iii

TABLE OF CONTENTS

ACKNOWLEDGEMENTS .......................................................................................... i

LETTER OF DECLARATION .................................................................................. ii

TABLE OF CONTENTS ............................................................................................ iii

LIST OF TABLES ........................................................................................................ v

ABBREVIATIONS ...................................................................................................... vi

ABSTRACT ........................................................................................................... vii

CHAPTER 1 INTRODUCTION ............................................................................. 1

1.1 Background of the study ........................................................................................ 1
1.2 Research Objectives ............................................................................................... 4
1.3 Research Questions ................................................................................................ 4
1.4 Significance of the study........................................................................................ 5
1.5 Scope and Limitations ........................................................................................... 6
1.6 Thesis Structure ..................................................................................................... 6

CHAPTER 2 LITERATURE REVIEW AND HYPOTHESIS

DEVELOPMENT ......................................................................................................... 8
2.1 Discussion of concepts........................................................................................... 8
2.1.1 Corporate cash holding ............................................................................. 8
2.1.2 Economic policy uncertainty (EPU) ......................................................... 9
2.2 Theories on corporate cash holdings ................................................................... 10
2.2.1 Trade-off theory of corporate cash holdings .......................................... 11
2.2.2 Pecking order theory of corporate cash holdings ................................... 13
2.2.3 Keynes (1936)’s theory of liquidity preference ...................................... 13
2.2.4 Agency theory ......................................................................................... 14
2.3 Determinants of corporate cash holdings ............................................................ 15
2.3.1 Ability to generate operating cash .......................................................... 15
 iv

2.3.2 Asset quality and allocation .................................................................... 16

2.3.3 Investment and capital expenditure ........................................................ 18
2.3.4 Firm size ................................................................................................. 18
2.4 Economic policy uncertainty (EPU) and corporate cash holdings ...................... 18
2.5 Research Hypotheses ........................................................................................... 20

CHAPTER 3 DATA AND METHODOLOGY .................................................... 22

3.1 Data Collection .................................................................................................... 22
3.2 Research methodology ......................................................................................... 22
3.2.1 Economic policy uncertainty (EPU) index ............................................. 22
3.2.2 Variable definition .................................................................................. 23
3.2.3 Research model ....................................................................................... 24
3.2.4 Research approach and method .............................................................. 24

CHAPTER 4 EMPIRICAL RESULTS ................................................................ 25

4.1 Descriptive statistics ............................................................................................ 25
4.2 Correlation matrix ................................................................................................ 26
4.3 Pooled-OLS regression ........................................................................................ 26
4.4 Fixed-Effects Regression ..................................................................................... 28
4.5 Findings................................................................................................................ 29

CHAPTER 5 CONCLUSIONS AND RECOMMENDATIONS ........................ 32

REFERENCES ........................................................................................................... 35
 v

LIST OF TABLES

Table 4-1: Descriptive statistics ................................................................................... 25

Table 4-2: Correlation matrix ....................................................................................... 26
Table 4-3: Pooled-OLS Regression .............................................................................. 28
Table 4-4: Fixed-effects Regression ............................................................................. 29
 vi

ABBREVIATIONS

EPU Economic Policy Uncertainty

FE Fixed Effect

GDP Gross Domestic Product

HOSE Ho Chi Minh Stock Exchange

IMF International Monetary Fund

POT Pecking Order Theory

PPP Purchasing Power Parity

 vii

ABSTRACT
Time and money have long been considered scarce resources for all firms. However,
many firms find managing appropriate cash level as a major difficulty. The shortage of
maintaining an appropriate level of cash might cause serious problems in business
operations. For example, many scholars assert that high cash storage would incur a high
opportunity cost. Further, if the firm ineffectively distributes its resources; this might
render the profitability of the shareholders. Henceforth, this paper is an attempt to adjust
this problem by investigating major factors affecting of cash holding level of the public
listed firms in HOSE exchange. Furthermore, I incorporate the effects of the global
economic uncertainty index with intention of capturing the director’s reaction toward
international uncertainty. To account for this research question, a sample containing
235 companies was formed. For the method, the fixed-effects model in addition to the
pooled OLS regression was used to address the potential endogeneity issues caused by
omitted variables. The results show that firms in the sample display a strong resistance
toward changes in the Global EPU index. In contrast, firm-specific financial
characteristics pose significant impacts on firm’s cash holding decision. More
specifically, the hypothesized relationships between cash holding ratio and firm’s size,
net working capital, operating cash flow, and fluctuation in cash flow are confirmed.
Leverage is found to have a positive effect on cash holding ratio, supporting the trade-
off theory. However, the effects of tangible assets and capital expenditure on cash
holdings are in contrast to what was suggested by previous studies. The major reason
underlying these differences might rest on the financing options of the firms. Finally,
this research provides some implications and instructive recommendations for both
firms and policy makers to better manage the cash holding level.
 1

CHAPTER 1 INTRODUCTION

1.1 Background of the study

Cash has long been considered as the primary asset of a company since it is the building-
block for any enterprise. Many scholars emphasize the magnitude of the cash holding
level. Among many disputable topics related to this stream of research, the cash holding
level has recently received attention from academics. Indeed, cash is not only the root
of investment decisions but also, plays a critical role in the hardship period. In
definition, the cash level is perceived as cash and its equivalent that the company
decides to choose. Depending on different accounting frameworks, but the most quoted
concept of cash equivalents shares similar merit which is highly-liquid assets including
bank deposit, gold or other currency reserves, and marketable securities. According to
Dittmar & Mahrt-Smith (2007), large US firms accumulated a remarkably high level of
cash, which equals 13% of the companies’ total assets. On the other side of the Atlantic
ocean, a study by Al-Najjar & Belghitar (2011) showed that the cash ratios of the UK
firms is 9% of the total assets. In Vietnam, although cash holding level research yet to
obtain significant consideration of the academic; nonetheless there are remarkable
researches has been conducted. Thanh (2019), for example, offered evidence suggesting
an optimum threshold of 9.93%. Drawing from 306 listed companies in HOSE and
HNX stock exchange, he contends that if the company holds more cash than this
checkpoint, the overall performance of the firm would be damaged.

Observing from the report of the International Monetary Fund (IMF), the cash holdings
ratio of the US firms appears to be volatile over time. Nonetheless, the overall trend is
increasing. In number, the average ratio of cash to asset claims from 5.5% to 14.73%
during the 1980-2004 period (Bates et al., 2009). The 1980s recession and dot.com
bubble play a central role in the manager’s decision of increasing cash reserves.
Meanwhile, Khuong et al. (2019) documented that this rate can reach 71 per cent for
energy firms in Vietnam. The second-quarter reports in the financial year 2017 of the
listed energy firms in Vietnam reveal that the majority of enterprises stocked cash and
 2

cash equivalents up to thousands of billion VND. This figure far exceeds the value of
total assets of many SMEs present at the stock market in this country. At the end of the
second quarter of 2017, Vietnam Gas Corporation's financial report showed that this
firm had hoarded cash and cash equivalents reaching 14,551 billion VND which shows
an increase of nearly 1,000 billion VND as compared to the beginning of the same year.
On the other hand, electricity firms, both hydropower and thermoelectricity, have
witnessed roughly double-digit profit growth recently and distributed much cash
dividends to shareholders every year. Surprisingly, these firms have not received
investors' attention and their market prices are rather low.

The cash holdings level decision of the manager would indeed be influenced by many
factors. One of the most cited theory is that the manager must consider the trade-off
relationship between the sustainability and opportunity cost of holding unnecessarily
extra cash (Shyam-Sunder & C. Myers, 1999). Many other scholars have found
evidence supporting this point of view. Le et al. (2018) suggest an appropriate level of
slightly higher than 5% will ascertain the business performance of UK firms. US firms
seem to be more conservative. Martínez-Sola et al. (2013) further affirmed the
presumption in which they found a concave relationship between cash level and a firm’s
profits. More specifically, their model shows that if the company director holds more
than 14.13% of assets in cash, the opportunity cost of the extra cash would outpace the
additional assurance of the high cash level. It, thus, damages the firm’s value. Another
point of view, which is proposed by Harford (1999), implied that firms accumulated a
huge amount of cash for future acquisition often result in ineffective investments and
thus lead to decreasing operational efficiency. In the latest attempts, he further found a
positive correlation between poor corporate governance and investment efficiency. As
he noted, an entrenched manager often exhibits irrational investment practices and not
fully aware of the opportunity cost of holding extra cash level (Chalmers et al., 2002).

