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Foreign ownership and investment Foreign

ownership and
efficiency: new evidence from an investment
efficiency
emerging market
Quoc Trung Tran 1185
Foreign Trade University, Ho Chi Minh City Campus, Ho Chi Minh City, Vietnam
Received 31 July 2019
Revised 26 September 2019
Abstract 17 December 2019
Accepted 30 January 2020
Purpose – This paper investigates the effect of foreign ownership on corporate investment efficiency in an
emerging market.
Design/methodology/approach – This paper employs the investment-investment opportunities sensitivity
to proxy for investment efficiency. Corporate investment and investment opportunities are measured by capital
expenditure and Tobin’s Q respectively. Control variables include state ownership, firm profitability, cash flow,
financial leverage, firm size, bank debt, asset tangibility and financial distress. The research sample includes
5,502 firm-years from 621 firms listed in Vietnamese stock market from 2007 to 2017.
Findings – We find that foreign ownership negatively affects corporate investment efficiency. Furthermore,
we continue to examine the effects of foreign ownership with financially unconstrained and constrained firms
that are classified based on the annual medians of Kaplan and Zingales (1997) score, firm size and dividend
payout ratio. We find that the negative relationship between foreign ownership and investment efficiency is
stronger in financially unconstrained.
Originality/value – Prior research shows that foreign ownership is positively related to corporate investment
efficiency. However, in Vietnamese stock market, foreign investors may prefer safe business activities as a
response to uncertainty in the business environment, ineffective legislations on corporate governance and their
informational disadvantage. Therefore, in this paper, we argue that foreign ownership negatively affects
Vietnamese firms’ investment efficiency. Risk-adverse foreign investors make firms lose some profitable
investment opportunities and thus decrease their investment efficiency.
Keywords Investment efficiency, Emerging market, Foreign ownership
Paper type Research paper

1. Introduction
In a frictionless market, firm investment is only determined by investment opportunities
(Modigliani and Miller, 1958). However, corporate investment may be irresponsive to firms’
investment opportunities due to several market frictions in the real world and thus firm
investment fails to reach the optimal level. Chen et al. (2006) and Jiang et al. (2011) document
that corporate investment efficiency is affected by information asymmetry and agency
problem respectively. Recently, investigating the relationship between ownership structure
and firm-level capital allocation of newly privatized firms across 64 countries, Chen et al.
(2017) find that foreign ownership is positively related to corporate investment efficiency. In
line with agency theory, this finding implies that foreign investors are likely to reduce agency
costs and improve investment efficiency. Several prior studies also find supporting evidence
for this hypothesis when examining the effects of foreign ownership on dividend policy (Cao
et al., 2017), cash holdings (Loncan, 2018) and risk taking (Boubakri et al., 2013). Besides,
Adaoglu and Turan Katircioglu (2013) find that foreign investor flows and stock returns of
blue chip have a contemporaneous relationship.
However, in Vietnamese stock market, foreign investors affect corporate financial
decisions through a different mechanism due to its special characteristics. First, Vietnam is
International Journal of Emerging
an emerging market experiencing several fluctuations in a short period. Established in 2000, Markets
Vietnamese stock market witnessed poor performance over the first five years before a short Vol. 15 No. 6, 2020
pp. 1185-1199
booming period from 2006 to 2007. After the crisis period 2008–2009, the market still had © Emerald Publishing Limited
1746-8809
many fluctuations. Second, legal regulations on corporate governance are insufficiently DOI 10.1108/IJOEM-07-2019-0573
IJOEM effective. Although Circular 12/2012/TT-BTC and Decree 71/2017/ND-CP stipulate
15,6 high-quality standards of corporate governance, listed firms failed to adhere to them due
to lack of effective remedies. For instance, there are over 83 percent listed firms violating
legislations on information announcement and about 70 percent listed firms fail to meet the
requirement on minimum percentage of independent directors in their board (Vietnam
Association of Financial Executives, 2017). Like foreign shareholders in other emerging
markets, foreign investors in Vietnam may be at a significant informational disadvantage
1186 relative to local investors (Choe et al., 2005; Dvorak, 2005). In addition, foreign investors are
allowed to hold up to 49 percent of shares in most listed firms[1]. Therefore, they tend to prefer
safe business activities as a response to uncertainty in the business environment, ineffective
legislations on corporate governance, and their informational disadvantage. Vo (2018) argues
that precautionary motives of foreign investors dominate Vietnamese firms’ cash holding and
find a positive relationship between foreign ownership and corporate liquidity. In addition,
Vo (2016) shows that foreign ownership is also positively related to corporate risk taking.
Therefore, in this paper, we argue that foreign ownership negatively affects Vietnamese
firms’ investment efficiency. Risk-adverse foreign investors make firms lose some profitable
investment opportunities and thus decrease their investment efficiency.
Following McLean et al. (2012) and Chen et al. (2017), we employ the investment-investment
opportunities sensitivity to proxy for investment efficiency. Corporate investment and
investment opportunities are measured by capital expenditure and Tobin’s Q respectively.
Control variables include state ownership, firm profitability, cash flow, financial leverage, firm
size, asset tangibility and financial distress. With a research sample of 5,502 firm-years from
621 firms listed in Vietnamese stock market from 2007 to 2017, we find that foreign ownership
negatively affects corporate investment efficiency. Robustness checks with different regression
approaches, various foreign ownership dummies and different sub-samples corresponding to
foreign ownership levels show that our research findings are stable. Furthermore, we continue
to examine the effects of foreign ownership with financially unconstrained and constrained
firms that are classified based on the annual medians of Kaplan and Zingales (1997) score, firm
size and dividend payout ratio. We find that the negative relationship between foreign
ownership and investment efficiency is stronger in financially unconstrained.
This paper contributes to the literature on emerging market finance by showing new
evidence for the effect of foreign ownership on corporate investment efficiency. Contrary to
Chen et al. (2017), we find a negative relationship between foreign ownership and investment
efficiency in an emerging market. The remaining of this study includes four sections. Section
2 reviews prior research and develops hypotheses. Section 3 proposes research models and
describes research data. Section 4 presents regression results, robustness checks, and
additional analysis. Section 5 is main conclusions.

