VIETNAMNATIONALUNIVERSITY HOCHIMINHCITY

INTERNATIONALUNIVERSITY
SCHOOL OF BUSINESS

DETERMINANTS OF WORKING CAPITAL

REQUIREMENT
THE STUDY FROM COMPANIES LISTED ON
HO CHI MINH STOCK EXCHANGE (HOSE)
In Partial Fulfillment of the Requirements of the Degree of
BACHELOR OF ARTS in BUSINESS ADMINISTRATION

Students name: NGUYEN NGOC QUYEN (BAIU09104)

Advisor: PHAM THI THU TRA, Ph.D.

HoChiMinh City, Vietnam

2013

DETERMINANTS OF WORKING CAPITAL

REQUIREMENT
THE STUDY FROM COMPANIES LISTED ON
HO CHI MINH STOCK EXCHANGE (HOSE)
APPROVED BY: Advisor

________________________

Pham Thi Thu Tra, Ph.D.

APPROVED BY: Committee,

___________________________________

Pham Thi Thu Tra, Ph.D, Chair.

___________________________________

Duong Thuy Tram Anh, M.S, Secretary.

___________________________________

Ho Diep, Ph.D.

___________________________________
Nguyen Thi Thuy Trang, MBA.
THESIS COMMITTEE

ii

ACKNOWELEDGEMENTS

First and foremost, I would like to express my sense of sincere and profound
gratitude to my supervisor, Professor Pham Thi Thu Tra, who has permitted me to do this
thesis under her supervision. I genuinely feel honored when I have a valuable chance to
work with the professional, skilled and enthusiastic supervisor. Furthermore, I have
learned a lot from her insightful guidance, experience and constructive suggestion
throughout all steps of the thesis. The thesis cannot be completed comprehensively
without her encouragement and inspiration. Again, with all of my appreciation, thank
you, my supervisor.
Secondly, it will be my shortcoming if I do not give thanks to the thesis
committee for their contribution to my proposal that helps me consolidate the weakness
of this thesis.
Then, I also like to extend my gratefulness to International University for
sponsoring and assisting for my study.
Last but not least, my heartfelt thanks go to my family who always love me, take
care of me and provide me the continuous supports, which motivates me to achieve the
goals in my life. Thank my friends for all the lovely memory that we shared together and
being by my side when I face the difficulties. Now this is the time for me to apply my
knowledge that I have accumulated during 4 years at International University in the
practice.

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TABLE OF CONTENTS
ACKNOWELEDGEMENTS ................................................................................................ iii
LIST OF TABLES ................................................................................................................. vii
LIST OF FIGURES ...............................................................................................................viii
ABBREVIATION .......................................................................................................... ix
ABSTRACT .............................................................................................................................. x
CHAPTER I. INTRODUCTION .......................................................................................... 1
1.1

Background to the study .................................................................................1

1.2

The objective of the study................................................................................4

1.3

Significant of the study ....................................................................................5

1.4

The scope of the study .....................................................................................5

1.5

The structure of study .....................................................................................5

CHAPTER II. THEORETICAL FRAMEWORK AND LITERATURE REVIEW .... 6

2.1

Working capital requirement..........................................................................6

2.2

Working capital policy ....................................................................................9

2.3

Determinats of working capital requirement ............................................... 12

2.4

The review of empirical evidence on the determinants of working capital

requirement .............................................................................................................. 17
2.5

Conceptual framework .................................................................................. 22

iv

CHAPTER III. METHODOLOGY .................................................................................... 24

3.1

Data ................................................................................................................ 24

3.2

Model specification ........................................................................................ 24

3.3.1 The model specification .................................................................. 25
3.3.2 Measurement of variables .............................................................. 25

3.3

Estimation ...................................................................................................... 26
3.3.1 The pooled OLS .............................................................................. 27
3.3.2 The fixed effects .............................................................................. 27
3.3.3 The random effects ......................................................................... 27
3.3.4 The Ramsey test .............................................................................. 28
3.3.5 The Hausman test ........................................................................... 28

CHAPTER IV. OVERVIEW OF WORKING CAPITAL REQUIREMENT OF

COMPANIES LISTED ON HOSE ............................................................................... 30
4.1

The working capital requirement of the industry sectors for the period

from 2007 to 2012 ..................................................................................................... 30

4.2

Working capital policy .................................................................................. 33

4.3

The relationship between working capital requirement and profitability of

the industries ............................................................................................................ 35

4.4

The alterations of working capital requirement and sales growth over 6

years .37
CHAPTER V. ANALYSIS, RESULTS AND DISCUSSIONS ...................................... 39
5.1

Descriptive statistics ....................................................................................... 39

5.2.