The second opinion suggests that the gist of cash holdings decision rest on the manger’s
perception of risk and the firm’s value. As a matter of fact, the positive relationship
between cash ratio and firm’s value has been well-documented in many researches.
 3

Saddour (2006) suggests that firms with an additional level of cash would endow with
better options and therefore, more efficient in operation. This would finally be added to
the firm’s value. In the same token, Bates et al. (2009) discover a positively linear
connection between the firm’s manager perception of risk and the cash holdings level.
In particular, the manager of the company often seeks a balanced cash level in which
the risk and the firm value are thoroughly considered.

The third point of view suggests that the relationship between cash holding level and
firm’s value should be nonlinear. Martínez-Sola and her colleagues (2013) are the
primary advocacy of this perspective. Their study covers data of the US industry in 6
years from 2001-2007 and found a concave relationship between the two
aforementioned variables. Markedly, the rationale behind this situation strictly follows
the trade-off theory, in which they contend that the manager of the firm identifies
optimum cash level by considering costs and benefits of cash holdings. Based on this
optimum level, the company will adjust the cash level in accordant to the following
costs to maximize its value. The empirical evidence of this concave relationship is
further confirmed by the study of Azmat (2014), who found evidence of a U-shape
relationship between the aforementioned variable with a turning point of 9.53%. In the
context of Vietnam, Thanh (2019) clearly explains the inverse U-shape using data from
2001-2008 of non-financial firms.

Among factors affecting corporate cash holdings, firm-specific characteristics have

been documented in prior studies. However, to the best of my knowledge, no research
examines the possible effect of macroeconomic factors on the cash holdings of
companies in Vietnam. To be more specific, prior studies have not investigated how the
corporate cash holdings of Vietnamese firms are affected by the global economic policy
uncertainty. It is common knowledge that the government's economic policy can cause
huge volatility and thus uncertainty in the business condition. This potentially has
detrimental impacts on the daily operation of corporates. Indeed, the possible
consequences of changing economic policy on private business operation, such as
public spending, tax, or monetary policy, have been well documented in previous
 4

literature. The original work of Baker et al.(2015) offers a new point of view in which
it measures the effects of economic policy uncertainty on the government fiscal policy.
This index would serve as the main interest independent variable in this research.
According to his research, the global economic policy uncertainty varies with a huge
variance during a period that has unstable political constraints among countries. For
example, the US index increased significantly during the gulf war and when the US
government was trapped in the Iraq war. In the global crisis of 2008, this index soared
as expected and peaked at the fiscal cliff crisis in 2011. On the contrary, this index
displays a fairly stable pattern during the Reaganomics. According to the research of
Stock & Watson (2012), the economic policy uncertainty index effectively describes
the impacts of government policy on the business condition. For example, Liu & Dong
(2020) claim that the global economic uncertainty index negatively affects the trade
credit. In number, they suggest for a percentage increase in EPU, the trade value would
reduce by 1.3%. Henceforth, given the significant influence of this index on the
economy, I expect that this index would significantly influence the corporate cash
holding level. This is the reason why I take GLOBAL ECONOMIC POLICY
UNCERTAINTY AND CORPORATE CASH HOLDINGS OF COMPANIES LISTED
ON HO CHI MINH STOCK EXCHANGE for my thesis.

1.2 Research Objectives

The purpose of this research is to discover effects of various factors on cash holdings
of Vietnamese firms. To the knowledge of the author, the factors to be investigated are
firm-specific factors and the global economic policy uncertainty (EPU) index which
measures the global policy-based economic uncertainty. The global EPU index is
constructed by Baker et al. (2015)

1.3 Research Questions

The research objective is accomplished by answering the research questions below:

1/ What are the firm-specific factors that affect the corporate cash holdings of
companies listed on HOSE?
 5

2/ Does the Global EPU index affect the corporate cash holdings of HOSE-listed
companies?

1.4 Significance of the study

This paper aimed to further broaden current knowledge regarding corporate cash
holding levels and their determinants. First, I explore a possible effect of economic
policy uncertainty on the cash holdings of Vietnamese firms. The effects of economic
policy on the firm decisions are documented in the literature but most of the studies
examine U.S. firms or focus on other corporate decisions. For example, prior studies
argue that policy uncertainties pose nothing but negative effects on firm-level capital
investment or M&A activities. Rising policy uncertainty would gradually create
dampening effects that will render the motivation investment. This situation has been
well documented in studies of Bargeron et al.(2017) and Gulen & Ion (2016). My study
offers a view that policy uncertainties may result in a higher cash holding level. As a
result, this paper leans more toward the financial side of corporate finance.

Second, this paper aims to contribute to cash holdings literature. Noticeably, previous
studies display overwhelming preferences toward firm-related variables (Al-Najjar &
Belghitar, 2011; Doan, 2020). Nonetheless, as Stock & Watson (2012) noted, the daily
business condition is heavily impacted by macro factors; thus it casts doubt on the
comprehensiveness of the traditional approach. Although other subsequent studies
quickly adapted and include other factors rather than internal ones, such as corporate
governance (Dittmar & Mahrt-Smith, 2007), tax (Khuong et al., 2019), and market risk
(Bates et al., 2009). However, those studies often focus on one particular aspect but fail
to record the panorama of the situation. Fortunately, Baker et al. (2015) offer a new
index capturing essential economic uncertainties; whereby particularly suits my
research. Henceforth, this paper broadens those researches by discovering the potential
impacts of aggregate economic uncertainty on the corporate cash holdings decision.
 6

1.5 Scope and Limitations

I examine non-financial firms listed on Ho Chi Minh Stock Exchange. The sample
period is from 2017 to 2019. Accounting data are hand-collected using Vietstock
Finance and audited financial statements of companies. I exclude financial firms, such
as banks, insurance companies, investment funds, and securities companies, as it is
irrelevant to include organizations whose cash level is always higher than average in
the analysis. I also exclude firms with missing data or errors. Since there is no EPU
index of Vietnam available, I use the Global EPU index with the argument that Vietnam
is now an open market and hence possibly affected by the global uncertainty. The
Global EPU index is constructed by Baker et al. (2015) and downloaded from
https://www.policyuncertainty.com/. I use the annual index by computing the average
monthly indexes over twelve months.

A limitation of my study is that the data period is quite short, only three years, since I
have to hand-collect accounting data. Should the database available, I could extent my
study to cover more years. Another limitation is that the Global EPU index may not
truly reflect the economic policy uncertainty of Vietnam.

1.6 Thesis Structure

This thesis comprises of five chapters and is organized as follows:

Chapter 1 Introduction – Presents the background of the study, research objectives,

research questions, research significance, research scope and limitations, and thesis
structure.

Chapter 2 Literature Review - Introduces the literature review of relative previous

researches and theories; then develops hypotheses.

Chapter 3 Data and Methodology – Describes the data set and data collection; and
analyzes the research models and research methods.

Chapter 4 Empirical Results – Presents and discusses the key findings of the research
and their implications.
 7

Chapter 5 Conclusions and Recommendations – Summarizes the conclusions of the

research, provides suggestions and recommendations, and highlights research
limitations.
 8

CHAPTER 2 LITERATURE REVIEW AND HYPOTHESIS

DEVELOPMENT

This chapter is to review existing literature regarding the interested issue of this paper
and thus provide the basic theoretical framework leading the research flow. By
thoroughly reviewing antecedent literatures, the key hypotheses and its components will
be formed.