2. Literature review and hypothesis development

According to influential work by Modigliani and Miller (1958), investment opportunities
should be the only determinant of corporate investment. However, corporate investment fails
to archive its optimal level in practice due to many frictions in the capital market. According
to Myers and Majluf (1984), firm managers prefer issuing securities to raise funds if they
possess private information that these security issues are overvalued. Understanding this
behavior, outside investors tend to discount these securities accordingly and thus managers
are reluctant to finance profitable projects with new securities. Consequently, firms
experience underinvestment. While information asymmetry models assume that managers
work for shareholders’ interest, agency theory argues that managers tend to act for their
personal benefits rather than maximizing shareholders’ wealth (Jensen and Meckling, 1976).
Jensen (1986) posits that empire-building motives lead firm managers to use corporate
resources (i.e. free cash flow) to overinvest in unprofitable projects. Prior empirical studies Foreign
find supporting evidence of the information asymmetry hypothesis (Chen et al., 2006) and the ownership and
empire-building hypothesis (Richardson, 2006; Harford, 1999; Jiang et al., 2011). Recently,
Chen et al. (2017) develop an investment model to investigate how foreign ownership affects
investment
corporate investment efficiency of newly privatized firms in the world based on the agency efficiency
theory. They argue that foreign investors are more effective than domestic investors in
mitigating information asymmetry and controlling managers; therefore, they can help firm
improve their investment efficiency. With a sample of 506 firms newly privatized across 64 1187
countries, they find that foreign ownership is positively related to firm investment efficiency.
The extant literature shows that foreign investors are more important than local investors
in improving corporate governance (Aggarwal et al., 2011; Gillan and Starks, 2003). Foreign
investors are deemed to have more global investment experience, well-developed technology
and better financial expertise. The advantage in expertise and technology make foreign
investors more effective in valuing firms and monitoring manager’s behaviors. Baba (2009),
Desender et al. (2016) and Jeon et al. (2011) document that foreign investors are able to enhance
corporate governance in countries of weak shareholder protection. Cao et al. (2017)
investigate the relationship between foreign institutional investment and corporate dividend
policy of firms listed in China from 2003 to 2013 and find that foreign shareholding positively
affects dividend payment decisions and vice versa. This positive relationship is consistent
with Huang and Zhu (2015). Analyzing the effect of foreign institutional investors on
corporate cash holdings across 23 emerging markets, Loncan (2018) document that foreign
institutional ownership is negatively related to cash holdings. Besides, Boubakri et al. (2013)
find that foreign ownership have a positive impact on corporate risk-taking with a research
sample of 381 firms newly privatized in 57 countries. On the other hand, prior research shows
that foreign investors have an informational disadvantage over domestic investors in
emerging markets (Portes and Rey, 2005). Brennan and Cao (1997) propose a model to
describe international equity portfolio flows based on differences in information between
domestic and foreign investors. They document that US investors stand at informational
disadvantages to local investors in foreign markets. Supporting evidence of this
informational disadvantage is also found in Germany (Hau, 2001), Indonesia (Dvorak,
2005) and Korea (Choe et al., 2005).
Despite the above-mentioned empirical evidence of foreign investors’ role to reduce
agency costs in corporate financial decisions, prior studies conducted in Vietnam show that
foreign shareholders affect firm decisions with another mechanism. Vo (2018) investigates
