In this paper we investigate the relationship between financial constraints and firm investment. This research uses data from the Vietnamese Stock Exchange, the Ho Chi Minh City Stock Exchange, and the Unlisted Public Company Market to examine the role of financial constraints on firm investment. The data are collected for the period of 2006 to 2017, and all of the variables necessary for a proper model are presented in Appendix A. The results of this research suggest that the level of financial constraint can have a profound impact on the allocation of resources.
Regression results for the whole sample and with firm-size effect are presented in Tables 3a and 3. The coefficients I/K and S/K are positive and statistically significant at 5% across all regressions. Furthermore, we find a positive correlation between current investment and previous investment to capital. This indicates that higher investment in the past likely translates to higher investment in the current period. Hence, this research is consistent with the existing literature on small firm investments and finance.
The research also confirms previous findings. Although financial leverage is negatively related to firm investment, it is less significant in high-information-asymmetric firms. As a result, a larger amount of financing is required to sustain growth. In contrast, a small firm with a high level of information asymmetry is not likely to benefit from more government support. In addition, small firms cannot compensate for underdeveloped financial and legal systems. In such situations, alternative sources of finance are needed.
The empirical results suggest that financial market reforms in developing countries can improve firms’ investment efficiency. By removing entry barriers and creating a competitive environment among banks, these improvements would likely increase investment in the long run. As a result, a larger share of companies will benefit from foreign capital and trade. The research also shows that the more capital flows, the more domestic credit is available to finance them. However, it is still possible for small firms to experience a negative correlation between their current investment and capital.
The relationship between financial leverage and firm investment is positive. The relationship is negative in low-information-asymmetric firms, but is not significant in high-growth firms. As such, the research suggests that financial leverage can negatively affect the firm’s investment. The results also point to a negative correlation between firm size and the level of information asymmetric firms. The two factors are not related to each other. The results show that the relationship between finance and firm investment is weak in high-information-asymmetric firms, but it is present in low-growth companies.
The relationship between financial leverage and firm investment is negative in underdeveloped countries. This is particularly true for firms that are highly information-asymmetric. Moreover, in a country with a strong financial system, the government’s funding for small firms is less competitive and thus, firms can afford to invest more in their firm. For example, a firm with a large market size will have a lower ratio of investment to capital than a small firm.