2.1 Discussion of concepts

2.1.1 Corporate cash holding

Cash is the lifeblood of organisation to retain financial stability and mitigate the harm
from adverse cash flow shocks due to financial distress. Cash holding is considered as
the precautionary financial measures. Cash holding topic is increasingly gained
attentions from the scholars and academic researchers (Al-Najjar & Belghitar, 2011;
Bates et al., 2009; Opler et al., 1999). The tradeoff principle of retaining cash is outlined
by Opler et al. (1999). In detail, according to trade-off theory, a business may benefit
from holding cash but also incur opportunity costs. Baumol (1952) points out that an
organization attempts to avoid the recurrent fund raising, reduce transaction costs, and
enhance the liquidation of non-cash assets for running and funding operations by
increasing cash holding. The more the amount of cash holding, the more positive the
net present value projects. Almedia et al.(2004) constructs a framework that indicates
that financially restricted businesses maintain more cash than firms having no cash
constraints, indicating that firms retain more cash for expansion.

The cost perspective of cash holding is recognized as widely associated with the low
returns on investment relative to other assets by previous literatures. Jensen (1986)
points out that the low control of additional cash assets results in the accumulation of
prerogatives and in return possibly misused as private benefits by someone in charge.
Dittmar et al (2003b) have the same consensus about holding a large sum of money
because they are concern about managers’ discretion to cash spending. Taking together,
holding an optimal amount of cash is an important liquidity management decision to
 9

avoid opportunity and agency costs of cash holdings and still maintain adequate
liquidity in case of emergency or for future profitable investment projects. Thus, it is
essential to understand factors affecting companies’ cash holding levels. The cash
holding literature has documented the effect of firm-specific factors on corporate cash
holdings but has not examined the possible effect of economic policy uncertainty on
this firm-level decision, especially for Vietnamese companies. My study attempts to fill
this gap in the literature.

2.1.2 Economic policy uncertainty (EPU)

The EPU index which stands for Economic Policy Uncertainty index is developed by
Baker et al.(2015). In order to measure nation policy uncertainty level, the EPU is built
on the basis of the three-dimensional monthly value-weighted average: specific policy
categories, back in time, and across countries. The first criterion applied to EPU is
constructed base on the frequency of key categories involved in policy terms and
economic uncertainty matters. In other words, EPU is calculated monthly as the average
proportion of newspaper articles covering economic policy uncertainty matters. By
normalizing these time series to unit standard deviation and introducing normalized
series, Baker et al. (2015) remove the effect of altering the amount of news over time
and between countries. The next criterion is to quantify the level of uncertainty about
the effect of change in tax codes and regulatory kick off in the following years. The last
criterion is the measure of dispersion among economic forecast variables of consumer
price index (CPI) and government spending. EPU indicates the response of government
decision makers to fiscal, regulatory, or monetary policy uncertainty.

Since the EPU index has not been constructed for Vietnam, I use the Global EPU index
with the argument that Vietnamese firms are more or less affected by the uncertainty of
the world economy, and hence might adjust their cash holding levels in response to the
Global EPU index. Davis (2016) learns from the study of Baker et al. (2016) to calculate
the monthly Global EPU index which is the average of monthly indexes based on three
components of 16 countries. Davis (2016) selects 16 countries to measure the Global
EPU index because the GDP-weighted average of the national EPU indexes of these 16
 10

countries constitutes two-thirds of global output, thus the Global EPU index represents
the major global economies. Each country EPU is able to capture country-specific
uncertainties about economic policy, tax codes, and fiscal and monetary policies that
are of primary interest to market participants. Thus, the Global EPU index provides a
useful measure to examine the effect of predictive power of global economic policy
uncertainty on cash holdings of corporations.

There are many studies about the rationale of EPU and GEPU. The effect of
macroeconomic variables including EPU index on stock market is emerging in recent
studies (Arouri et al., 2016). The uncertainty level related to potential policy and
regulatory outcomes also affect the liquidity of corporate investment of firms (Gulen &
Ion, 2016). Basher et al (2018) exert of GEPU index to examine the likelihood of high
volatility stocks in the shocks driving oil prices. Davis (2016) points out the GEPU
Index has risen sharply following the three recent recessions and examines how GEPU
contribute to the recessions as the cause and effect. In order to examine the explanatory
value of global macroeconomic variables for decision-making in business, together with
cash holdings, GEPU Index is also an acceptable measure. Demir and Ersan
(2017)present the evidence about the positive relationship between GEPU index and
cash holding decision of BRIC firms.

2.2 Theories on corporate cash holdings

Sceptical theorists adhere to the view that there is no need for holding cash since firms
can raise external fund whenever the internal fund is not sufficient (Gordon et al., 2017).
Nonetheless, these theories was built on an un-real assumption: the capital market is
perfectly operated. Yet this is often not the case in the real life. Actual practices of this
market involve many irrelevant decisions as has been shown in assets price bubbles
(Ozkan & Ozkan, 2004). Many theories urge to provide an appropriate explanation for
the manager’s rationale behind cash holdings decisions. Among others, trade-off and
pecking order theories have gained mutual consensus of scholars; in which these
theories are often cited as the most prevalent theoretical background guiding manager’s
decision of the cash holdings level. These two theories, though stems from capital
 11

structure theory, have proved themselves to be effective in explaining cash holding level
of firms (Dittmar et al., 2003; Drobetz and Grüninger, 2007).

The topic of the capital structure takes a long dispute among scholars. Modigliani &
Miller (1958) have been considered as fathers of capital theory. Since the first
publication, their paper set light for a new stream of research and rapidly become an
interesting field in financial academics. Following this original work, some major
theories quickly emerged and complement the primitive version of Modigliani & Miller,
which was criticized for being over-theoretical. Trade-off theory, as its name refers,
considers the costs and benefits of maintaining a current level of debt. Noticeably, it
fulfils the shortage of MM theorem by adding variables that represent the imperfection
of the capital market, for example, the effects of tax, or bankruptcy cost (Nicodano &
Regis, 2019). By balancing those costs and economic profits, an optimum capital
structure is then determined. Nonetheless, a major shortage of this theory stems from
the abstract and vague of the costs. Many managers find it very hard to thoroughly
reflect those costs in quantitative numbers (Altman, 1984) The second theory is the
pecking order theory, which is a more intuitive one. According to Baskin (1989), firms
should logically follow hierarchical financing to reduce the opportunity cost of
asymmetric information between internal directors and external stakeholders.
Notwithstanding these two theories were primarily built to explain the implicit reason
for capital structure; cash shares similar merits as debt in terms of opportunity costs and
benefits. Thus, it is expected that the corporate cash holdings level would
proportionately be answered by applying those theories.

2.2.1 Trade-off theory of corporate cash holdings

According to Dittmar & Mahrt-Smith (2007), the trade-off theory suggests that the
firm’s directors must balance the marginal benefits of holding an extra amount of cash
with its opportunity costs arising from keeping unwanted liquid assets. Regarding the
benefits side, Dittmar et al.(2003c) contend that a cash reserve would effectively
preclude the possibility of financial distress; hence it provides the company with
sufficient resources to not only survive but also maintain the daily operations. Further,
 12

as Ferreira and Vilela (2011) have pointed, extra cash reserve reduces the arbitrage and
lobby costs of rising external funds or liquidating other assets. Opler et al. (1999)
construct the motivation of holding extra cash reserve in a more systematic way. First,
a firm facing transaction costs when it rises additional capital. These additional
expenses increase both fixed and variable costs, such as liquidating assets or issuing
new debts. Second, the precautionary motive describes the actions that firms
accumulate cash for unexpected investment. Hence, precautionary would likely to save
a considerable amount of financial costs when the opportunity cost of holding extra
money is lesser than other sources of financing (Ozkan & Ozkan, 2004).

