Determinants on capital expenditure of non-financial listed companies on Hanoi Stock Exchange

Capital expenditure is cash outflows for property, plant and equipment. Capital expenditure

decision is a strategic decision at both the macro and micro levels. Capital expenditure is one of the

most crucial managerial decisions whether at the institutional (macro) or the organizational (micro)

levels. At the macro level, capital expenditure affects aggregate demand and gross national

product, economic development and business cycles. At the micro level, it influences production

decisions and strategic planning. Therefore, to make a rational decision, the enterprise must make

plan for investment expenditure and need to carefully consider the factors affecting the

investment. This paper attempts to find empirical evidences of the factors affecting capital

expenditure of non-financial listed companies on the Hanoi Stock Exchange. The paper uses data

from 190 non-financial listed companies on the Hanoi Stock Exchange from 2010 to 2017. By using

General Method of Moments (GMM), the results of the study showed that the free cash flow and

company size have positively effect on capital expenditure while interest expense and depreciation

expense have negatively effect on capital expenditure of non-financial companies listed on the

Hanoi Stock Exchange

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es were related to the dependent variable in the model (CE). However, to study the exact impact of independent variables on the dependent variable, regression model is required. 5.3. Regression Results • FEM Regression Results Table 3: Results from fixed effects models CE Coef. Std. Err. T P>t CEt-1 0.089 0.034 2.610 0.009 FCF 0.058 0.055 1.040 0.296 DIV 0.012 0.036 0.330 0.744 IE -0.055 0.046 -1.190 0.234 DPRN -0.189 0.102 -1.860 0.063 WC -0.218 0.070 -3.130 0.002 SIZE 1.775 0.183 9.730 0.000 _cons -17.590 4.181 -4.210 0.000 (Source: Processing results of author) • REM Regression Results Table 4: Results from random effects models CE Coef. Std. Err. z P>z CEt-1 0.326 0.028 11.650 0.000 FCF 0.166 0.043 3.890 0.000 DIV -0.012 0.027 -0.440 0.657 IE -0.062 0.028 -2.210 0.027 DPRN 0.165 0.053 3.110 0.002 WC -0.137 0.046 -2.960 0.003 SIZE 0.579 0.085 6.830 0.000 _cons -2.714 1.015 -2.670 0.007 (Source: Processing results of author) 178 • GMM Regression Results Table 5: Results from GMM CE Coef. Std. Err. z P>z CEt-1 0.271 0.080 3.410 0.001 FCF 0.109 0.064 1.700 0.089 DIV 0.066 0.045 1.470 0.141 IE -0.118 0.061 -1.930 0.054 DPRN -0.168 0.119 -1.410 0.158 WC -0.487 0.071 -6.830 0.000 SIZE 1.874 0.192 9.760 0.000 _cons -19.161 3.712 -5.160 0.000 (Source: Processing results of author) • Summary results of three models Table 5.6: Summary of regression results (1) (2) (3) Variables Model 1 (FEM) Model 2 (REM) Model 3 (GMM) L.CE 0.0894*** 0.326*** 0.428*** (0.0342) (0.0280) (0.0433) FCF 0.0580 0.166*** 0.246*** (0.0555) (0.0427) (0.0453) DIV 0.0117 -0.0121 0.00614 (0.0358) (0.0272) (0.0310) IE -0.0546 -0.0619** -0.0521* (0.0459) (0.0280) (0.0306) DPRN -0.189* 0.165*** -0.255*** (0.102) (0.0532) (0.0931) WC -0.218*** -0.137*** -0.365*** (0.0696) (0.0462) (0.0520) SIZE 1.775*** 0.579*** 0.881*** (0.183) (0.0848) (0.125) Constant -17.59*** -2.714*** -0.222 (4.181) (1.015) (2.151) Observations 1,213 1,213 538 R-squared 0.145 Number of i 190 Standard errors in parentheses *** p<0.01, ** p<0.05, * p<0.1 (Source: Processing results of author) 179 Research results indicate that free cash flow (FCF), firm size (SIZE), interest expense (IE), working capital (WC) have close relationship with capital expenditure but in different directions. In particular, free cash flow (FCF), the size of the company (SIZE) positively affects the cost of capital expenditure (CE) while interest expense (IE) and working capital (WC) Depreciation (DPRN) have the opposite effect on capital expenditure (CE). Dividend (DID) does not affect capital expenditure (CE) 6. Discussions and recommendations 6.1. Discussions Firstly, evidences from regressions results showed that: there is a fairly positive relationship between free cash flows and capital expenditures. The relationship between cash flow and capital expenditure is an important ratio for researchers and investors. The significance of this relationship demonstrates the ability of the companies listed on Hanoi Stock Exchange to acquire long-term assets by using free cash flow. As the rate of relationship between