IMPACT OF LEVERAGE ON FIRM’S INVESTMENT DECISION OF FOOD - BEVERAGE INDUSTRY.

Nguyen Van Duy., Pham Thi Lan Huong & Le Minh Tu. (2015), Impact Of Leverage On Firm’s
Investment Decision Of Food - Beverage Industry, International Conference on Emerging
Challenges: Managing to Success, 1, 325-331
1
IMPACT OF LEVERAGE ON FIRM’S INVESTMENT DECISION
OF FOOD - BEVERAGE INDUSTRY.
Nguyen Van Duy1*
, Pham Thi Lan Huong2
, Le Minh Tu3
1. Viet Nam Quantitative Analysis Joint Stock Company
2. Bachelor of National Economics University
3. School of Economics and Management, Hanoi University of Science and Technology, Hanoi
*
Author's contact information: Email: duynguyen.qa@gmail.com
Abtract
Researching impacts of leverage on firm’s investment decision is very important to business. The author
estimates the leverage with factors: firm’s performance (Tobin’s Q, ROA), cash flows (CF), sales growth
(Sale) and liquidity (Liq) on firm’s ivestment decision (I) of Food – Beverage (F&B) industry which are listed
on Vietnam Stock Exchange on period of 2008-2014. The researching method using GMM model
(Generalized method of moments) indicates that leverage has only immediate impacts and has affects on lag
1 to investment decisions. Besides, the factors of cash flow and sales growth also have impacts on investment
decision. The other factors do not have affects on firm’s ivestment decision of food - beverage industry..
Từ khóa: GMM Model, Investment Decision, Leverage.
1. INTRODUCTION
In the context of the Trans-Pacific
Partnership (TPP) and the Asian Economic
Community (AEC) is being deployed to signing
period for Vietnam, domestic enterprises are facing
opportunities and challenges after joining the
economic alliance. Thus, the enterprise belongs to
food & beverages industry (F & B) also gets
significant impacts by this agreement. For the
current situation, companies in the F & B are
promoting investment in expanding business
model, diversifying commodities to create strongly
steps for joining the TPP [1]
By the end of 2014 there are twenty eight F
& B enterprises listed on Stock Exchange. The
statistical data of the whole industry shows three
companies: Vietnam Dairy JSC (VNM); Kinh Do
Corporation (KDC) and Masan Group (MSN)
account for 92.23% of net profits of the whole
industry [2]. In particular, net profit of VNM takes
account for 72.74%, MSN is the second largest
(12.95%) and the third is the KDC (6:54%). [3]
Studying on how debt (Leverage) and debt
maturity structure influences on the investment
decisions of the company is the fundamental
problem in corporate finance [4]. To achieve the
growth in performance and productivity, leverage
needs being well managed. In the era of global
competition, companies need to make major
investments in tangible fixed assets and other
intangible assets in order to enhance enterprises’
competitiveness. Besides, the capital and debt are
main resources for this investment category. [5]
However, there have been various
discussions on Leverage and investment decisions
of businesses. Accordingly, in perfect competitive
environment, the policies including debt ratio has