Correlation statistics...................................................................................... 41

5.3.

Regression results for separate years ............................................................ 42

5.4.

Regression results of pooled OLS, manufacturing industry and

conservative working capital policy ........................................................................ 45

5.5.

Fixed effects and random effects results ....................................................... 52

Chapter VI. CONCLUSION........................................................................................ 55

LIST OF REFERENCES.............................................................................................. 58
APPENDICES ............................................................................................................... 61

vi

LIST OF TABLES

Table

Descriptive title

Page

Table 1: Summary of dependent varable and independent variables......................................... 26

Table 2: Descriptive statistics result (means by year) ................................................................. 39
Table 3: Pearson correlation coefficient .................................................................................... 41
Table 4: Regression results for separate year ............................................................................ 43
Table 5: Regression results of pooled OLS, manufacturing industry and conservative working
capital policy ..................................................................................................................... 45
Table 6: The results of fixed effects and random effects ............................................................ 53

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LIST OF FIGURES

Figure

Descriptive title

Page

Figure 1: Cumulative capital requirement ................................................................................... 8

Figure 2: The determinants of working capital requirement of companies listed on Hose in
Vietnam ............................................................................................................................ 22
Figure 3: Working capital requirement of the industry sectors from 2007 to 2012 .................... 31
Figure 4: Working capital policies of the industry sectors, 2007- 2012 ....................................... 33
Figure 5: The relationship between working capital requirement and profitability of listed
companies in Hose from 2007 to 2012 .............................................................................. 35
Figure 6: The changes of working capital requirement and sales growth from 2007 to 2012 ..... 37

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ABBREVIATION

ARE

Number of days in account receivables

INVT

Number of days in inventory

LEV

Financial leverage

OLS

Ordinary Least Square

OPC

Operating cycle

ROA

Return on asset

SGR

Sales growth

SIZ

Size of company

WCR

Working capital requirement

RESET

Regression Equation Specification Error Test

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ABSTRACT

Over years there are many researches about the impact of working capital
management on firms profitability. Nonetheless, the factors that determine working
capital requirement of company have not been investigated extensively. Consequently,
the study is carried out to examine the determinants influencing the need of working
capital of 265 companies listed on Ho Chi Minh stock exchange (Hose) using panel data
for the period from 2007 to 2012.
For the purpose of this study, the quantitative method is used to test a set of
research hypothesis. The empirical results reveal that most industries exposed in the
study have run their business with the conservative working capital policy in accordance
with high demand of working capital. The company size, profitability and operating cycle
have positive and significant impact on working capital requirement of Vietnamese
companies. Besides, it is also shown that the more financial leverage company employs,
the less working capital it requires. Sale growth factor appears to have no significant
impact on working capital requirement. The moderate effect of such decisive factors as
size, profitability, operating cycle and leverage illustrates the context of working capital
need in a transitional economy as Vietnam. The studys findings offer the basic reference
for future research as well as the implication for managers in operating business.

CHAPTER I

INTRODUCTION

The first chapter intends to provide the primary aspects which are essential to
get general idea about working capital requirement and the rationale of doing this study.
It includes the research background, research objective, significant implication, the scope
and the structure of the study.
1.1 Background to the study
The transition of Vietnamese economy to become a market-oriented economy
has brought a new look for the country and Vietnamese peoples life. This has been
proved by the notable achievements in the development of economy, increasing the
standards of living, the enhancement of culture and education over the past twenty five
years. However, in recent years, with the global crisis, most of companies in the world as
well as in Vietnam get the difficulties for the expansion. According to the economic
experts, Vietnamese economy has gradually fallen into the stage of stagflation - a
circumstance where the inflation rate is high, the growth rate goes down and the
unemployment rate is still high. That is a major alarm of any economy and gives a signal
of disturbance of cash flows as well as the shrink of business growth. Besides that, with
the increase of bad debt expenses, Vietnamese banks have the policies to tighten the
credit, many companies now try to find the opportunities for improving cash flow and
avoid the stagnancy of operation. Even though Vietnamese government has introduced
numerous policies to support the business sector, particularly the interest rate has
dropped, the Vietnamese companies have not felt excited since they do not afford to
repay the old loans for getting new ones and the problem of unsettled inventories still
exists. Additionally, the decrease of interest rate has not yet helped many companies