the effect of foreign ownership on corporate liquidity of firms listed in Ho Chi Minh City Stock
Exchange during the period from 2007 to 2015 and find that firms with higher foreign
ownership tend to accumulate more cash. He posits that this relationship is due to
precautionary motives of foreign investors. Moreover, examining how foreign investors
affect corporate risk taking with a sample of 263 Vietnamese firms from 2007 to 2014, Vo
(2016) documents that foreign ownership is also positively associated with corporate risk
taking. We argue that these research findings can be explained by special characteristics of
Vietnamese stock market. First, it is a young market but experiences many fluctuations
within a short period. Vietnamese stock market is established in 2000 with four listed firms.
During the first five years, trading activities were poor, and there were only 30 listed firms in
2005; however, the market started to develop rapidly from 2006 and reached a peak in 2007
with the market capitalization equivalent to 43 percent of GDP. From 2008 to 2009,
Vietnamese stock market is plunged into crisis. After the crisis period, the market still
witnessed several fluctuations. Second, legislations on corporate governance fail to improve
the quality of corporate governance in listed firms due to their weak enforceability. Circular
12/2012/TT-BTC issued by the Ministry of Finance and Decree 71/2017/ND-CP issued by the
Government require listed firms to meet high quality standards of corporate governance;
IJOEM however, they failed to be actually binding due to lack of effective remedies. Listed firms
15,6 violating legal regulations on information announcement constitute over 83 percent of the
whole market and there are 70 percent of firms that fail to have one-third of independent
directors in their board as requested. Foreign investors are likely to stand at a significant
informational disadvantage over Vietnamese investors since this information asymmetry is
popular in emerging markets (Choe et al., 2005; Dvorak, 2005). As a result, foreign investors
tend to be risk-adverse in response to market fluctuations, ineffective corporate governance
1188 legislations and informational disadvantage.
In this study, we argue that when foreign investors are strictly risk-adverse, they tend to
control managers severely to make sure that firms have safe investment only and they miss
some profitable investment opportunities. Therefore, we hypothesize that foreign ownership
has a negative impact on Vietnamese firms’ investment efficiency.
H1. Foreign ownership is negatively related to corporate investment efficiency.
According to agency theory, firms are likely to experience more severe shareholder
expropriation when their resources are more available to managers (Jensen and Meckling,
1976; Jensen, 1986). Understanding this behavior, foreign investors tend to increase their
control of corporate managers that face more availability of resources. Therefore, when firms
have better access to external funds, foreign investors have higher incentives to pressure firm
managers to follow safe investment policy. This reaction may make firms lose some
investment opportunities and thus decrease their investment efficiency.
H2. The negative relationship between foreign ownership and corporate investment
efficiency is stronger in financially unconstrained firms.

3. Research methods
3.1 Research data
We select all non-financial firms listed in both stock exchanges located in Ho Chi Minh City
and Ha Noi to construct our research sample. Financial information and foreign ownership
data are provided by Stoxplus. After elimination observations with missing information, we
obtain a final research sample including 5,502 firm-years from 621 firms listed in both
exchanges between 2007 and 2017. To remove outliers’ effects, we winsorize all financial
variables at 3 percent. Table I describes the research data. Panel A shows that there is a rapid
increase in the number of listed firms from 2007 to 2009. In the booming period 2006–2007,