According to Kraus and Litzenberger (1973), firms should maintain an optimal cash
holdings level that comprehensively reflects the trade-off relationship between the
marginal benefits and the deadweight losses of holding abundant cash. However, the
term deadweight loss is ambiguous. Haugen & Senbet (1978) provides a useful
discussion of the deadweight loss, in which he contends that in a neutral world, it is
optimal to use the risk-free rate to simplify the deadweight loss of cash holdings.
Normally, managers take a high flexibility manner when determining those costs, thus
increasing errors. Although firms holding cash incur opportunity costs, cash holdings
can help firms to reduce the probability of financial distress by avoiding costly external
financing. In general, the trade-off theory suggests that firms with limited access to
external funding or have high financing costs, such as small firms. On the contrary,
firms having more growth opportunities have a higher incentive to hold additional cash
reserve, henceforth maintains low financial leverage. Ozkan & Ozkan (2004) suggest
another implication of the trade-off theory is maintaining cash reserve would reduce the
probability of financial distress by timely meeting interest and principal payment,
especially in high financial leverage firms. Empirical findings seem to support the first
argument which states a negative relationship between cash holdings and leverage
(Altman, 1984).
 13

2.2.2 Pecking order theory of corporate cash holdings

The empirical research over the applicability of pecking order theory (POT) is neutral.
A number of researchers find supportive evidence for pecking order theory (Shyam-
Sunder & C. Myers, 1999), while Chirinko (2000) and Leary (2010) show the contrary
proofs. Among other scholars, Frank & Goyal (2003) demonstrate the strongest
preferences for the POT drawing from evidence of large firm in the US market. In
particular, they found a significantly negative relationship between capital structure and
firm’s profitability. In the same light, firms that are better in constructing their capital
structure exhibit a strong growth tendency. Nonetheless, the conclusion in which the
firm should follow pecking order theory is left to be unadjusted. The empirical evidence
regarding the application of this theory is mixed (Miller and Orr, 1966; Dittmar et al.,
2003). Halov & Heider (2011) argue that the firm’s director must encompass the
magnitude of risk and the opportunity costs of adverse selection to the choice of
financing. This thus explains the reason why large firms could raise external finance.
An outsider investor would be able to assess the firm’s risk with careful and serious
manner. Meanwhile, a small company often lacks of detail information; it thus renders
the motivation of external creditor. Henceforth, this company is left with no option but
issuing equity.

Applying the pecking order theory for corporate cash holdings, it is predicted that firms
with a high level of internally-generated funds, including cash, have less need to
borrow. That means cash holding is negatively related to leverage. Moreover, this
theory suggests that it is irrelevant for a firm to pursue a target cash holding level. They
use cash as the first source of financing for their investments. Therefore, the need for
holding cash increases if firms have more investment opportunities.

2.2.3 Keynes (1936)’s theory of liquidity preference

The theory of liquidity preferences approaches the motivation of corporate cash
holdings level from a macro perspective. Following this theory, an individual has three
motives for holding money including transaction motive, precautionary motive, and
speculative motive. The transaction motive describes the money in the closest meaning
 14

to its nature: a bridge that transports capital, goods, and services among market players.
This motive simply generates an intuitive idea of the cash holding level is to make a
future purchase. A key difference that distinguishes this motive from the other twos is
it has nothing related to risk or future uncertainty (Tily, 2006). Also, these two motives
display a strong correlation toward the interesting topic of corporate cash holding. More
to the point, both speculative and precautionary motives primarily reflect the investors’
perception of risks. Henceforth, based on this theoretical background, the corporate cash
holding level depends significantly on the precautionary and speculative manner of the
firm’s director (Opler et al., 1999). If he/she perceived the future risk is increasing,
he/she tends to accumulate extra cash reserve to minimize the risk of financial distress.
On the other hand, if the business condition is stable and there is an investment
opportunity in the future, the company’s director would stockpile cash to make an
additional investment.

2.2.4 Agency theory

The agency theory is derived from the argument of asymmetric information; which
means it shares the same root with the pecking order theory. Nonetheless, this theory
emphasizes the internal misunderstanding between the firm’s manager and its
shareholders (Dittmar et al., 2003b; Dittmar & Mahrt-Smith, 2007; Ozkan & Ozkan,
2004). Studies of Durnev & Kim (2005) and Frésard Laurent & Salva (2010) offer
empirical evidence arguing that the unthoughtful behaviours of managers would
damage the firm’s resources; which thus transfers to a reduction in the value of the firm.
Prior studies suggest that the agency issues account for a considerable amount of cost
from holding extra cash (Dittmar & Mahrt-Smith, 2007; Nicodano & Regis, 2019).
Scholars have focused on the influences of corporate governance on minimizing the
cost of those entrenched behaviours. Although an enhancement of the internal control
system would promise to reduce those undesirable costs; however, as Gulen & Ion
(2016) noted, the internal corporate governance needs to cooperate with an external
framework to assure the comprehensiveness of this system. In essence, the agency
theory implies that a particular firm should maintain an appropriate level of that
 15

minimizes the risk of holding extra cash. This is to prevent the manager to use the firm’s
resources for their private benefits.

2.3 Determinants of corporate cash holdings

This section provides the literature on firm-specific factors affecting the cash holding
level. Among many models regarding cash holdings, the baseline model of Opler et al.
(1999) receives the highest creditability. Most of the following researches inherit the
basic merit of this model with more or few updates. Previous researches provide a
number of accounts and ratios which the authors believe to have an impact on cash
holdings. Nonetheless, it is important to notice that cash holding decision is determined
by actions and situation underlying those ratios, rather than the figures itself. For this
reason, I form four aspects that I believe to have a strong impact on cash holding level
of firms.

2.3.1 Ability to generate operating cash

The ability to generate cash is an assurance against the shortage of liquidity. It is
expected that firms that have a better ability in generating revenue and collecting cash
are allowed to hold a more significant cash level than their opponents. Hence, I argue
that the following dimensions tend to have a positive impact on cash holdings.

2.3.1.1 Operating cash flow

The financial statements are presented on the accrual rather than cash manner, thus
revenue is nothing in comparison with cash. However, in accounting for cash holding,
it is important to focus on the cash collection ability of firms. There are many studies
providing evidence for the impact of cash on a firm’s performance (Nissim & Penman,
2001). For example, the study of Penman and Zhang (2005) suggests that cash level has
a positive correlation with stock price. Abarbanell and Bushee (1998) find evidence that
companies whose cash conversion cycle is shorter have a significant advantage in
reducing the deadweight loss of holding abundant cash. In general, it is expected that
operating cash flow has a positive impact on cash holding levels. Operating cash flow
can be viewed as an alternative to cash, therefore, the literature has documented a
 16

negative relationship between this cash substitute and corporate cash holdings (Hardin
et al., 2009; Phung & Nguyen, 2018). In general, it is expected that operating cash flow
has a negative impact on cash holding level.

2.3.1.2 Cash flow volatility

Companies with higher changeable cash flows are more vulnerable to liquidity
limitations (Ozkan & Ozkan, 2004). The instability of cash flow raises confusion
regarding future money assets. Uncertainty could inevitably affect decision-making
process of companies in investment opportunities. Therefore, businesses tend to hold
more cash to minimize the cost of cash shortages. This argument complies with the
principle of trade-offs between the costs and benefits of cash holdings and implies that
cash flow fluctuations and cash holdings have a favourable relationship. The findings
of previous research, however, seem inconclusive regarding the nature of the
relationship between the volatility of cash flow and cash holdings. Some studies argue
that there is a positive relationship between the two variables (Mohanram, 2005; Guney
et al., 2007), but others found a negative association (Ferreira & Vilela, 2011).

2.3.2 Asset quality and allocation

Asset quality and allocation choices have strong impacts on cash holding levels. The
more liquidity the firm chooses to hold, the more deadweight loss of abundant cash
level.

2.3.2.1 Liquid assets

Liquid assets apart from cash may be liquidated in times of cash shortfall to address
financial obligations and then become liquidity substitutes (Dittmar et al., 2003b; Ozkan
& Ozkan, 2004). The related literature offers evidence to support the hypothesis that
non-cash fixed assets or net working capital are a suitable alternative for liquid assets
(Durnev & Kim, 2005; Ozkan & Ozkan, 2004). According to Ozkan and Ozkan (2004),
holding noncash liquid assets bring two main benefits. Firstly, it is less costly to turn
net working capital into cash in comparison to other assets. Secondly, holding a large
number of liquid assets will minimize the risk of stock markets raising funds. Thus, I
hypothesize that firms with more net working capital assets are less likely to hold cash
 17

reverses based on the trade-off theory. In other words, there is a negative association
between net working capital and cash holdings.