improve their production and business operation due to the lack of working capital
requirement. As a result, working capital requirement is considered as an important
element to ensure the survival and growth of any company and the business may not run
efficiently without the appropriate amount of working capital.
Furthermore, it cannot be ignored the cruciality of working capital
requirement during financial decision making because it is a part of investment in assets
to finance day to day operation and also minimizes the risk of future financial
shortcoming. When the company does not have enough amount of working capital for
running business in short-term, it will affect significantly the businesss value in longterm. However, in the time of financial decision making, the managers sometimes do not
pay attention to determine the need of working capital as they assume that it just regards
to the investment and financing in short period and does not enhance the return to equity
(Sanger, 2011). If this happens unfavorably, there is the likelihood of discrepancy
between current assets and current liabilities during operating business so it will influence
the companys productivity and growth. Seriously, it can lead to the financial distress or
even the bankruptcy of company.
Traditionally, the corporate finance literature has only concentrated on the
study of long-term finance such as capital budgeting, capital structure and dividend
policy. The short-term finance, on the other hand, should be focused cautiously on how
the current assets and current liabilities are decided because it affects the companys
performance within a period as well as contributes a main resource of capital for small
and medium-sized companies and high growth companies. For instance, a manufacturing
company may invest in excess of a haft of total assets for current assets while a service
company may retain the investment in current assets at low level. Although investing in
working capital is very vital, the way how each company decides an adequate amount of
working capital requirement also influences considerably its performance. As an
inadequate working capital will disrupt the daily production and impair the firms sales.
Consequently, the companys working capital position is not only an internal concern but

also the indicator of creditors risk. Van Horne and Wachowicz (2004) stated that the
overload of current assets might have a negative impact on companys profitability while
the small amount of current assets can cause the stock out condition and weaken the
liquidity that results in creating obstacles for business operation.
In practice, the paradigm each company requires different level of working
capital has become one of the most significant matters in the field of financial
management. The reason here is that working capital requirement of company is no
longer valid, in which the managers are getting difficulty in recognizing the determinants
of working capital requirement to decide an appropriate amount of working capital.
Generally, each company has to need a minimum amount of source as the working
capital requirement to finance its operational expenses. If the level of working capital is
too high, it implies that the company has the idle funds which are associated with high
opportunity cost. Whereas a small amount of working capital may result in the risk of
insolvency since the company might not be able to finance its short-term liabilities. For
instance, there are many studies carried out by the Bureau of Public Enterprises that
expose the reason for the poor performance of public industry. As a result, the public
industry has the over capitalization in operating business which indicates that the public
companies have too large funds for working capital requirement. This leads to a low level
rate of return and using the resource at a less rate than optimal. Therefore, each company
should focus on determining the working capital requirement.
During running business, working capital requirement of company also varies
from company to another and specifically in one firm, it also changes from time to time.
The differences in production and strategic plans between companies in the same and
different industries are obvious; therefore, the working capital requirement is also not
identical for all companies. And basically, working capital requirement will be relied on
how much and how frequently the company has received the earning, which expenses the
company must cover and how frequently these expenses will be paid. Furthermore,
nowadays, many small companies have troubles to meet their working capital

requirement with the constraints of their margin and the sales nature while the large ones
can afford working capital requirement and do not have faced any barrier. To get an
adequate working capital requirement, this also raises a straightforward question as to
what factors influence the companys working capital requirement. Consequently, the
company will be going to the insolvency and bankruptcy if it has the shortage of
understanding about the influence of working capital requirement as well as the lack of
transparency about its determinants.
Smith (1973) has figured out that a major failure of company may be the
result of the inability of manager in scheduling the current assets and current liabilities
efficiently. In short, researching the determinants of working capital requirement will
explore the useful aspects that help managers verify the reason why each company has
different level of working capital requirement so they will have a proper preparation in
planning the need of working capital and allocate the funds effectively. Most of studies
tend to examine the relationship between the working capital management and the
companys profitability or the influence of working capital policy on the creation of
value. However, there are few studies about the driver factors determining working
capital requirement among developing countries, especially in Vietnam. Therefore, this
study is carried out to find out the determinants of working capital requirement of
companies listed on Ho Chi Minh stock exchange (Hose) in Vietnam.

1.2 The objective of the study

The conduct of this study intends to figure out the determinants of working
capital requirement of companies listed on Ho Chi Minh stock exchange (Hose).
Furthermore, it also investigates the nature of financial and non financial factors that
decide the requirement of working capital as well as the impact of particular determinants
on the companys working capital requirement.