Year N Year N Year N

Panel A. Annual number of firms

2007 215 2011 522 2015 596
2008 356 2012 537 2016 603
2009 457 2013 554 2017 591
2010 490 2014 581
Panel B. Industry distribution
Industry N Percent Industry N Percent
Technology 196 3.56 Health Care 211 3.83
a
Industrials 2,471 44.91 Consumer goods 901 16.38
Oil and Gas 56 1.02 Basic materials 812 14.76
Table I. Consumer Services 526 9.56 Utilities 329 5.98
Description of Note(s): aIndustrials (ICB code: 2000) is an industry including two super-sectors: Construction and Materials
research data (ICB code 2300) and Industrial Goods and Services (ICB code: 2700)
many firms planned to go public and they were actually listed within two years. Between Foreign
2010 and 2016, the number of firms rises slightly from 490 to 603. Panel B illustrates the ownership and
sample distribution by industry. Industrials are the largest with 2,471 observations
accounting for 44.91 percent of the full sample, followed by Consumer goods (16.38 percent)
investment
and Basic materials (14.76 percent). Oil and Gas, Technology, Health Care constitute from 1 efficiency
percent to 4 percent.
1189
3.2 Regression models and variables
In line with McLean et al. (2012), Chen et al. (2017), we propose a corporate investment model
in which investment efficiency is proxied by the investment-investment opportunities
sensitivity and employ an interactive term between investment opportunities and foreign
ownership in order to investigate how foreign ownership affects investment efficiency.
Foreign ownership is hypothesized to have a negative effect on corporate investment
efficiency; therefore, the coefficient of this interactive term is expected to be negative. In
addition, according to Chen et al. (2017), state ownership is likely to distort firm investment
since it is associated with agency problem and information asymmetry. Therefore, we also
add state ownership to the research model. Moreover, Chen et al. (2018) find that firms with
high profitability and cash flow tend to increase their investment expenditure. In line with
pecking order theory, many prior studies show that firms with lower leverage, larger size and
high tangibility are more likely to raise their investment due to better access to external
financing (Myers and Majluf, 1984; McLean et al., 2012; Chen et al., 2017; Chen et al., 2018; Du
et al., 2018; Abadi et al., 2016). Farinha et al. (2018) also show that firms facing financial
distress tend to save cash to reduce the probability of default and thus decrease investment.
Therefore, we also employ these financial characteristics including firm profitability, cash
flow, financial leverage, firm size, tangibility and financial distress as control variables.
Investit ¼ αi þ β1 Qit þ β2 Foreignit þ β3 Qit  Foreignit þ β4 Stateit þ β5 Profitit þ β6 Cashflowit
þβ7 Leverageit þ β8 Sizeit þ β9 Tangibilityit þ β10 Zit þ εit
(1)

where Invest is corporate investment measured by capital expenditure deflated by total

assets. Q is investment opportunities measured by market value of common equity plus book
value of debt deflated by total assets. Firms with more investment opportunities should have
higher investment. Foreign is foreign ownership measured by the percentage of shares held
by foreign investors. State is state ownership measured by the percentage of shares held by
government agencies. Profit is firm profitability measured by net income deflated by total
assets. Cashflow is firm cash flow measured by operating cash flow deflated by total assets.
Leverage is financial leverage measured by total debt deflated by total assets. Size is the
natural logarithm of total assets. Tangibility is asset tangibility measured by net fixed assets
deflated by total assets. Z is financial distress measured by Z score for emerging markets
(Altman et al., 1995). It is a linear combination of four common business ratios, weighted by
coefficients as follows: Z 5 3.25 þ 6.56X1 þ 3.26X2 þ 6.72X3 þ 1.05X4, where X1 5 (current
assets  current liabilities)/total assets; X2 5 retained earnings/total assets; X3 5 earnings
before interest and taxes/total assets; X4 5 book value of equity/total liabilities. Expected
signs for research variables are as follows. Q (þ), Foreign (þ), Q *Foreign (), State (), Profit
(þ), Cashflow (þ), Leverage (), Size (þ), Tangibility (þ) and Z ().
Our research data is unbalanced panel data[2]. Based on the behavior of the individual
effect αi, there are two regression models for panel data model namely fixed effects and
random effects. First, fixed effects model treats αi as a specific term group constant. The
estimation of this model may be conducted by least squares with dummy variables (LSDV),
archiving the within-groups estimator. Second, random effects model treats αi as a specific
IJOEM disturbance and thus αi is a random variable that is independent of exogenous variables. The
15,6 estimation approach is generalized least squares (GLS). In order to find which model is
appropriate for our research sample, we use Hausman’s test comparing coefficients of the
within-groups regression and the GLS regression (Wooldridge, 2010). In addition, we also
conduct Pagan–Hall test to consider whether heteroskedasticity problem. The test results
presented in Appendix 2 show the presence of heteroskedasticity; therefore, we run both
fixed effects and random effects regression models with robust standard errors.
1190 Apart from fixed effects model and random effects model, we also use different regression
approaches including random effects, pooled OLS, system GMM and Heckman two-step to
test the robustness of our research findings. Prior research documents conducted in Vietnam
and other countries show that ownership structure and corporate financial decisions may
have a reverse causality problem (Chen et al., 2017; Cao et al., 2017; Vo, 2016). Therefore, we
add the first lag of investment to Equation (1) and apply system GMM to control the potential
reverse causality and even endogeneity problem. In addition, our research sample contains
both observations with and without foreign ownership and thus we may face a selection bias
(Wooldridge, 2010). Therefore, following Chen et al. (2017), we also employ Heckman two-step
regression that can control this selection bias as a robustness check. In the first stage, a probit
regression model is used to estimate the presence of foreign investors with a dependent
variable assigned 1 if state investors are present and 0 and independent variables including
control variables, year and industry effects. This stage is conducted to predict the inverse
Mills ratio (Lamda). In the second stage, we add Lamda to the investment efficiency
regression.

