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Testing Trade-Off Theory Between Networking Capital And Firm Value: Empirical Evidence From Vietnam

Author

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  • DUONG DANG KHOA

    (Faculty of Finance and Banking, Ton Duc Thang University, Ho Chi Minh City, Vietnam)

  • PHAM THI TRAM ANH

    (#x2020;Faculty of Business Administration, Finance and Marketing University, Ho Chi Minh City, Vietnam)

  • LE THI MY DUYEN

    (#x2021;Faculty of Finance and Banking, Van Lang University, Ho Chi Minh City, Vietnam)

Abstract

This study investigates empirically how net-working-capital (NWC) affects firm value, using a sample of the Vietnamese stock market. Our empirical results indicate an optimal NWC level that maximizes firm value. Our research also shows empirical evidence that deviations from actual and estimated NWC levels (above and below optimal level) can reduce firm value. We show that more than 40% of NWC observations in our sample on the right-hand side of the breakpoint reduce firm value. Managers tend to build up excessive working capital to prevent hiking funding costs after the 2008 crisis. Therefore, our findings help managers determine an optimal level of NWC, which enhances firm value. Our findings are consistent with the trade-off theory.

Suggested Citation

  • Duong Dang Khoa & Pham Thi Tram Anh & Le Thi My Duyen, 2020. "Testing Trade-Off Theory Between Networking Capital And Firm Value: Empirical Evidence From Vietnam," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 15(03), pages 1-21, September.
    • Handle: RePEc:wsi:afexxx:v:15:y:2020:i:03:n:s201049522050013x
    DOI: 10.1142/S201049522050013X
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    Cited by:

    1. Yi Zhou & Jiapeng Dai & Umar Farooq & Jaleel Ahmed & Klunko Natalia Sergeevna, 2023. "National Culture as a Determinant of Corporate Capital Structure: Empirical Evidence from Three Emerging Economies," Advances in Decision Sciences, Asia University, Taiwan, vol. 27(2), pages 122-144, June.

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