2
not significant meaning on affecting investment
decisions of businesses. Besides, in non-perfect
competitive market, the issues of leverage will
cause an impact on investment decisions (leverage
can cause underinvestment or overinvestment. [6]
There have be many researchers, who make
studies with different approaching methods, also
give various oppinions. If debt matures after the
expiration of the firm's investment option, it
reduces the incentives ofthe
shareholder-management coalition in control of
the firm to invest in positive
net-present-value investment projects since the
benefits accrue, at least partially, to the
bondholders rather than accruing fully to
the shareholders. [7]
According to Jensen, the assets of large
companies will create investment opportunities
which will bring better value (investments in
projects with positive net present value). In case if
the debt ratio occupies a large proportion in the
capital structure of the company, it will push
managers to make investment decisions by using
debt as the fund (possibly, this debt is being used
in the project with a negative NPV, or causing
damage to shareholders and overinvestment is
increasing burden of debt). Therefore, it shows
clearly that the debt ratio had a negative impact on
the value of the company. [8]
There are many researchers who study on
impacts of financial leverage on the investment
decisions of the business all over the world.
Among them, Aivazian is the typical author who
gave an important report by doing research on US
financial company on Compustat in the period
1982 to 2002. The results showed that long-term
debt ratio has reduced the impact of investment in
companies with high growth. Nevertheless,
leverage factor has not significant meaning in
affecting investment decisions of lower growth
enterprises. [4]
An experimental study in the Republic of
Mauritius Odit & Chitoo shows that Leverage has
both positive and negative effects on investment
decisions of twenty-seven companies listed on the
exchange Mauritius (SEM) 1990 - 2004. The
author separates those companies into two groups:
high-growth companies and low-growth companies.
The research shows that the debt ratio negatively
impacts on investment decision of low-growth
firms (the bigger the debt ratio is, the less the
investment is) while this trend becomes a positive
factor in promoting investment in high-growth
companies. These high-growth companies seems to
invest more when the debt ratio is bigger (financial
leverage has a positive impact). [5]
Studies of Firth, Lin and Wong are done in
China market also indicates negative impacts of
debt on investment decisions for firms listed on
the Shanghai Stock Exchange or the Shenzhen
Stock Exchange in China from 1991 - 2004.
[9].The other study results also give the same
conclusions as Firth, Lin and Wong’s. The
researches of Yuan and Motohashi also point out
reverse relationship existing between financial
leverage and investment decisions [10]. Or even as
the most recent research did by Naeemullah Khan
also refer the opposite relationship between
Leverage and investment decisions of companies
listed in Pakistani. [11]
In Vietnam market, at present, there are
studies by Nguyen Thi Ngoc Trang and Trang
Thuy Quyen who research on relationship between
financial leverage and investment decisions of the
public companies listed on Vietnam's stock
exchanges during 2009 - 2011. the authors values
financial leverage affects on investment decisions
at the significant level of 10% [12]. However,
because the time factor used in research is quite
short (only 3 years) and research methods do not
have appropriate testing (the authors used Pooled
effect, Fixed effect and random effect model),
research results do not achieve high reliability.
Although there have been studies on impact
of financial leverage on investment decisions, no
studies have been made for food and beverage
industry. In Vietnam market, due to limitations of
studies by Trang and Quyen, a study with
expanding the number of researching year and
more-closely research method is required to be
conducted. Therefore, the authors conducted a
study "Impact of Investment Firms Levrage on

3
decission of Food - Bererage Companies" in the
period of 2008-2014.
2. RESEARCH METHOD
2.1 Research Model
Basing on researching model Avizian 2005,
this research is conducted to estimate the impact of
financial leverage and immediate impact on
investment decisions; and this research is salso
considered the impact of the performance variables
(Tobin's Q, Cash Flow (CF), Sale, Liquidility and
Return on total assets on investment decision (I).
Models are presented as below:
Hình 1 Research Model
Regression Estimation: Ii,t / Ki, t-1 = (CFi,t
/ Ki, t-1) + β1Qi, t-1 + β2LEVi, t-1 +β3SALEi, t-1 +
β4ROAi,t-1 + β5LIQi,t-1 + uit
With:
Ii,t: Net Investment of the company i at the
time t
Ki, t-1: Net tangible fixed assets.
CFi,t: Variable cash flow of the company i at
the time t.
Tobin’s Q i, t-1: variable Tobin’s Q,
representing for company’s growth
opportunity.
LEVi, t-1: Variable Leverage represents for
leverage at time t-1.
SALEi, t-1: represents for growing in sales.
ROAi,t-1: Variable Profitability, return on
total assets.
Variable LEV (called Leverage): long-term
or short term debt ratio on total assets.
Tobin’s Q: stands for growth opportunity.
Authors’ expectation about results when
using this model is as below:
Table 1. Authors’ expectation
Variable Symbol Expectation
1 Net Investment Ii,t / Ki, t-1
2 CF CF=CFi,t/Ki,t-1 +
3 Tobin’s Q Qi, t-1 +
4 Leverage LEVi, t-1 -
5
Net revenue on
tangible fixed
assets
SALEi, t-1
+
6
Return on total
assets
ROAi,t-1 +
7
Thanh khoản
Liquidity
LIQi,t-1 +
2.2 Data-analyzing method.
Because the unique characteristics of this
research is proceeded on time data (2008-2014)
and space data (in F&B companies), regression
equation with panel data is made of use is an
entirely reasonable choice .[13]
Regarding for table-data, there are three
models can be used: (1) Pooled OLS; (2) Fixed
effect Model; (3) Random Model; However; using
panel data often causes defects due to endogenous
variables which internally exist in this model.
Hence, in case of meeting these defects, we apply
the Generalized Method of Moments (GMM)
developed by Arellano & Bond in 1991 [14]. This
method first differences the data to eliminate the
individual effect, and then utilizes all the lagged
values of the regress as instruments.
3. RESULTS
Leverage
Tobin’s Q
CF
Growth
LIQ
Investment
ROA