1.3 Significant of the study

The study looks for the factors that determine the companys working capital
requirement. Since the working capital plays an important role in making financial
decisions, it should be critical for company to determine an adequate level of working
capital requirement in running daily operation and maintain the short-term investment.
Through the findings, the corporate manager will gain better understanding of the
influence of determinants on working capital requirement.

1.4 The scope of the study

This study is carried out to examine the determinants of working capital
requirement among Vietnamese companies. However, due to the limitation of time and
availability of data, the study primarily collects the data from companies listed on Hose.
Therefore, the results cannot be generalized for all Vietnamese companies.

1.5 The structure of study

This study is organized as follows. The first section is the introduction which
consists of the background to the study, the research objectives, significant of the study,
the scope of the study and structure of the study. Second section presents the literature
review of working capital requirement and conceptual framework of the study conducted
in relating to the previous studies. Third section is research methodology which describes
the sample, measurement of variables and estimation methods. Next section reports an
overview of working capital requirement of listed companies in Ho Chi Minh stock
exchange (Hose). Fifth section exposes the data analysis and discussion of result based on
the data collected. Last section summarizes the main findings of this study and also
provides the suggestions and conclusion.

CHAPTER II

THEORETICAL FRAMEWORK AND LITERATURE REVIEW

The second chapter figures out the theoretical framework for the study about
working capital requirement, working capital policy, determinants of working capital
requirement as well as the previous researches related to the study problem. This part is
necessary in any research since it not only helps to comprehend various concepts but also
contributes to construct the conceptual framework for the study.
2.1 Working capital requirement
The foundation of working capital requirement is defined as the minimum
amount of resource which a company needs to efficiently wrap the daily costs and
expenses to run the business (Amarjit Gill, 2011). Since each company has typical
features, it will require the level of working capital differently. Accordingly, there is no
optimal level of working capital requirement that is generally suitable to all business
activities from industry to another or even to companies operated in the same industry.
Normally, working capital is considered as the means of existence for any enterprise and
a significant matter throughout financial decision making as it is an element of the
investment in total assets (Bhunia, 2010).So it is impossible to run business smoothly
without a proper amount of working capital. And to avoid this problem, the financial

managers and executives should have strategic plans to obtain an adequate working
capital. There are two methods of forecasting the working capital requirement:
conventional method and operating cycle method (VirendraC.Jani, 2007). The
conventional method emphasizes the liquidity of business and the compatibleness
between cash inflow and cash outflow. The operating cycle method, on the other hand, is
more active and has high reliability. With the operating cycle method, the working capital
is based on the fundamental of operating cycles length. Besides that, according to The
Institute of Chartered Accounting of India, other methods like ratio of fixed investment
and ratio of sales would be used to forecast the working capital requirement. Specifically,
the working capital requirement is estimated as the percentage of fixed investments by
the ratio of fixed investment method and as the proportion of sales on the supposition
which the current assets change with changes in sales by ratio of sales method.
Moreover, the working capital requirement also responds to the short-term
financial needs for managing business. The lesser need for financing and less cost of
capital are the results of lesser needs of working capital and it simultaneously raise the
amount of cash for stockholder (Ganesan, 2007). The study of Brealey, Mayers and Allen
(2006) stated that the cumulative capital requirement is the cost of capital which a
company acquires time by time. The cumulative capital requirement tends to develop
unpredictably in accordance with the unique cycle of business and is financed by either
short-term liabilities or long-term liabilities. If the cumulative capital requirement is
covered with the excess of long-term financing, there is the surplus of cash. However, the
opposite case will result in acquiring the short-term financing for companys operation.
Therefore, this will indicate two scenarios of company such as short-term lender or
borrower. The below figure illustrates the cumulative capital requirement graphically:

Figure 1: Cumulative capital requirement

(Source: Adapted from the study of Brealey, Mayers and Allen, 2006)
From the figure1, there are three different strategies that are named A, B and
C. The three lines have upward sloping which demonstrate that the more company
develops, the more capital it needs. The line A signifies a situation that the short-term
assets are invested by the surplus of cash kept constantly. The line B shows a situation
that the company may become the short-term lender in one year and the short-term
borrower in another year. Finally, the need of permanent short-term financing is
demonstrated by the line C. In other words, this figure has specified the way how the
working capital requirement of company has the effect on its financing decisions. The
company with lots of capital invested in current assets can utilize more long-term
financing than the company with appropriate matching between the short-term assets and
short-term liabilities. As a result, it is essential for the study to find out the determinants
of working capital requirement which will help company have the precise decisions for
financing working capital.