cash flow and capital expenditure increases, it can be a positive sign. From the organizations considered, it was established that there is a positive fairly significant relationship between free cash flows and capital expenditure that is as the level of free cash flows increase, the level of capital expenditure increases. Firms prefer internally generated funds since they are cheaper to finance their investment needs especially short term projects and long-term projects that require immediate commitment (those that may not wait for strategic plans to be made). The results of this study are consistent with the findings of Meyer and Kuh (1957), Becker and Sivadasan (2006), Hovakimian and Hovakimian (2009), Alti (2003), Kinyanjui Michael M. (2013). Thus, the first research hypothesis is accepted. Secondly, the results of the study show that the dividend is not related to the capital expenditure. This study’s results agrees with Fama (1974). Fama (1974) carried out a research on the relationship between investment decisions and dividend decisions. His findings revealed that capital expenditure decisions and dividend decisions are not correlated; that two types of decision making do not affect each other. Thus, the second hypothesis is rejected. Thirdly, the study results show that interest expense is negatively correlated with investment in fixed assets. The results of this study agree with the results of Rittenberg and Tregarthen (2014) and Sigeng Du (2016). According to Rittenberg and Tregarthen (2014), there is a negative relationship between interest rate and capital expenditure. Higher interest rate can increase the cost of borrowing used to finance capital expenditure and can reduce the quantity of investments. Thus, the third hypothesis is rejected. Fourthly, the results of the study show that depreciation are inversely related to the capital expenditure. Thus, the fourth hypothesis is rejected. This result means that during the research period, when the firm has a large amount of fixed assets (reflected in the large fixed 180 asset depreciation expense), the enterprise will not pay attention on capital expenditure. The company will set high priority on other activities such as financing activities to pay dividend to shareholders. The findings are consistent with the findings of Kinyanjui Michael M. (2013). Fifthly, the research results show that the size of the company is closely related to the capital expenditure of company. This is very reasonable because fixed assets are valuable assets and investing in fixed assets will increase the total value of the company's assets. Large companies will always be big winners for fixed asset investment and vice versa. The results of this study are consistent with the findings of Sigeng Du (2016). Thus, the fifth research hypothesis is accepted. Sixth, the study found that working capital was negatively correlated with capital expenditure on fixed assets. This result is reasonable because working capital and fixed assets are two types of assets that constitute the total assets of an enterprise. According to the business strategy of each enterprise, they should decide whether to invest in fixed assets or current assets. Fixed assets are assets of great value and long life, long repayment period. At the same time, current assets are short-term assets, short-term returns. For companies listed on the Hanoi Stock Exchange, when companies choose to spend their investment strategy on current assets, the amount of money invested in current assets will be less. Therefore, the relationship between capital expenditure and working capital is counter- productive. The findings are consistent with those of Sigeng Du (2016) and Ding, Guariglia & Knight (2013). Thus, the sixth hypothesis is rejected 6.2. Contributions of the research and recommendations Firstly, in this study, it was observed that the relationship between free cash flows and capital expenditure of firms quoted at the Hanoi Stock Exchanges have a fairly significant relationship. Various stakeholders strive to carry out researches in order to be able to identify which are other major factors that affect the performance of their industry. This study will enable them to know the main factors that may influence investment decisions to ensure that firms make more factual investment decisions increasing their return on assets, thereby increase in their financial performance and maximize shareholders’ wealth. Secondly, in this study, it can be observed that most firms give much attention to profits after tax or earnings, which are not as refined as free cash flows. Therefore, I would recommend the Ministry of Finance in Vietnam should issue regulations to require all enterprise to disclose the value of free cash flows on financial reporting. Having this information will be considered to a better indicator of a company's financial health. 