4
3.1 Descriptions Data
Statistical result shows that the rate of net
investment of all stages at average is as 0.18 times
as tangible assets. The period of time which had
the highest net investment rate 3.69 times was in
2008, this rate belongs to VHC stocks; while the
lowest rate belongs to CLC stocks (-0.41). As for
Leverage, it reached the highest point in 2012
(belonged to VTL stock – 76%) and fell at the
lowest point in 2013 (belonged to SGC
stocks-14%). Similarly, the indicators are
described in the below statistical table:
Table 2: Descriptions Data
Variable Mean
Std.
Dev. Min Max
I 0.19 0.58 -0.41 3.69
CF 1.02 1.04 -0.16 5.01
TobinQ 1.34 0.77 0.60 5.15
LEV 0.46 0.17 0.14 0.76
SALE 15.29 15.37 1.44 79.28
ROA 0.11 0.08 -0.07 0.34
LIQ 1.87 0.93 0.56 5.71
Source: Results of STATA software
3.2 Correlations
The correlation coefficient indicates a
two-way relationship between each pair of
variables. The bigger coefficient is, the more
tightly the pair of variables gets. The result
presents that I- variable correlates the most
strongly with CF (0.283), followed is with
Leverage (0.205) and lowest correlates wit-0.021)
(table 2).
Table 3. Correlations matrix
Corr I CF TobinQ LEV SALE ROA LIQ
I 1
CF 0.283 1
TobinQ 0.031 0.075 1
LEV 0.205 -0.291 -0.405 1
SALE -0.108 0.646 -0.168 -0.019 1
ROA -0.021 0.305 0.654 -0.685 -0.042 1
LIQ -0.149 0.331 0.317 -0.770 0.100 0.621 1
3.3 Result of estimating
In the original model of Aivazian, he only
uses variables with lag 1 year for researching. In
this research, the author will evaluate two models
using lag 1 year towards original model and
evaluate immediate impacts of variables on
investment decision:
3.3.1 Estimate immediate impacts:
The result of Hausman test with p-value at
0.018 less than 0.05 shows that fixed effect model
is more suitable than the random effect model. The
author uses fixed effect model to analyze and
implement the inspections. Besides, both
heteroskedasticity test and autocorrelation test give
p-value less than 0.05, Fixed effect model does not
match reliability require to testing. Therefore; the
author uses GMM model to address this
phenomenon (remove the effects of endogenous
variables in the model). Basing on the correlation
coefficient and testing each independent variable
as endogenous variables, the author obtains the
most suitable endogenous variable is CF and LEV.
AR(2) test with p-value 0.609 and
Endogenous test (Sargan test) at 0.089 bigger than
0.05, VIF less than 10 shows that GMM model is
an entirely suitable choice for estimating impacts
of Leverage and other variable on Investment
decisions. The regression result indicates Leverage
as a positive effect on Investment decisions
(p-value is 0.026 and Coefficient is 2.222).
Furthermore; Variable CF also has positive impact
on Investment decisions at significant level 5%
(p-value is 0.000 and Coefficient is 0.367).
Variable Sale has negative impact on Investment
decisions (p-value is 0.000 and Coefficient is
-0.027). Other variables: Tobin’s Q, ROA, LIQ is
not statistically significant at 5% (p-value >0.05)
Table 4. Regression Results: Independent
Variable (Net Investment)
Fixed effect GMM model
Variable Coef sig Coef sig
CF 0.54 0.000 0.367 0.000
TobinQ -0.191 0.258 -0.238 0.106