4. Research results
4.1 Descriptive statistics
Table II presents descriptive statistics of research variables. Corporate investment varies
considerably with an interquartile range from 0.007 to 0.040. Its mean and median values are
0.029 and 0.020 respectively. Tobin’s Q has a mean of 0.991 and its SD is 0.458. On average,
foreign investors and state agencies account for 7.2 and 21.3 percent of shares. High state
ownership in Vietnamese stock market is due to the Government privatization policy that

Variables Mean 1st quartile Median 3rd quartile SD

Invest 0.029 0.007 0.020 0.040 0.031

Q 0.991 0.742 0.907 1.110 0.458
Foreign 0.072 0.000 0.014 0.086 0.120
State 0.213 0.000 0.089 0.475 0.243
Profit 0.069 0.022 0.054 0.100 0.063
Cashflow 0.124 0.027 0.104 0.202 0.152
Leverage 0.495 0.315 0.519 0.673 0.221
Size 26.824 25.888 26.722 27.750 1.385
Tangibility 0.210 0.064 0.149 0.302 0.190
Z 7.206 4.567 6.066 8.589 3.875
Invest is corporate investment measured by capital expenditure deflated by total assets. Q is Tobin’s Q
measured by market value of equity plus book value of debt deflated by total assets. Foreign is foreign
ownership measured by the percentage of shares held by foreign investors. State is state ownership measured
by the percentage of shares held by government agencies. Profit is firm profitability measured by net income
deflated by total assets. Cashflow is firm cash flow measured by operating cash flow deflated by total assets.
Leverage is financial leverage measured by total debt deflated by total assets. Size is the natural logarithm of
Table II. total assets. Tangibility is asset tangibility measured by net fixed assets deflated by total assets. Z is financial
Descriptive statistics distress measured by Altman et al. (1995) Z score for emerging markets
 Invest Q Foreign Q *Foreign State Profit Cashflow Leverage Size Tangibility

Q 0.144***
(0.000)
Foreign 0.023* 0.263***
(0.086) (0.000)
Q*Foreign 0.005 0.449*** 0.897***
(0.717) (0.000) (0.000)
State 0.093*** 0.139*** 0.000 0.022
(0.000) (0.000) (0.988) (0.102)
Profit 0.189*** 0.398*** 0.182*** 0.304*** 0.03**
(0.000) (0.000) (0.000) (0.000) (0.028)
Cashflow 0.349*** 0.265*** 0.057*** 0.144*** 0.048*** 0.657***
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Leverage 0.057*** 0.053*** 0.184*** 0.190*** 0.069*** 0.47*** 0.353
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Size 0.008 0.144*** 0.295*** 0.289*** 0.072*** 0.091*** 0.065*** 0.337***
(0.545) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Tangibility 0.597*** 0.010 0.012 0.008 0.123*** 0.031** 0.071*** 0.031** 0.079***
(0.000) (0.439) (0.382) (0.562) (0.000) (0.020) (0.000) (0.022) (0.000)
Z 0.020 0.093*** 0.133*** 0.166*** 0.048*** 0.497*** 0.43*** 0.844*** 0.297*** 0.134***
(0.143) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Invest is corporate investment measured by capital expenditure deflated by total assets. Q is Tobin’s Q measured by market value of equity plus book value of debt
deflated by total assets. Foreign is foreign ownership measured by the percentage of shares held by foreign investors. State is state ownership measured by the percentage
of shares held by government agencies. Profit is firm profitability measured by net income deflated by total assets. Cashflow is firm cash flow measured by operating cash
flow deflated by total assets. Leverage is financial leverage measured by total debt deflated by total assets. Size is the natural logarithm of total assets. Tangibility is asset
tangibility measured by net fixed assets deflated by total assets. Z is financial distress measured by Altman et al. (1995) Z score for emerging markets. *is significant at
10%. **is significant at 5%. ***is significant at 1%. t-statistics are in parentheses
investment
efficiency
Foreign
ownership and