181 7. Conclusion Capital expenditure is a payment where the benefit continues over a long period and it will improve productivity of enterprises. We are living in the digital age, biotechnology and computer development transforming all aspects of global socio-economic life, so raising capital expenditure to keep up the trend of the development of the era is a wise choice. Factors affecting the decision to spend on capital expenditure are free cash flow of the company, the size of the company, the interest expense and working capital. The results of this research are really meaningful for investors, business executives and state management authorities to make effective decisions. 8. References Alti, A. (2003), “How sensitive is investment to cash flow when financing is frictionless?”, The Journal of Finance, 58(2), 707–722. Bo Becker, j. S. (2006), “The effect of financial development on the investment-cash flow relationship cross-country evidence from Europe”, ECB lamfalussy fellowship programme B. Becker and J. Sivadasan, (2006) “The effect of financial development on the investment-cash flow relationship: cross-country evidence from Europe” ECB publications. Myers, S. (1984), “Corporate Financing and Investment Decisions when firms have information investor do not have”, Journal of Financial Economics, 13, 187-221 Modgliniani, F. & Miller, M. (1958), “The Cost of Capital, Corporation Finance and the Theory of Investment”, The American Economic Review, 48, 120 – 127. Modigliani F. and M. Miller (1958). “The Cost of Capital, Corporation Finance and the Theory of Investment.” American Economic Review, 48, 261-97 Ding, S., Guariglia, A., & Knight, J. (2013), “Investment and financing constraints in China: does working capital management make a difference?”, Journal of Banking & Finance, 37(5), 1490-1507 Fama, E. (1974), “The Empirical Relationship between the Dividend and Investment Decisions of Firms”, American Economic Review, 64, pp.304-318. Fazzari, Steven M., Hubbart, Glenn R., and Petersen, Bruce C. (1988), “Financing Constrains and Corporate Investment”, Brooking Papers on Economic Activity, 19: pp. 141- 195. Geng, N. and P. N’Diaye, 2012, “Determinants of Corporate Investment in China: Evidence from Cross-Country Firm Level Data”, IMF Working Paper 12/80 (Washington: International Monetary Fund). Jensen, m. C. (1986), “Agency costs of free cash flow, corporate finance, and take overs”, American economic review, May 1986, vol. 76, no. 2, pp. 323-329 182 Hovakimian, A., & Hovakimian, G. (2009), “Cash flow sensitivity of investment. European Financial Management”, 15(1), 47-65 Kinyanjui Michael M. (2013), “The relationship between free cash flows and investments of firm quoted at the Nairobi securities exchange”, partial fulfilment of the requirements for the degree of Master of science in finance of the university of Nairobi” Lê Khương Ninh, và cộng sự (2008), “Phân tích các yếu tố ảnh hưởng đến quyết định đầu tư của các doanh nghiệp ngoài quốc doanh ở Kiên Giang”, Tạp chí Khoa học 9, trang 103-112. Meyer, J. and E. Kuh (1957), “The Investment Decision”, Cambridge, MA: Harvard University Press. Navid Saffarizadeh (2014), “The Relationship Between Cash Flow And Capital Expenditure: Evidence From German Automobile Sector”, in partial fulfillment of the requirements for the Degree of Master of Science in Banking and Finance Eastern Mediterranean University Rittenberg L. and Tregarthen T., (2014) “Principles of Macroeconomics,” Flat World Education, Inc. v. 1.0 Subramanyam, K. R.; and J. J. Wild, (2009) “Financial statement analysis.” 10th edition McGraw-Hill/Irwin Sigeng Du (2016), “Testing the relationship between Free Cash Flow and Capital Expenditure in Canadian listed companies”, A Research Project Submitted in Partial Fulfillment of the Requirements of the Degree of Master of Finance Saint Mary’s University. Vogt, S. C. (1997). Cash flow and capital spending: Evidence from capital expenditure announcements. Financial Management, 26(2), 44–73.

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