This paper examines the impact of misvaluation on firm investment in Vietnam. Data were collected from the financial statements of Vietnamese firms listed on the Hanoi Stock Exchange and Ho Chi Minh City Stock Exchange. It also examined the role of debt in financing misvaluation-induced investment. The findings provide evidence for both the shared sentiment and economic competition hypotheses. Furthermore, the results are robust to alternative treatments of growth opportunities. Moreover, the empirical evidence supports the shared sentiment hypothesis.
A number of studies have examined the effect of financial constraints on firm investment. Some studies suggest that internal cash flow is negatively related to firm investment. This effect is stronger for firms with high information asymmetry. In contrast, this relationship is not significant for firms with low growth. However, this relationship is not as strong for firms with high growth rates. Further research should be conducted to examine the effect of credit constraint on the investment decisions of firms. This is an important area for empirical research.
Despite the evidence, the study found that external funds play an important role in firm investment. In addition to internal funds, firms’ financial condition is also linked to external funds. Kaplan and Zingales (1997) determined that the least constrained firms were most sensitive to internal cash flow. This finding is in line with earlier findings. Thus, external funds do play a significant role in firm growth. They are therefore important to study the impact of these financial constraints on firm investment.
The results of the regression show that firm investment decisions are related to internal financing. In a perfect capital and credit market, firms’ investment decisions are not affected by internal finances. But in developing countries, external funds play a major role in firm growth. The results of this study suggest that firm investment in developing countries is more sensitive to external cash flow than firms in developed economies. In a perfect capital and credit market where the government has little control over the economy, external funds can boost the growth of small and medium-sized firms.
The study found that internal finance is related to firm investment in different countries. This is consistent with the previous findings that the ratio of equity investment to capital is related to firm creditworthiness. In developing countries, external funds play a major role in firm growth. For example, in Italy, foreign equity investments have increased by five-fold in the past five years compared to the previous five-year period. While firm investments are important to firms, they should also be considered in context of the local economy.
There is a strong correlation between internal finance and firm investment. The latter is more sensitive to internal funds than the former. For example, firms with higher internal finance are more likely to invest in new technology. As a result, equity firms tend to be more aggressive in investing and expanding. The same goes for smaller companies in developing countries. The results of the study suggest that external funds have a significant effect on firm growth. A high degree of financial flexibility can lead to increased profitability.