5
LEV 2.222 0.026 1.339 0.020
SALE -0.014 0.035 -0.027 0.000
ROA -2.025 0.134 -2.706 0.113
LIQ -0.097 0.514 0.191 0.122
_cons -0.515 0.448 -0.136 0.785
Hausman
0.018-> fixed effect
Hetero 0.000-> heteroskedasticity
Auto 0.000-> Autocorrelation
AR(1) 0.669
AR(2) 0.609
Sargan
test
0.089
VIF <10
3.3.2 Estimate impacts at Lag 1.
AR(2) test with p-value 0.768 and
Endogenous test at 0.478 bigger than 0.05, VIF
less than 10 shows that GMM model is totally
suitable for estimating impacts of Leverage and
other variables at lag 1 on Investment decisions.
The research shows Leverage has a positive effect
on Investment decisions (p-value is 0.044 and
Coefficient is 1.176). Other variables: CF, Sale,
Tobin’s Q, ROA, LIQ is not statistically significant
at significance level 5% (p-value >0.05).
Table 5. Regression Results: Independent
Variable (Net Investment)
Fixed effect GMM model
Variables Coef sig Coef sig
CF t-1 0.125 0.061 0.125 0.061
TobinQ t-1 0.024 0.786 0.024 0.786
LEV t-1 1.176 0.044 1.176 0.044
SALE -0.005 0.305 -0.005 0.305
ROA t-1 0.772 0.493 0.772 0.493
LIQ t-1 0.081 0.391 0.081 0.391
_cons -0.745 0.096 -0.745 0.096
Hausman
0.04094-> Random
effect
Hetero
0.1000-> No
Heteroskedasticity
Auto
0.000->
Autocorrelation
AR(1) 0.000
AR(2) 0.768
Sargan
test
0.478
VIF <10
3.4 Discussion
Leverage Statistical Data of F& B
enterprises shows that leverage of these companies
are at safe range. (The highest rate has just reached
76% of total asset of the business). This number
indicates that F&B companies have taken a very
high caution in investing by external loan. Besides,
there are still companies using Leverage but at
quite low rate 14%. This reality clearly reflected
that companies are quite weak in deploying
Leverage or in other words, they do not know how
to raise capital by debt.
By means that the Net investment only
reaches 0.19 of tangible fixed assets at average, it
refers that investment rate of F&B enterprise
remained rather low. Still; there were periods when
companies boosted up to 3.69 tangible fixed asset
is on the first stage of operation. At this period,
most of companies have a common trend to
promote investment as well as extend company’s
scale in order to create a long-term growth in the
future.
The regression results indicate that leverage
affects Net investment in the same direction
(immediate impact and last influence for one year
later). This issue refers when Leverage has signs of
decreasing motivation, F&B companies will limit
their investment on fixed assets as well as other
long-term assets. It can be considered that F&B
industry seems rather hesitated in investing to
increase their competitiveness in the period of
pre-signing TPP agreements. Also, in an opposite
assumption when leverage increases, the industry
continues to promote Net Investment; this
phenomenon occurs suggesting that the F& B
sector is heavily depending on debt. Many
companies do not have enough effort to fund
projects, they are forced to use Leverage as the
main source to investment. This outcome is similar
to Lang’s research when he studied on Leverage,
Investment and Firm Growth [14] and the research
by John & Muthusamy when they did a research
on Indian pharmaceutical companies during the
period from 1998 to 2009. [16]

