Firm performance: the moderation impact of debt and dividend policies on overinvestment

Abstract

PurposeDebt, dividend and investment policy constitutes a company's important financial decisions to determine firm performance. The research emphasizes on the problem of overinvestment, a phenomenon that worsens firm operation. Furthermore, it clarifies the moderation role of debt and dividend policy in mitigating the negative effect of overinvestment on firm performance in the case of Vietnamese listed companies.Design/methodology/approachThe research uses all financial statement of non-financial Vietnamese listed companies on Ho Chi Minh and Hanoi Stock Exchange in the period of 2008–2018. The data are collected from Thomson Reuters Eikon. The final data set is comprised of 669 listed companies. The study measures overinvestment though investment demand function and HP filter. Moreover, the research employs the dynamic model, so it has to apply the SGMM method to deal with the problem of endogeneity caused by the lagged dependent variable.FindingsThe research finds that overinvestment is negatively associated with firm performance. Debt or dividend policy separately can moderate the negative effect of overinvestment on firm performance. However, when these two policies are combined, they lessen the positive interaction impact of each policy due to the substitution between debt and dividend policy.Research limitations/implicationsThe research may have two limitations. Firstly, the research measures overinvestment indirectly through investment demand function and HP filter. These two measures only help identify the sign that companies may have the problem of overinvestment because we cannot determine whether they overinvest or not in reality. Secondly, when using interaction variables, the problem of multicollinearity may be higher, and this may adjust the signs and significance level of variables in the models.Practical implicationsPractically, the research proposes three policy recommendations. Firstly, a company can exploit debt or dividend policy to limit excessive free cash flow in order to constrain the problem of overinvestment. Secondly, a company should enhance its corporate governance to resolve agency problems. Thirdly, the government should make the financial sector more transparent and effective to improve monitoring functions of various parties in the capital market.Social implicationsOverinvestment sometimes can cause social issues. Overinvestment means that companies make ineffective investment. If they continue this situation over a long time, companies may have financial distress or even go bankruptcy. As a result, it will slow down economic growth and increase unemployment in the economy.Originality/valueThe research is supposed to make two great contributions to the existing empirical studies in two aspects. Firstly, it is the first attempt to take into consideration the interaction between overinvestment and financial policies. Secondly, it helps enhance the fundamental stance of the agency theory, which supports the interdependence of debt, dividend and investment policy.

Board governance quality and risk disclosure compliance among financial institutions in Uganda

“…These findings are consistent with that of Agyei-Mensah and Buertey (2019) who found institutional ownership improving risk disclosure, whereas Mnif and Znazen (2020) and Agyei-Mensah (2017a) who found that larger boards enhance IFRS compliance. Furthermore, in line with firm size, Grassaa et al (2020) found that larger banks in terms of total assets have a higher risk disclosure behavior compared to smaller ones while Trong and Nguyen (2020) found a negative significant relationship between firm size and firm performance. Further, Agyei-Mensah (2017a), Juhmani (2017) and Agyei-Mensah and Buertey (2019) found no significant relationship between firm size and RDC with IFRS 7.…”

Anti-Corruption Campaign and Firm Financial Performance: Evidence From Vietnam Firms

“…Control Variables. Following the previous studies in the firm performance literature (Iqbal et al, 2020;Kong et al, 2017;Nguyen & Dijk, 2012;Nguyen Trong & Nguyen, 2021;Sahakyan & Stiegert, 2012;Sharma & Mitra, 2015;Zhou & Peng, 2012), we include the common control variables at firm-level and macro-level such as firm size (SIZE), financial leverage (LEVERAGE), cash flow (CASHFLOW), corporate investment (INVESTMENT), fixed assets ratio (PPE), the Rule of Law index (ROL) of Vietnam, investment opportunity proxied by macroeconomic growth (GDP and INFLATION). Variable measurements and descriptions are presented in Table 1.…”

The Effects of Corporate Governance on Company Performance and Dividends in Three Asean Countries

“…These two control variables were used because of the research gap in the existing studies. Several studies reveal that the use of debt gives a positive result on performance so that it also has a positive impact on dividend payments (Al Farooque et al, 2020;Benjamin & Biswas, 2019;Nguyen Trong & Nguyen, 2020). However, some studies state that when a company has debt, creditors will carry out supervision to the company so that the dividend function as a signal of the company's condition can be reduced (Al-Najjar & Kilincarslan, 2016;Christianto, Murhadi, & Wijaya, 2021;Tekin & Polat, 2020).…”

“…However, some studies state that when a company has debt, creditors will carry out supervision to the company so that the dividend function as a signal of the company's condition can be reduced (Al-Najjar & Kilincarslan, 2016;Christianto, Murhadi, & Wijaya, 2021;Tekin & Polat, 2020). The use of company size can positively affect performance and dividends, where large-sized companies tend to have stable performance and pay higher dividends (Baker, Dewasiri, Premaratne, & Yatiwelle Koralalage, 2020;Benjamin & Biswas, 2019;Nguyen Trong & Nguyen, 2020;Tekin & Polat, 2020). Meanwhile, some argue that analysts and investors relatively pay more attention to large-sized companies, so that the dividend function as a signal of the company's condition will decrease (Asali, Murhadi, & Sutejo, 2020;Christianto et al, 2021;Rajput & Jhunjhunwala, 2019;Sarwar, Xiao, Husnain, & Naheed, 2018).…”