. First, most projects were
based on bidding and there was always a binding contract, so abandoning the project
36

before the contract ends was a breach of contract, and was often impossible. Second,
administrators wanted to hide bad news. In the context of the economy in crisis,
investors were very sensitive to information, so abandoning a project could transmit
information that the company was experiencing financial problems, which may make
the situation worse, so managers always chose to hide bad news as long as possible,
until good information neutralized the influence of the bad news. Finally, the effect of
agency problem, managers could use the company's money to invest in projects with
negative NPVs to maximize personal benefits, so managers may not want to terminate
these projects immediately.
However, the findings in the study are consistent with findings of Riddick and Whited
(2009), Riddick and Whited suggested that a company with negative cash flow was
investing in projects with negative NPVs, or the effective of the company's tangible
assets decreased. Thus, when the company had negative cash flow, they would stop
investing in projects and would not buy low-yielding tangible assets, which would
increase the company's cash reserves.
The study has demonstrated the effect of cash flow sensitivity on cash holdings in
Vietnam and shows that there is an asymmetric in cash flow sensitivity between the two
group negative cash flows and positive cash flows. The differences in the impact of
cash flow sensitivity in Vietnam compared to previous studies may be explained by the
economic characteristics of Vietnam during the study period.
Financial constraints are when a company has difficulty in accessing external sources
due to company characteristics or the cost of these funds is too high. Bao, Chan and
Zhang (2012) demonstrated that financial constraints could affect a company's cash
holdings. In this section, examining the impact of cash flow sensitivity on cash
holdings, the study adds financial constraints to consider the effect of this factor on cash
holdings. To divide the sample into two financially constrained and financially
unconstrained groups, the study uses three methods: WW index, KZ index and dividend
payments. The WW index is based on Whited and Wu (2006) and KZ based on Kaplan
and Zingales (1997). These are two indicators used to distinguish companies with
37

financial constraints based on their own characteristics. Bao, Chan and Zhang (2012)
suggested that the WW was more appropriate than the KZ, so the study will use both
indicators to compare and find suitable indicators for the Vietnamese economy. When
dividing based on dividend payments, if the company does not pay dividends in year,
the company will be assessed as having financial constraints. Because not paying
dividends indicates that it is difficult for companies to access external capital, so the
company will retain cash to finance its operations instead of paying dividend for its
shareholders.
Table 4. 9: The number of observations of companies by year divided into
three categories
Criteria
KZ index WW index Dividend
A B A B A B
1. KZ index
Constraint (A) 720
Unconstraint (B) 1,198
2. WW index
Constraint (A) 182 294 476
Unconstraint (B) 538 904 1,442
3. Dividend
Constraint (A) 279 168 266 181 447
Unconstraint (B) 441 1030 210 1261 1,471
38

Table 4. 10: The summary statistics for the cash holdings of the two groups
of companies by the three classification criteria
Mean Std dev N
1. KZ index
Constraint (A) 0.064 0.067 720
Unconstraint (B) 0.148 0.139 1,198
p-value (A – B= 0) 0.00
2. WW index
Constraint (A) 0.105 0.138 476
Unconstraint (B) 0.121 0.119 1,442
p-value (A – B= 0) 0.02
3. Dividend
Constraint (A) 0.074 0.108 447
Unconstraint (B) 0.130 0.126 1,471
p-value (A – B= 0) 0.00
39

Table 4. 11: Estimation results for financial constraints
Dep.Var: KZ Index WW Index Dividend
ΔCashHoldings
CashFlow 0.136**(0.067) 0.089*(0.053) 0.092(0.117)
Neg -0.020(0.026) -0.009(0.023) -0.036*(0.021)
CashFlow*Neg -0.165(0.105) -0.071(0.075) -0.207(0.160)
Constraint -0.004(0.010) -0.025(0.017) -0.014(0.013)
CashFlow*Constraint -0.055(0.069) 0.286(0.179) 0.035(0.130)
Constraint*Neg 0.016(0.031) 0.005(0.0295) 0.035(0.031)
CF*Constraint*Neg 0.014(0.114) -0.454**(0.217) 0.049(0.174)
Q 0.022(0.014) 0.021(0.014) 0.023*(0.014)
Size 0.008***(0.003) 0.009***(0.003) 0.009***(0.003)
Expenditure -0.044*(0.025) -0.045*(0.025) -0.044*(0.025)
Acquisition 0.021(0.017) 0.0196(0.017) 0.0196(0.017)
ΔNCWC 0.045***(0.007) 0.047***(0.007) 0.046***(0.007)
ShortDebt -0.059**(0.027) -0.068***(0.026) -0.064**(0.026)
Constant -0.099***(0.037) -0.098***(0.038) -0.094**(0.0395)
R-squared 0.065 0.067 0.064
Number of company 274 274 274
depreciation over total assets. Neg is the indicator variable of 1 if the company has
negative cash flow and vice versa, Constraint is the indicator of 1 if the company is
rated financial constraint in year, Q is the total market value of the asset plus the book
value of the asset minus the book value of the capital divided by the total book value of
40