6
Growth in sales has opposite and immediate
impacts on Net Investment once again reflected
hesitation in investment decision of companies in
F&B sector (although there is growth in sales but
investment is still limited because they concerns
about their current debt). It can be realized that
F&B sector is facing enormous pressure from
enlarging the scale as well as its competitiveness in
economics.
Among all variables, only variable CF has
bright signs (CF has a positive impact on net
investment). This sign, according to pecking order
theory conducted by Myer, points out that the
companies prefer using internal cash flow to
external cash flow because this funds exist
available. The remaining variables such as Tobin’s
Q, ROA, and LIQ have not impacts on Net
Investment in F&B sector. It shows that
performance result or liquidity is not a cause
deciding on Net Investment.
4. Conclusion
By regression analysis, the paper finds out a
positive relationship between Leverage and Net
Investment, and this connection is immediate and
at Lag 1. This result clearly implies that high
caution leading to underinvestment means
hesitancy in making investment decision in
developing business systems; (2) Reserve assets
are not big enough to fund for investment projects;
firms are still using debts as main sources to
investing and using reserve assets seems rather
limited. This shows that companies are struggling
for many difficulties in improving performance,
enlarging scale, increasing competitiveness before
integrating into the coming international
playground.
With this result, the authors also make
recommendations for the F& B industry on
business investment to enhance the
competitiveness in the era of more and more
powerful integration. In addition; companies also
need to review their performance to raise their
reserve assets, reduce dependence of investment
projects on debts.
5. ACKNOWLEDGEMENTS
First of all, I would like to express my
thanks to the organizers of international
conferences ICECH2015 who support us a lot in
publishing our works. Finally, we would also like
to thank to all members of the Quantitative
Research Center who has distributed and
encouraged me in finishing this thesis in the best
way.
6. REFERENCE
[1] A race among F&B industry,
http://www.vcci.com.vn/tin-tuc/2015012110283
8522/soi-dong-cuoc-chay-dua-cuanganh-thuc-p
ham-va-do-uong.htm
[2] F & B industry,
http://vietstock.vn/2015/03/nganh-thuc-pham-
do-uong-2014-vnm-va-msn-chiem-86-lai-toan
-nganh-737-408470.htm
[3] Statistics on the Stock
http://vietstock.vn/2015/03/nganh-thuc-pham-
do-uong-2014-vnm-va-msn-chiem-86-lai-toan
-nganh-737-408470.htm ; http://cafef.vn/
[4] Aivazian, V.A., Ge, Y & Qiu, J. (2005), “Debt
Maturity Structure and Firm investment”,
Financial Management, 107-119
[5] Odit, M.P., Chitoo, H.B. (2008), “Does
Financial Leverage Influence Investment
Decisions? The Case Of Mauritian Firms”,
Journal of Business Case Studies, 4(9), 49-60)
[6] Modigliani & Miller (1958), “The cost of
capital, corporation finance and the theory of
investment” The American Economic Review,
48(3), 261-297
[7] Myers, S. (1977), "Determinants of Corporate
Borrowing," Journal of Financial Economics,
5, 147-175
[8] Jensen, M.C. (1986), “Agency Cost of the Free
Cash Flow, Corporate Finance, and
Take-overs”, American Economic Review, 76,
323-329
[9] Firth, M., Lin, C & Wong, S.M.L. (2008),
“Leverage and investment under a
state-owned bank lending
Environment: Evidence from China”, Journal of
Corporate Finance, 14(5), 642-653
[10] Yuan, Y & Motohashi, K. (2012), “Impact of

7
Leverage on Investment by Major
Shareholders:
Evidence from Listed Firms in China”, WIAS
Discussion Paper, 1-28
[11] Khan, J & Naeemullah. (2015), “The Impact
of Leverage on Firm’s Investment”, Research
Journal of Recent Sciences, 4(5), 67-70
[12] Nguyen Thi Ngoc Trang & Trang Thuy Quyen
(2013), “Relationship between Leverage and
Investment”, Development and integration,
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[13] Nguyen Van Duy, Dao Trung Kien, Nguyen
Thi Hang, Dao Thi Huong, (2014), “Impact of
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Marke”t, International Conference on
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[14] Arellano, M & Bond, S. (1991), “Some test of
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Equations”, Reviews of Economics Studies,
58, 277-297
[15] Lang, L. (1995), “Leverage, Investment, and
firm growth”, NBER Working Paper, 51(65),
1-35
[16] John, F & Muthusamy, K. (2011), “Impact of
Leverage on Firms Investment Decision”,
International Journal of Scientific &
Engineering Research, 2(4), 1-16

IMPACT OF LEVERAGE ON FIRM’S INVESTMENT DECISION OF FOOD - BEVERAGE INDUSTRY.

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