1191

Correlation matrix
Table III.
IJOEM Variables Fixed effects Random effects System GMM Heckman
15,6
Intercept 0.1737*** 0.0463*** 0.0589***
(6.57) (3.59) (5.83)
L.Invest 0.2144***
(7.29)
Q 0.0089*** 0.0041*** 0.0019 0.0018
1192 (7.04) (3.25) (0.88) (1.04)
Foreign 0.0182** 0.0212*** 0.0160* 0.0235***
(2.13) (3.25) (1.92) (3.55)
Q*Foreign 0.0251*** 0.0150*** 0.0128** 0.0136***
(4.19) (3.07) (2.15) (2.65)
State 0.0124*** 0.0032 0.0035 0.0051**
(4.82) (1.54) (1.21) (2.45)
Profit 0.0685*** 0.0334*** 0.0072 0.0077
(6.28) (3.46) (0.33) (0.77)
Cashflow 0.0559*** 0.0530*** 0.0382*** 0.0604***
(14.09) (13.34) (4.10) (18.80)
Leverage 0.0175*** 0.0121*** 0.0006 0.0080**
(3.71) (3.10) (0.08) (2.31)
Size 0.0054*** 0.0009** 0.0002 0.0020***
(5.42) (2.04) (0.23) (5.92)
Tangibility 0.0611*** 0.0777*** 0.0429*** 0.0882***
(13.68) (21.47) (6.69) (45.87)
Z 0.0014*** 0.0011*** 0.0002 0.0003*
(5.61) (5.31) (0.60) (1.70)
Industry dummies No Yes Yes Yes
Year dummies No Yes Yes Yes
Clustered by firms Yes Yes No No
F statistics 56.72***
Wald λ2 1,244.04*** 3,892.77***
Hausman testa 274.96***
Hansen test 294.88
Lambda 0.0074**
No. of observations 5,502 5,502 4,899 5,502
Note(s): aHausman test is conducted for regression models without robust standard errors. The result shows
that fixed effects model is more suitable for our research data. The dependent variable is corporate investment
(Invest) measured by capital expenditure deflated by total assets. Q is Tobin’s Q measured by market value of
equity plus book value of debt deflated by total assets. Foreign is foreign ownership measured by the
percentage of shares held by foreign investors. State is state ownership measured by the percentage of shares
held by government agencies. Profit is firm profitability measured by net income deflated by total assets.
Cashflow is firm cash flow measured by operating cash flow deflated by total assets. Leverage is financial
leverage measured by total debt deflated by total assets. Size is the natural logarithm of total assets. Tangibility
is asset tangibility measured by net fixed assets deflated by total assets. Z is financial distress measured by
Table IV. Altman et al. (1995) Z score for emerging markets. *is significant at 10%. **is significant at 5%. ***is
Regression results significant at 1%. t-statistics and z-statistics are in parentheses

forces state-owned enterprises to go public. Besides, descriptive statistics of firm-specific

control variables indicate that they are appropriate for subsequent analysis.
In addition, Table III shows correlation matrix of research variables. We find that foreign
ownership and its interactive term with investment opportunities have the largest correlation
coefficient at 0.897. According to Hair et al. (2010), multicollinearity may be present if the
correlation between exploratory variables is higher than 0.90. Therefore, there is no
multicollinearity problem in our research models. Besides, we also calculate variance inflation
factor (VIF) as a robustness check. Results of VIF calculation presented in Appendix 3 show
Variables D (Foreign > 0%) D (Foreign > 5%) D (Foreign > 10%) D (Foreign > 20%) D (Foreign > 30%) D (Foreign > 40%)

Q 0.0141*** 0.0091*** 0.0090*** 0.0082*** 0.0078*** 0.0078***

(7.54) (6.95) (7.28) (6.83) (6.56) (6.55)
D (Foreign > x%) 0.0053** 0.0037 0.0063** 0.0078*** 0.0087*** 0.0118**
(2.34) (1.54) (2.49) (2.71) (2.67) (2.50)
Q*D (Foreign > x%) 0.0130*** 0.0068*** 0.0080*** 0.0078*** 0.0088*** 0.0107***
(5.88) (3.12) (3.61) (3.80) (3.87) (3.58)
No. of observations 5,502 5,502 5,502 5,502 5,502 5,502
The dependent variable is corporate investment (Invest) measured by capital expenditure deflated by total assets. Q is Tobin’s Q measured by market value of equity plus
book value of debt deflated by total assets. *is significant at 10%. **is significant at 5%. ***is significant at 1%. t-statistics and z-statistics are in parentheses
investment
efficiency
Foreign
ownership and

1193

Table V.
Robustness checks

dummies
with foreign ownership
IJOEM that all VIF values are much lower than 10 and thus we confirm that multicollinearity
15,6 problem fails to exist in this research (Hair et al., 2010).

