The Impact of Cash Flow and Working Capital on Corporate Investment with Financial Constraints: Evidence from Vietnam

Abstract

The paper measures the investment cash flow sensitivity and identifies the role of working capital in reducing firms's investment dependence on cash flows with financial constraints. The paper is based on data of non-financial enterprises listed on the Vietnamese stock market from 2012 to 2022. Using the SGMM method, the research results show that investment expenditure and working capital investment are very sensitive to cash flow shocks; furthermore, sensitivity increases with financial constraints. In addition, this study also examines the role of working capital in maintaining and stabilizing investment when internal capital changes; this role increases with the level of financial constraints. The results are relevant for financial managers to develop policies combining working capital management and investment policies to minimize the impact of financial constraints on investment and new institutional policies to support access to capital sources for firms.