the asset, Size is the natural logarithm of the total asset, Expenditure is Capital
expenditures divided by total assets, Acquisition is indicator variable 1 if the company
has acquisitions in the year, ΔNCWC is the difference in non-cash flow divided by total
assets, ShortDebt is the debt in short-term weighted by total assets. ***, **, * are
Table 4.11 shows the empirical results of the equation (2). In equation (2), the study
combines the Constraint dummy variables (financial constrained firms receive a value
of 1) and the interaction variables with Constraint variables. The CashFlow variable is
not statistically significant in the dividend payout measure, in the two KZ and WW
index, the coefficient of CashFlow variables is positive and significant at 5% and 10%
respectively, indicating that KZ and WW index are likely to be the appropriate criteria
to assess the impact of cash flow sensitivity on cash holdings in financially constrained
companies.
For all three measurement methods, the KZ, WW index and dividend payments, the
coefficient of Constraint, Constraint*Neg and CashFlow*Constraint are not statistically
significant. This result shows that the financial constraint does not affect the cash flow
sensitivity of companies in Vietnam, based on classification criteria as KZ and WW
index. It shows that the financial constraints themselves do not have a single impact on
the decision to hold cash. However, according to the WW index,
CashFlow*Constraint*Neg has a negative coefficient and is statistically significant (-
0.454 at 5% significance level). According to Riddick and Whited (2009), when a
company had many projects with low or even negative NPVs, the company would have
difficulty in cash flow, when the company tended to end its investment and spending on
low-productivity tangible assets, this would lead to an increase in the company's cash
reserves. In addition, Bao, Chan and Zang (2012) argued that firms had financial
constraints because of the limited access to capital, the greater negative cash flow they
had, the less cash they would be able to finance its projects in order to ensure their cash
holdings. In addition, due to the economic characteristics of Vietnam during the period
of the sample, tightening monetary policy made it harder for companies to access more
capital, leading to an increase in the amount of cash held by companies for ensuring
41

liquidity of the company as well as waiting for opportunities in prospects projects in the
future.
4.2.3 Effects of cash flow sensitivity on cash holdings under agency problem
Previous studies have shown that the agency problem influences the cash holdings of
companies. Dittmar, Mahrt-Smith, and Servaes (2003) found evidence in many
countries indicating that companies would hold more money in countries having larger
agency problem. Bao, Chan and Zhang (2012) found that the effect of cash flow
sensitivity on cash holdings was greater for firms with stronger external controls, i.e.
less agency problem. In the model of the influence of agency problem and cash flow
sensitivity, the study combines the Inst variables (firms with a percentage holding by
institutions that are in the top 10% will receive a value of 1) and the variables
interacting with the Inst variable will determine whether the representation problem will
affect the relationship between cash flow sensitivity and cash holdings.
42

Table 4. 12: Estimation results of the model for agency problem
Dep.Var: GMM4 FEM REM
ΔCashHoldings
CashFlow -0.019(-0.20) 0.103**(0.050) 0.073**(0.033)
Neg -0.003(-0.16) -0.005 (0.020) 0.007(0.018)
CashFlow*Neg 0.029(0.27) -0.148(0.102) -0.064(0.085)
Inst -0.004(-0.2) -0.004(0.026) 0.008(0.015)
CashFlow*Inst 0.122(1.11) 0.163(0.133) 0.036(0.102)
Inst*Neg -0.023(-0.43) -0.053(0.054) -0.032 (0.048)
CashFlow*Inst*Neg -0.378**(-2.34) -0.211(0.274) -0.295(0.241)
Q 0.025**(2.54) 0.022**(0.009) 0.023***(0.006)
Size 0.00003(0.03) 0.008***(0.002) -7.39e-06(0.0014)
Expenditure -0.044*(-1.90) -0.044**(0.0196) -0.046**(0.018)
Acquisition 0.016(1.07) 0.021(0.013) 0.017(0.011)
ΔNCWC 0.044***(6.72) 0.046***(0.006) 0.044***(0.006)
ShortDebt -0.038***(-2.76) -0.061**(0.026) -0.033***(0.012)
Constant 0.012(0.77) -0.099***(0.0299) 0.003(0.018)
depreciation over total assets. Neg equals zero if in that year the firm has positive cash
flow and one otherwise, Inst is the indicator variable 1 if the number of shares held by
the organization is in the 10th The highest value in year t and vice versa, Q is
calculated by total of the market value of the capital and the book value of assets minus
the book value of the capital and divided by the book value of assets, Size is the natural
logarithm of total asset, Expenditure is capital expenditure divided by total assets,
43

Acquisition is variable indicator with 1 if the company has acquisitions in the year,
ΔNCWC is the difference in non-cash flow divided by total assets, ShortDebt is the debt
in short-term weighted by total assets. ***, **, * are respectively significant at 1%, 5%,
10%)
Table 4.12 shows the empirical results of the equation (3). Using the Hausman test to
determine the resultant choice between FEM and REM models, the results were
significant, so the null hypothesis was rejected, which means that the FEM model had
better results.
Regression results in FEM and REM showed that the coefficient of CashFlow variable
was positive and statistically significant, indicating that cash flow sensitivity persisted
in the agency cost hypothesis. In variables interacting with Inst, in FEM and REM
regression, there were no statistically significant variables. However, for the results
from the GMM4 regression, the CashFlow*Inst*Neg variable was negative and
significant (-0.378 at the 5% significance level). The regression results of the model
show that the share holding of institutional has a relative effect on the cash flow
sensitivity of companies in Vietnam. According to Bao, Chan and Zhang (2012), the
larger the number of shares held by institutions, the more likely it would prevent
managers of the companies to pursue ineffective projects to seek personal profit; so the
firm’s cash holdings will increase when the company has negative cash flow. In the
case of Vietnam, external controls are also influenced by important factors including
cross-investment and cross-ownership. Roughly cross-investment happens when both
companies take turns holding each other's shares. This cross-ownership issue has
reduced the effectiveness of external control. Cross ownership negatively affects
corporate governance. In many cases, managers can make decisions that are not purely
for business purposes, not for the benefit of the business, of shareholders, especially
small shareholders, shareholders do not have the rights to dominate, manage and run
enterprises. This may be the cause that there is no longer the positive influence of the
external control element of the company making institutional share holdings no longer
affect the cash flow sensitivity for companies in Vietnam, according to the results of the
study.
44

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