4.2 Regression results

Table IV show regression results to investigate how foreign ownership affects corporate
investment efficiency. We find that foreign ownership is positively related to corporate
investment but its interaction with Tobin’s Q is negatively associated with firm investment.
1194 These findings imply that although foreign investors pressure firm managers to increase
corporate investment, they negatively affect the investment-investment opportunities
sensitivity. The negative relationship between foreign ownership and investment
opportunities are consistent with prior studies conducted in Vietnamese stock market (Vo,
2016; Vo, 2018). Due to high uncertainty business environment, disadvantage in information
and ineffective corporate governance legislations, foreign investors tend to be risk-adverse
and thus they make firms lose profitable investment opportunities.
Moreover, our regression results show that firm profitability is negatively related to
corporate investment in fixed effects and random effects models; however, it is not
significantly associated with corporate investment system GMM as expected. This can
be explained that fixed effects and random effects models may face causality
relationship between firm profitability and corporate investment while system GMM
is able to control it (Arellano and Bond, 1998). We also find that firms with higher cash
flow tend to have higher corporate investment. In line with Myers and Majluf (1984),
McLean et al. (2012), Chen et al. (2017), Chen et al. (2018), Du et al. (2018), we document
that asset tangibility is positively related to corporate investment since firms with high
asset tangibility have better access to external funds. Besides, consistent with Farinha
et al. (2018), firms with high financial distress tend to decrease investment due to more
cash savings.
Besides, we also use alternative measures of foreign ownership to confirm our research
findings. Table V presents results of fixed effects regression with foreign ownership
dummies. We find that these results are consistent with our findings reported in Table IV.
Moreover, we also conduct robustness checks with sub-samples corresponding different
levels of foreign ownership. Regression results reported in Table VI show that the interaction
between Tobin’s Q and foreign ownership is still negatively related to corporate investment
in all sub-samples. These results indicate that our research findings are stable across levels of
foreign ownership.
In addition, we continue to analyze whether the effects of foreign ownership on investment
efficiency are different between financially unconstrained and constrained firms. We employ
the annual medians of Kaplan and Zingales (1997) score, firm size and dividend payout ratio
to classify observations in the full sample into two sub-samples of firms with and without
financial constraint. A firm-year is defined as financially constrained in a year if its KZ index
is higher than the year median or its size (payout ratio) is smaller than the year median.

Variables Foreign < 5% Foreign ≥ 5% Foreign ≥ 10% Foreign ≥ 20% Foreign ≥ 30%

Q 0.0094*** 0.0090*** 0.0062* 0.0105 0.0075

(5.87) (2.58) (1.73) (1.60) (0.57)
Foreign 0.2030** 0.0229* 0.0105 0.0496** 0.0467
Table VI. (1.97) (1.80) (0.75) (2.17) (1.21)
Robustness checks Q*Foreign 0.3242*** 0.0259*** 0.0189* 0.0332** 0.0271**
with different levels of (3.08) (2.88) (1.82) (2.01) (2.21)
foreign ownership No. observations 3,712 1,790 1,255 686 406
 KZ index Firm size Payout ratio
Foreign
Variables Low High Big Small High Low ownership and
investment
Q 0.0085*** 0.0094*** 0.0094*** 0.0089*** 0.0087*** 0.0094***
(5.10) (4.15) (4.98) (5.20) (5.06) (4.55) efficiency
Foreign 0.0306*** 0.0046 0.0295*** 0.0003 0.0248** 0.0067
(2.72) (0.33) (2.65) (0.02) (2.30) (0.58)
Q *Foreign 0.0328*** 0.0193 0.0291*** 0.0243** 0.0292*** 0.0173* 1195
(4.34) (1.62) (3.78) (2.12) (3.81) (1.86)
No. observations 2,722 2,780 2,748 2,754 2,755 2,747
Table VII.
The dependent variable is corporate investment (Invest) measured by capital expenditure deflated by total The effects of foreign
assets. Q is Tobin’s Q measured by market value of equity plus book value of debt deflated by total assets. ownership on
Foreign is foreign ownership measured by the percentage of shares held by foreign investors. * is significant at investment efficiency
10%. ** is significant at 5%. *** is significant at 1%. t-statistics and z-statistics are in parentheses by financial constraint

Estimation results of fixed effects model reported in Table VII show that coefficients of the
interactive term between Tobin’s and foreign ownership are significantly higher for the
subsample of financially unconstrained firms. When firms are financially unconstrained,
managers are more likely to invest in risker projects. Understanding this behavior, foreign
investors tend to increase their control on managers and thus firms are more likely to miss
investment opportunities.