2.3.2.2 Asset tangibility

Companies with more tangible assets are likely to retain less capital because, in the
event of cash shortages, tangible assets may be sold, but this is more difficult to do for
tangible assets than for non-cash liquid assets. Moreover, when businesses need to issue
loans, tangible assets may be used as collateral (Drobetz & Grüninger, 2007), and it is
also possible for businesses with more tangible assets to boost external debt funding,
contributing to a lower need to retain cash reserves. Drobetz and Grüninger (2007) point
out that there is a negative relationship between asset tangibility and cash holding. Thus,
I hypothesized the negative association based on empirical evidence.

2.3.2.3 Leverage
Companies with a high leverage ratio are likely to face financial distress and are thus
required to carry more cash to meet debt obligations and reduce the likelihood of
financial bankruptcy according to trade-off theory (Ferreira and Vilela, 2011; Kim et
al., 2011). However, according to the pecking order theory, as investment exceeds
retained earnings, firms encounter the burden of rising debt, and thus cash holding level
decline (Ferreira & Vilela, 2011). In parallel with pecking order theory, many studies
have found that less cash is owned by more leveraged firms (Liu & Dong, 2020; Opler
et al., 1999; Penman, 1998). However, Drobetz and Grüninger (2007) and Guney et al.
(2007) found a nonlinear relationship between cash holding and leverage. Guney et al.
(2007) first found a negative relationship, then a positive one at higher leverage levels.
Uyar and Kuzey (2014) also found that there is a positive association between two
variables in the case of Spanish SMEs firms, in other words, highly leveraged firms
tend to hold more cash probably to avoid financial distress. Based on two contrasting
theoretical arguments and mixed results found in prior studies, I hypothesize that there
might be a positive relationship between leverage and cash holdings (trade-off theory)
or a negative relationship (pecking order theory) for Vietnamese companies.
 18

2.3.3 Investment and capital expenditure

Capital spending increases new properties, and that these assets enable borrowing as
collateral through pledging, so higher spending ultimately decreases the need to carry
cash (Kim, et al.,1998). According to the pecking order theory, investment greater than
retained earnings is associated with the drop in cash holding. In other words, cash
balances are reduced when firms make investments (Dittmar et al., 2003). Guney et al.
(2007) present evidence that firms with high capital expenditure are less likely to hold
cash. Dittmar et al. (2003) advocate that the increase in capital expenditure reduces cash
holdings. However, Opler et al. (1999) find the opposite conclusion about the
association between capital expenditure and cash holding. In conformity with most
previous studies, I expect cash holding is negatively correlated with capital expenditure.

2.3.4 Firm size

The larger scale economies in cash management, making it quicker and easier for
businesses to benefit financially ( Miller & Orr, 1966; Bigelli & Sánchez-Vidal, 2011).
It is also claimed that the fixed borrowing costs are not relative to the amount of the
loan and are comparatively restrictive for smaller businesses (Kim et al., 1998). In
addition, larger businesses are more volatile and have a lower risk of experiencing
bankruptcy risk. Such variables indicate a negative correlation between the size of the
company and cash holdings. The negative relationship between firm size and cash
holdings is confirmed by most of the earlier studies ( Bigelli & Sánchez-Vidal, 2011;
Drobetz and Grüninger, 2007). However, there are a few studies that find empirical
evidence about there is no significant relationship between firm size and cash holding
(García, 2005;Guney et al., 2007). In conformity with most previous studies, I
hypothesize a negative relationship between firm size and cash holdings.

2.4 Economic policy uncertainty (EPU) and corporate cash holdings

The rising collection of studies which include findings and information about the
change in firm variables, stock market, and macro-economic variables is formulated
into the level of economic policy uncertainty. In reference to the impact of EPU on firm
variables, Zhang et al. (2015) find that the estimates of capital structures of Chinese
 19

listed firms are much grounded on the level of economic policy uncertainty. The study
of Zhang et al. (2015) uses EPU index as a proxy of uncertainty level and contends that
when EPU increases, firms tend to reduce the leverage ratios. Wang et al. (2014) also
reach a consensus on the explanation for the effect on financial investment which is due
to the worsening of the external financing environment. Wang et al. (2017) find that
there is a negative relationship between policy uncertainty and corporate R&D
investments. Gulen and Ion (2016) document that economic policy uncertainty is
positively correlated with cash holdings and new debt issuance, though no impact is
reported on new equity issuance. Pinkowitz et al. (2003) measure the uncertainty in two
dimensions: economic variables such as stock market volatility, and political indices
constructed by political restrictions, corruption, the risk of expropriation, International
Country Risk Guide. Pinkowitz et al. (2003) show that high uncertainty of the country
decreases the cash holdings of firms. Besides macro-economic and political
uncertainties, socio-economic factors and institutional development are determinants
triggering firm-level decisions in emerging countries (Al-Najjar, 2013). Moreover, the
volatility in macro-economic conditions affects the firm’s decision on cash holdings.
Baum et al. (2006) use macro-economic policy level constructed by real GDP, industrial
production, CPI inflation, and S&P 500 return. They claim that firms would not be
effective in evaluating firm-specific information due to high uncertainty times causing
them to act more cautiously. On the opposite, a healthy economic situation will allow
managers to make a decision more idiosyncratically and predict the level of liquid assets
in compliance with the company's requirements.

Taking into account policy uncertainty level will help firms adjust their allocation more
efficiently to resources and this explains the time-variation in the cross-sectional
distribution of cash holding ratios. Examining listed U.S. firms, Baum et al. (2008)
explore that as there is a rise in macroeconomic policy uncertainty, businesses will raise
their level of cash holdings. In more volatile periods, this suggests a precautionary
reason for retaining liquid assets. By the use of similar measures of uncertainty with
other research, Saumitra et al. (2011) investigate the effect of economic policy
uncertainty on cash holdings in India. It is also found that Indian firms increase the cash
 20

holding ratio when the uncertainty level in terms of policy increases. More recently,
Phan et al. (2019) use the EPU index of Baker et al. (2016) to examine the relationship
between U.S. economic policy uncertainty and cash holdings of U.S. public companies.
They find a positive relationship between EPU and corporate cash holdings of U.S.
firms which can be explained by precautionary motives and, to a lesser extent, the delay
in investments. The study of Duong et al. (2020) has similar findings which attribute
the increase in the U.S. companies’ cash holdings in response to higher EPU index to
the financial constraints rather than the reduction in investments. To the best of my
knowledge, there is no study in Vietnam about the relationship between Vietnamese
firms’ cash holdings and the uncertainty of economic policy. I attempt to examine this
relationship in my thesis. EPU may increase financing constraints or costs of external
funds (Denis & Sibilkov, 2010; Harford et al., 2014). Therefore, firms hold more cash
to avoid costly external financing and still maintain adequate liquidity. Moreover, the
theory of real options suggests that EPU induces firms to delay their investments to wait
for a better time (Bernanke, 1983), thereby during a high level of EPU, firms tend to
accumulate more cash to take the opportunity of future profitable investments. Based
on the above two arguments, it can be concluded that economic policy uncertainty
increases firms' cash holdings by holding resources idle and delaying potential
investment projects because of concerns about being impacted by an unstable economy.

2.5 Research Hypotheses

Based on the literature and the argument related to economic policy uncertainty, I
predict that a firm will hold more cash to avoid liquidity shocks during the time of
uncertainty of economic policy or delay projects and accumulate cash to take advantage
of future investment opportunities when there is currently a high level of economic
policy uncertainty. It is in the best interests of a firm to respond quickly; and hence a
firm will hold more cash for precautionary and speculative purposes when anticipating
policy-based economic uncertainty. My testable hypothesis is as follows:

Main hypothesis - Hypothesis 1: Global EPU index has a positive effect on corporate
cash holdings.
 21

In addition to Global EPU index, I also control for firm-specific factors that are
documented in the literature to affect corporate cash holdings. Below are the hypotheses
related to these control variables as discussed in the previous section.

Hypothesis 2: Firm size negatively affects corporate cash holdings.

