Volume 3 • Issue 2 | September 2019
Overinvestment and Free Cash Flow: Empirical Evidence from Vietnamese Enterprises
Le Ha Diem Chi, Nguyen Thi Minh Chau
Abstract:
The paper reports an investigation into Vietnamese enterprises’ optimal level of investment based on panel data to find out the relationship between overinvestment and free cash flow. The results show that Vietnamese enterprises have been largely overinvesting. Overinvestment is significantly negatively associated with the efficiency of the company. By following the statistical approach to measure overinvestment and free cash flow, the results show that there is a significantly positive association between overinvestment and free cash flow of enterprises. This completely corresponds to agency theory. Enterprises with free cash flow have strong incentives to engage in overinvestment.
JEL classification: A1, F16, J1