5. Conclusions
This study shows that foreign investors determine corporate financial decisions with a
special mechanism. We argue that foreign investors are risk-adverse in response to a capital
market of high uncertainty, ineffective legislation on corporate governance and their
information disadvantage in Vietnamese market. Therefore, they pressure firm managers to
follow safe investment and firms experience lower investment-investment opportunities
sensitivity. With a sample of 5,502 observations from 621 firms listed in Vietnam from 2007 to
2017, we find that foreign ownership is negatively related to corporate investment efficiency.
In addition, we also find that this effect is stronger in financially unconstrained firms. These
findings imply that policy makers in emerging countries should create more transparent and
stable economies to build the trust of foreign investors. Therefore, foreign investors are less
risk-averse and more likely to improve corporate investment efficiency. Moreover, these
understandings also indicate that international investors should choose economies with high
transparency and less uncertainty for their investment projects. Besides, investors should
take foreign ownership into consideration when valuing stocks.

Notes
1. Before December 2015, foreign ownership cap for non-financial firms is 49 percent. From December
2015, Vietnamese government allows foreign investors to hold 100 percent of shares in some
industries if firms conduct required administrative procedures. However, until December 2017, there
are about 20 firms with foreign ownership greater than 49 percent.
2. Please see the participation pattern in research data in Appendix 1.

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IJOEM Appendix 1
15,6
Frequency Percent Pattern

204 32.85 11111111111

132 21.26 .1111111111
1198 98 15.78 ..111111111
32 5.15 ...11111111
27 4.35 ....1111111
21 3.38 .......1111
19 3.06 ......11111
18 2.90 .....111111
Table I. 13 2.09 ........111
Participation pattern in 57 9.18 (other patterns)
research data 621 100.00

Appendix 2

Ho: Panel Homoscedasticity–Ha: Panel Heteroscedasticity

Table II.
Panel Data Hall–Pagan LM Test E2 5 Yh 5 633.3298 p-value > Chi-squared(1) 5 0.000
Heteroscedasticity Hall–Pagan LM Test E2 5 Yh2 5 576.4791 p-value > Chi-squared(1) 5 0.000
Hall-Pagan Test Hall–Pagan LM Test E2 5 LYh2 5 411.1357 p-value > Chi-squared(1) 5 0.000

Appendix 3

Variable VIF 1/VIF

Q 2.060 0.487
Foreign 6.270 0.160
Q * Foreign 7.560 0.132
State 1.170 0.853
Profit 2.490 0.402
Cashflow 2.030 0.491
Leverage 4.400 0.227
Size 1.550 0.646
Tangibility 1.210 0.825
Z 4.300 0.233
Q is Tobin’s Q measured by market value of equity plus book value of debt deflated by total assets. Foreign is
foreign ownership measured by the percentage of shares held by foreign investors. State is state ownership
measured by the percentage of shares held by government agencies. Profit is firm profitability measured by net
income deflated by total assets. Cashflow is firm cash flow measured by operating cash flow deflated by total
Table III. assets. Leverage is financial leverage measured by total debt deflated by total assets. Size is the natural
Variance inflation logarithm of total assets. Tangibility is asset tangibility measured by net fixed assets deflated by total assets. Z
factor is financial distress measured by Altman et al. (1995) Z score for emerging markets
Appendix 4 Foreign
ownership and
investment
Variables Coefficients efficiency
Intercept 5.2341***
(8.42)
Q 2.2377*** 1199
(23.35)
State 1.9249***
(15.83)
Profitability 5.9622***
(9.75)
Cashflow 0.3396
(1.52)
Leverage 2.6093***
(11.30)
Size 0.2096***
(9.53)
Tangibility 0.3569***
(2.59)
Z 0.0365***
(2.77)
Industry dummies Yes
Year dummies Yes
No. Observations 5,502
Q is Tobin’s Q measured by market value of equity plus book value of debt deflated by total assets. State is
state ownership measured by the percentage of shares held by government agencies. Profit is firm profitability
measured by net income deflated by total assets. Cashflow is firm cash flow measured by operating cash flow
deflated by total assets. Leverage is financial leverage measured by total debt deflated by total assets. Size is Table IV.
the natural logarithm of total assets. Tangibility is asset tangibility measured by net fixed assets deflated by Heckman’s first step
total assets. Z is financial distress measured by Altman et al. (1995) Z score for emerging markets probit model results

Corresponding author
Quoc Trung Tran can be contacted at: tranquoctrung.cs2@ftu.edu.vn

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