Hypothesis 3: Net working capital has a negative effect on corporate cash holdings.

Hypothesis 4: Operating cash flow negatively affects corporate cash holdings.

Hypothesis 5: Cash flow risk has a positive effect on corporate cash holdings.

Hypothesis 6: Tangible assets negatively affects corporate cash holdings.

Hypothesis 7a: Leverage might have a positive effect on corporate cash holdings (based
on the trade-off theory: firms with high leverage hold more cash to meet debt
obligations and avoid financial distress).

Hypothesis 7b: Leverage might have a negative effect on corporate cash holdings
(based on the pecking order theory).

Hypothesis 8: Capital expenditure negatively affects corporate cash holdings.

 22

CHAPTER 3 DATA AND METHODOLOGY

3.1 Data Collection

I examine non-financial firms listed on Ho Chi Minh Stock Exchange. The sample
period is from 2017 to 2019. Accounting data are hand-collected using the Vietstock
Finance website and audited financial statements of companies. I exclude financial
firms, such as banks, insurance companies, investment funds, and securities companies,
as it is irrelevant to comprise organizations whose cash level is always higher than
average into the analysis. I also exclude firms with missing data or errors. The Global
EPU index is constructed by Baker et al. (2016) and downloaded from
https://www.policyuncertainty.com/. There are two Global EPU indexes, one is the
current-price GDP-weighted average national index, the other is the PPP-adjusted GDP-
weighted average national index. I use the annual index by computing the average
monthly indexes over twelve months. This approach is commonly used in the literature.
The initial sample covered 306 observations. Nonetheless after adjusted for missing and
invalid variables, the final sample includes 235 firms with 615 firm-year observations.

3.2 Research methodology

3.2.1 Economic policy uncertainty (EPU) index

One of the main concerns in using the Global EPU index is that it might not truly reflect
the uncertainty of Vietnamese economic policy. However, as the process of
internationalization and globalization is more pronounced, especially in the business
and economics area, I believe that Vietnamese companies are more or less affected by
global uncertainty.

Another issue is that the EPU index may be confounded by other sources of general
economic uncertainty. First, it is possible that the EPU index is closely associated with
other macroeconomic uncertainties. The instability events, such as recessions, conflicts,
financial crises, leading to policy uncertainty can also theoretically drive global
economic uncertainty. It is also possible that companies, when confronted with policy
 23

uncertainties, will also face uncertainty in other areas of their sector, such as market
demand or external finance. Second, the concern about EPU index capturing general
economic uncertainty in its construction is still worth considering, even though Baker
et al. (2016) have made a lot of progress to minimize this possible error of
measurement. Therefore, I use time fixed effects to control for unobservable but
possibly omitted economic uncertainty sources.

3.2.2 Variable definition

Dependent variable: cashholding: Cash holdings scaled by total assets.
cashholding = (Cash + Marketable securities) / Total assets

Explanatory variables:

globalEPU: The annual Global EPU index.

globalEPU = Average of twelve monthly Global EPU indexes, which are
from https://www.policyuncertainty.com/ (Baker et al., 2016). I use two
indexes: globalEPU1 based on current-price GDP and globalEPU2 based
on PPP-adjusted GDP
size: Firm size.
size = natural logarithm of total assets

nwc: Net working capital scaled by total assets.

nwc = (Working capital – Cash and marketable securities) / Total assets

cf: Operating cash flow scaled by total assets

cf = (Cash flow from operating activities) / Total assets

cfrisk: Cash flow risk or volatility of operating cash flow

cfrisk = Standard deviation of operating cash flows over the three-year period
from (t-2) to t, with the requirement that there are operating cash flows of all
three years
tangible: Tangible assets scaled by total assets
tangible = Property, plant and equipment / Total assets

leverage: Financial leverage

leverage = (Long-term debt + Short-term debt) / Total assets
 24

capex: Capital expenditure scaled by total assets

capex = Capital expenditure / Total assets

3.2.3 Research model

I use the following research model to test hypotheses developed in the second chapter.

𝐶𝑎𝑠ℎℎ𝑜𝑙𝑑𝑖𝑛𝑔𝑖,𝑡 = 𝛼 + 𝛽1 𝑔𝑙𝑜𝑏𝑎𝑙𝐸𝑃𝑈𝑡 + 𝛽2 𝑠𝑖𝑧𝑒𝑖,𝑡 + 𝛽3 𝑛𝑤𝑐𝑖,𝑡 + 𝛽4 𝑐𝑓𝑖,𝑡 +

𝛽5 𝑐𝑓𝑟𝑖𝑠𝑘𝑖,𝑡 + 𝛽6 𝑡𝑎𝑛𝑔𝑖𝑏𝑙𝑒𝑖,𝑡 + 𝛽7 𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖,𝑡 + 𝛽8 𝑐𝑎𝑝𝑒𝑥𝑖,𝑡 + 𝜀𝑖,𝑡
where:
the subscripts i and t indicate firm i and year t, respectively

3.2.4 Research approach and method

The purpose of this study is to identify factors affecting cash holdings of Vietnamese
firms. Thus, it is logical to approach this topic under a quantitative manner. Hence,
quantitative method will be used as backbones of this research.

Research procedure includes four steps. The first is identifying variables based on
aforementioned hypotheses. The second is calculating variables and identifying
assumptions regarding regression analysis. The third step is running a multivariate
regression. The fourth step is to address potential problems of the model and employ
the solution to solve these issues.

The method which I use in this paper is panel-data regression method. Among
explanatory variables, EPU is considered an exogenous factor, while other determinants
are endogenous to cash holdings. Therefore, it is necessary to address the endogeneity
issue to avoid potential incorrect signs of coefficients (Ketokivi and McIntosh, 2017)
or potential wrong inferences of causal effects. For panel data, to address the potential
endogeneity issue caused by omitted variables, I use the fixed-effects model in addition
to the pooled-OLS regression.
 25

CHAPTER 4 EMPIRICAL RESULTS

4.1 Descriptive statistics

The descriptive measures of each variable are provided in Table 4-1.

Table 4-1: Descriptive statistics

Variable Obs Mean Std. Dev. Min Max

cashholding 615 .381 .441 .001 0.498
globalEPU1 615 204.56 34.074 170.379 247.418
globalEPU2 615 217.281 40.057 176.752 267.621
size 615 15.273 1.44 11.208 18.393
nwc 615 .098 1.828 0.016 0.547
cf 614 -.016 .542 -.467 0.496
cfrisk 615 .197 .587 .002 0.359
tangible 615 .531 .413 0 0.839
leverage 614 .513 .451 0 0.753
capex 614 .176 .716 0 0.557

Regarding the cash holding ratio, firms in the sample vary from 0.01 to 0.498 with a
mean of 0.381. Speaking of the EPU1 index, the descriptive measure shows that the
average of twelve-monthly is 204.56. The index varies from a min of 170.379 to a high
of 247.418. There are some differences between EPU1 and EPU2. In detail, the EPU2
variable has a mean of 217.281, which is slightly higher than EPU1. Also, the variability
moves accordingly, which ranges from 176.752 to 267.621. The variable “size”
describes the natural log of the firm’s total assets and has a mean of 15.723.
Surprisingly, the “cf” variable has a negative mean (-0.16), which signifies the fact that
the ability of public listed firms in the sample size to generate cash from operating
activities is fairly poor. The “cfrisk” affirms the previous presumption; the standard
deviation of operating cash changes significantly through the years. Tangible asset
accounts for a large proportion of the firm’s assets, on average it makes up for more
than half of the total asset (53.1%). High leverage (0.513) implies that most firms in our
sample prefer external debt financing. Last but not least, on average companies in the
sample spend capital for fixed-asset investment of 17.6% of total assets, illustrated by
the “capex” variable.
 26

4.2 Correlation matrix

The Pearson correlation among variables is listed in Table 4-2

Table 4-2: Correlation matrix

Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
(1) cashholding 1.000
(2) globalEPU1 0.026 1.000
(3) globalEPU2 0.026 1.000*** 1.000
(4) size -0.271*** 0.054 0.054 1.000
(5) nwc -0.452*** -0.045 -0.045 -0.078* 1.000
(6) cf -0.448*** -0.009 -0.009 0.048 0.201*** 1.000
(7) cfrisk 0.838*** 0.039 0.040 -0.280*** -0.150*** -0.278*** 1.000
(8) tangible 0.785*** 0.009 0.009 -0.245*** -0.318*** -0.499*** 0.672*** 1.000
(9) leverage 0.621*** 0.021 0.020 -0.269*** 0.240*** -0.176*** 0.817*** 0.528*** 1.000
(10) capex 0.200*** -0.047 -0.047 -0.294*** 0.723*** -0.111*** 0.417*** 0.176*** 0.667*** 1.000
*** p<0.01, ** p<0.05, * p<0.1

Drawing from the table above, the cash holding variable appears to have a strong
correlation with other variables, except the Global EPU index; it thus implies that most
of the previous hypotheses are potentially true. Although the correlation between cash
holding and the Global EPU index is insignificant, both global uncertainty indexes have
a positive correlation with the cash holding ratio of firms in the sample, consistent with
the prediction. The two Global EPU indexes, globalEPU1 and globalEPU2, have the
correlation of 1, implying that the two indexes have a perfectly positive correlation.
Therefore, it is not necessary to use two indexes in the analysis for robustness checks.
Either one of the two indexes can represent the other in measuring the policy-based
economic uncertainty globally. Henceforth, I use global EPU1 in the regression analysis
as these two indexes are perfectly substituted and the results are not significantly
different if using globalEPU2. Interestingly, there are significant correlations between
cash holding ratio and size, net working capital, operating cash flows and its volatility,
tangible assets, leverage, and capital expenditure.

4.3 Pooled-OLS regression

As earlier presented, the global uncertainty index EPU1 and EPU2 are perfectly
correlated. Thus, in order to examine the effect of global EPU on cash holding of
Vietnamese firms under controlling firm characteristics factors such as firm size, net
 27

working capital, operating cash flow, cash flow risk, tangible assets, leverage, and
capital expenditure, the panel data regression model is as follows:

𝐶𝑎𝑠ℎℎ𝑜𝑙𝑑𝑖𝑛𝑔𝑖,𝑡 = 𝛼 + 𝛽1 𝑔𝑙𝑜𝑏𝑎𝑙𝐸𝑃𝑈1𝑡 + 𝛽2 𝑠𝑖𝑧𝑒𝑖,𝑡 + 𝛽3 𝑛𝑤𝑐𝑖,𝑡 + 𝛽4 𝑐𝑓𝑖,𝑡 +

𝛽5 𝑐𝑓𝑟𝑖𝑠𝑘𝑖,𝑡 + 𝛽6 𝑡𝑎𝑛𝑔𝑖𝑏𝑙𝑒𝑖,𝑡 + 𝛽7 𝑙𝑒𝑣𝑒𝑟𝑎𝑔𝑒𝑖,𝑡 + 𝛽8 𝑐𝑎𝑝𝑒𝑥𝑖,𝑡 + 𝜀𝑖,𝑡
Where i indicates a firm, and t indexes a calendar year.

From the p-values of the explanatory variables, it is clear that only the GEPU variable
is not statistically significant at 5% level (p = 0.931 > 0.05) and the magnitude of the
coefficient on globalEPU1 is very small but positive. Other variables related to financial
indicators of firms are significant at the 5% level. According to the coefficient results
from Table 4-3, GEPU, firm’s size, net working capital, operating cash flow, and cash
flow risk have correct signs as hypotheses. The signs of the coefficient on variables
related to asset quality and allocation including tangible asset and capital expenditure
are reversed from the postulated ones. These results are supportive of hypotheses 2, 3,
4, and 5. The positive coefficient on cash flow risk implies that when operating cash
flow is more volatile, firms tend to hold a higher cash holding level for the precautionary
motive. However, contrary to my expectations, tangible assets and capital expenditure
have a statistically positive relationship with cash holding; the results do not support
hypotheses 6 and 8. These findings imply that Vietnamese firms with large capital
expenditure or large tangible assets tend to hold even more cash, probably to prepare
themselves for future investments which might be consistent with the speculative
motive of cash holding. For leverage, the coefficient is positive and statistically
significant, supporting the trade-off theory which suggests that firms having high
leverage also maintain high cash reserves to pay debt obligations and avoid financial
distress.
 28

Table 4-3: Pooled-OLS Regression

cashholding Coef. St.Err. t-value p-value [95% Conf Interval] Sig

globalEPU1 .0034 .004 0.09 .931 -.001 .001
size -.0243 .011 -2.31 .021 -.045 -.004 **
nwc -.4312 .018 -23.94 .000 -.467 -.396 ***
cf -.1395 .031 -4.46 .000 -.201 -.078 ***
cfrisk .5482 .058 9.51 .000 .435 .662 ***
tangible .0593 .007 8.99 .000 .046 .072 ***
leverage .0726 .013 5.45 .000 .047 .099 ***
capex .6856 .049 14.13 .000 .59 .781 ***
Constant .4299 .181 2.37 .018 .074 .786 **

Mean dependent var 0.381 SD dependent var 1.143

R-squared 0.909 Number of obs 613.000
F-test 752.582 Prob > F 0.000
Akaike crit. (AIC) 452.257 Bayesian crit. (BIC) 492.022
*** p<.01, ** p<.05, * p<.1

4.4 Fixed-Effects Regression

In order to examine the effect of global EPU on cash holding of Vietnamese firms under
controlling firm characteristics factors such as firm size, net working capital, operating
cash flow, cash flow risk, tangible assets, leverage, and capital expenditure, I estimate
the equation through the fixed-effects regression, and the result is shown in Table 4-4.
The R-square value shows that 94.3% of the variance in cash holding is explained by
the contributions of independent variables in the model. R-square of the fixed-effects
regression is greater than that of the Pooled-OLS regression, indicating that the fixed-
effects regression generates more reliable results. The F-test value describes the overall
importance of the model. The F-statistic is significant (F= 761.801, p = 0.00 < 0.01). It
illustrates the value of the relationship between the dependent variable and all
explanatory variables. The coefficients underline the significance of the relationship
between the dependent variable and each explanatory variable. Using the fixed-effects
regression, among statistically significant variables, the coefficient value of capital
expenditure gives the highest absolute value of 1.163 and tangible assets with the lowest
absolute value of 0.045. According to the results shown in Table 4-4, there is no
statistical relationship between global EPU and cash holding of Vietnamese firms,
whereas control variables related to firm characteristics have a significant impact on
 29

cash holdings. Among independent variables, firm size, operating cash flow, and net
working capital have a negative relationship with cash holding, and cash flow risk has
a positive impact on cash holding, the same way given in the above hypotheses. The
positive coefficient on cash flow risk implies that a higher proportion of cash holding
is contributed by the increase in cash flow volatility. However, contrary to the
expectations in hypotheses 6 and 8, tangible assets and capital expenditure have a
positive relationship with cash holding. Hypothesis 7a is confirmed with the positive
coefficient on leverage. In general, the fixed-effects model generates the same results
related to the relationship between variables as found in the Pooled-OLS regression.

Table 4-4: Fixed-effects Regression

cashholding Coef. St.Err. t-value p-value [95% Conf Interval] Sig

globalEPU1 .001 0 0.51 .607 0 .001
size -.076 .031 -2.43 .016 -.138 -.015 **
nwc -.595 .022 -27.34 0 -.638 -.553 ***
cf -.103 .031 -3.36 .001 -.164 -.043 ***
cfrisk .208 .068 3.08 .002 .075 .341 ***
tangible .045 .007 6.03 0 .03 .06 ***
leverage .077 .014 5.38 0 .049 .105 ***
capex 1.163 .062 18.80 0 1.042 1.285 ***
Constant 1.211 .492 2.46 .014 .244 2.179 **

Mean dependent var 0.381 SD dependent var 1.143

R-squared 0.943 Number of obs 613.000
F-test 761.801 Prob > F 0.000
Akaike crit. (AIC) -164.484 Bayesian crit. (BIC) -124.719
*** p<.01, ** p<.05, * p<.1

4.5 Findings

The most striking result to emerge from the data is that, inconsistent with my
expectation, the cash holding ratio of the public listed firms in the HOSE exchange is
less likely dependent on the global policy uncertainty. Rather, this ratio appears to be
more dependent on the internal factors of the firms. One of the explanations for this
finding is that I use the Global EPU index rather than the Vietnamese EPU index since
this index is not yet available for Vietnam. I argue that with an open economy,
Vietnamese firms are more or less affected by the world economic uncertainty and
 30

might adjust their cash holdings in response to the Global EPU index. However, it seems
that the Vietnamese companies’ cash holding decisions are reluctant to the uncertainty
of the world economic policy.

In essence, my findings confirm the hypothesized relationship between cash holding

ratio and firm’s size, net working capital, operating cash flow, and fluctuation in cash
flow. Those findings are aligned with other previous studies in a different time and
spatial dimension. The negative relationship between the cash holding ratio and the
firm’s size might stem from fixed costs associated with borrowing (Kim et al., 1998).
Or, as Opler et al. (1999), Drobetz and Grüninger (2007), and Bigelli and Sánchez-
Vidal (2011) suggest, larger firms are better diversified and have a lower likelihood of
facing financial distress. Henceforth, these factors encourage firms to maintain a stable
cash holding ratio. The negative relation with operating cash flow affirms the previous
study of Abarbanell and Bushee (1998), in which they contend that companies whose
operating cash flows are higher have a significant advantage in reducing the deadweight
loss of holding abundant cash, therefore firms can hold less cash. Furthermore, Ozkan
& Ozkan (2005) argue that firms with higher volatile cash flows are more prone to
liquidity constraints. This would deter firms from engaging in other investment
opportunities. Henceforth, they tend to hold additional cash to reduce this opportunity
cost.

On the other hand, the assumed negative relationship between cash holdings and
tangible assets or capital expenditure is not supported. Instead, I find statistically
positive coefficients. The major reason underlying these differences might rest on the
financing options of the firms. Noticeably, Vietnamese firms spend an excessive
amount of money on capital expenditure. This perhaps causes a positive relationship
between cash holding ratio and capital expenditure. Significantly, the coefficient on
capex is 1.163, which implies that the more capital expenditure a firm has, the more
cash it holds, probably to prepare for future investment opportunities. As for tangible
assets, the relationship of the cash holding ratio with tangible assets is significantly
positive. This finding is contrary to the study of Drobetz & Grüninger (2007), in which
 31

they argue that firms with more tangible assets find it easier to raise external debt
financing, leading to less need to hold cash reserves. A possible explanation is that these
firms may rely more on retained earnings or equity financing instead of debt financing
although they have large tangible assets which can serve as collaterals. It appears that
firms listed in HOSE still want to maintain large cash holdings even when they can
easily obtain debt thanks to large tangible assets. The finding of the positive relationship
between leverage and cash holdings confirms this argument. Firms having high leverage
ratio maintain large cash holdings to ensure debt payments and avoid financial distress,
the results are supportive of the trade-off theory rather than the pecking order theory. In
general, I document that firm-specific factors are significant determinants of corporate
cash holdings of HOSE-listed non-financial firms.
 32

CHAPTER 5 CONCLUSIONS AND RECOMMENDATIONS

The study has led to conclude that firm characteristics have a significant impact on the
firm’s cash holdings while global EPU has an insignificant relationship. The study used
Pooled-OLS and Fixed-effects regression models to investigate the effect of
independent variables on the decision on cash holding of 235 listed non-financial
companies in the HOSE market during the period of 2017-2019. The ratio of cash and
market securities to total assets represents the cash holding of the firm, and other firm
characteristics variables are computed by financial indicators in audited financial
reports of listed firms. The Global EPU index is constructed by Baker et al. (2016) and
collected from https://www.policyuncertainty.com/.

Research results indicate that the effect exists between cash holdings and firms’
financial characteristics, however the Global EPU index shows no relationship with
cash holding decision of Vietnamese firms. From the empirical results above, this study
suggests some implications and recommendations for non-financial companies listed
on the Vietnam stock exchange in deciding their cash holdings.

Firstly, it seems that Vietnamese companies do not determine their cash holdings based
on the index that measures the global policy-based economic uncertainty. This result
does not imply that a macroeconomic factor like the EPU index has no significant effect
on cash holdings of Vietnamese firms. The insignificant relationship might be because
the Global EPU index is too broad. Should the EPU index be available for Vietnam, a
different, statistical result might be found. Future studies may investigate the effect of
macroeconomic factors on the firm-level cash holding decision of Vietnamese
companies using the Vietnamese EPU index if this index is available or using any other
factors that capture the macroeconomic uncertainty.

Secondly, companies usually identify the optimal cash holding based on firm
characteristic indicators. My study finds a similar result which suggests that cash
holdings of Vietnamese firms are determined in associated with firms’ financial
characteristics for precautionary and speculative motives to ensure and improve firms’
 33

performance. I find the following factors influencing cash holdings of Vietnamese

firms: firm size, net working capital, operating cash flow, cash flow volatility, tangible
assets, leverage, and capital expenditure. The results suggest that firm-specific
characteristics must be established when firms want to determine their optimal cash
holding level. Although my study does not explicitly examine what the optimal cash
holding is and how it affects firm performance, it documents that firms do adjust their
cash holding based on firm financial characteristics and these adjustments reflect the
motives that can help them avoid an unexpected shortage in cash and reduce opportunity
costs, thereby preventing firms from having financial distress as well as improving their
performance. However, as firms in different sectors have different cash holding needs,
another study may want to explore specific policies of changing cash holding ratios for
each specific group of companies. From this idea, at each particular cash holding
threshold, a further research should be carried on to examine the factors that influence
the cash holding motive for each group of companies. The results of this future research
will provide a more comprehensive and specific suggestions for determining the
optimal cash holding level to boost the performance of companies in different sectors.

Thirdly, the outcomes of this study will be useful for the companies that want to have
the right amount of cash in the context of Vietnamese corporate governance
mechanisms condition. The sufficient cash holding can help firms reduce the agency
costs arising from free cash flow problems, especially for firms with poor corporate
governance. Maintaining too much cash will create opportunities for managers to use
for wasteful activities, whereas firms with little cash may face the cash shortage. This
emphasizes the importance of determining the optimal cash holding level. Therefore,
my results might be useful in predicting the right cash level for Vietnamese firms that
experience the corporate governance mechanisms of an emerging or transitional
economy like Vietnam. Future research may want to examine how firms’ cash holding
policy changes when Vietnam achieves more improvements in corporate governance
mechanisms. The results of the next study can provide companies and policy makers
with the picture of the influence of corporate governance on the amount of cash holdings
in Vietnamese listed firms. Among corporate governance mechanisms, both external
 34

and internal factors should be taken into account. For example, a better ownership
structure can help corporations to raise cash easily in some unexpected cases. Changes
in the regulations of the stock exchange may affect a firm’s ability to raise external
financing, leading to changes in the firm’s level of cash reserve. Additionally, the board
of directors and corporate compensation structure possibly affects agency costs;
therefore, companies should take them as important issues in considering the amount of
cash holding.

Finally, the findings would be useful for corporate governance mechanisms to evaluate
to some extend the effect of external factors on cash reverses of firms. However, this
outcome is less likely to be useful in predicting the correct cash level in different
circumstances of corporate governance structures in developing countries or transition
economies, especially in the context of Vietnam. Thus, the effect of the financial
governance system on cash holding in the listed Vietnamese companies should be
considered by policy makers. Besides, Vietnamese companies may also consider
making a proper capital structure in attempt of enhancing cash liquidity, especially in
some unpredicted situations. In order to help companies in determining their potential
performance, companies should understand the internal corporate capital structures and
macro variables that affect their businesses, even though external factors captured in
the policy uncertainty has insignificant impact. The listed firms should break down the
issues related to policy uncertainty due to the fact that their market may be wavered in
unstable period.
 35

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