2.2 Working capital policy

As determining an adequate working capital requirement, the working capital
policy is essential in planning working capital precisely. Besley and Brigham (2008)
stated that working capital policy is referred as the companys fundamental policy
relating the objective level for every type of current assets and the way that the current
assets would be financed. Moreover, the working capital policy can be illustrated as the
helpful guideline to direct business as well as match moderately between current assets
and current liabilities in the approach which can release the risk of default. Each
company should control carefully the working capital level in other to maintain the
availability of cash for short-term financing. Unless the companys performance is well
in short-term, its value is not be maximized in long-term. With an inefficient working
capital policy, the companys working capital requirement cannot be met sufficiently
which causes the failure of company. In addition, Hawawini, Viallet and Vora (1986)
pointed out that working capital policy depends on industrys characteristic and changes
from time to time as well as from industry to another or even from different companies in
the same industry. Since every company has different working capital requirement, for
instances, manufacturing industry requires a large amount of working capital whereas
service industry requires less amount of working capital.
From the prior empirical studies (Filbeck and Krueger, 2005; Yadav, Kamath
and Manjreka, 2009), working capital policy has changed over time with the variation of
economic cycles. Therefore, companies have a tendency to need a large amount of
working capital in the high business volatility context and a small one in the low
volatility context. Furthermore, in the case of more instability of future cash flow, the
company will need more cash held and short-term investment to maintain the operational
business. Hence, working capital policy helps manager to decide the correct level of
working capital and to manage working capital effectively. Additionally, the liquidity of

current assets corresponding with the current liabilities is also dependent on the working
capital policy. With different liquidity positions, the companies will have distinctive
working capital requirements in production process. According to Arnold Glen, 2008,
Corporate financial management, 4th edition, working capital policy is classified into
three types such as conservative policy, aggressive policy and moderate policy.

Conservative policy
Through the conservative policy, the companys fixed assets and major parts
of current assets are financed by long-term fund and the company will hold the excess of
cash and inventory as well as a minimum amount of current liabilities. As a result, in the
conservative policy, the level of working capital is high. In 2009, the study of
Paramasivan and Subramanian revealed that a company can establish the financial
strategy which fits the expected life of asset with the source of funds increased to manage
business successfully under this approach. Although the company can decrease the risk
by diminishing the current liabilities, it still has the side- effect on its profitability due to
higher interest rate of long-term debt. Therefore, this policy is considered as the low risklow return strategy. Because it may prevent financial distress generated by the shortage of
funds to finance short-term liabilities, but it also lessens companys profit and raises the
cost of financing.

Aggressive policy
Under the aggressive policy, the company will finance all current assets and
some parts of fixed assets with the short-term debt and also minimize the investment in
current assets. Since the interest rate of short-term debt is relatively lower than long-term
debt so it can enhance the higher return by reducing cost. However, it also exposes the
substantial risk if the short-term interest rate varies unpredictably or the current cash
inflow is not sufficient to cover the current liabilities (Weston and Brigham, 1977,
p.716). Besides that, with aggressive approach, the company will reserve the minimum

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level of inventory in other to decrease the expenses related to carrying inventory.

Therefore, the company can gain more profit but there is existence of the risk that is the
stock out situation. More important, its sale will be missed because of the lack of
inventory, particularly in retail industry. For this approach, the level of working capital is
low and it results in high return that is corresponded with high risk.

Moderate policy
The above approaches have own advantages and disadvantages; in some case,
the company cannot increase the current assets to against the current liabilities followed
the conservative policy or decrease the current assets to against the current liabilities
followed the aggressive policy. Obviously, the moderate policy is not only the
harmonious combination of conservative policy and aggressive policy but also adjusts the
balance of risk and return. In this policy, the short-term assets will be financed by shortterm liabilities and the fixed or permanent assets will be financed by long-term funds.
Within this policy, the companys current assets are matched effectively with the current
liabilities. As it helps manager determine the reasonable level of working capital in other
to decrease the default risk and ensure the operational business. Consequently, the
moderate policy is associated with moderate risk and moderate return as well as fit with
companies in the high volatility context.
Gardner et al, 1986; Weinraub and Visscher, 1998 concluded that the more
aggressive policy company uses, the higher risk and return are in regard to high working
capital. While high availability of cash and inventory under conservative policy lead to
lower risk and return. As a result, the company will set up the suitable working capital
policy which is dependent on the business context to find out an appropriate demand
level of working capital in running the business.

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2.3 Determinants of working capital requirement

In recent years, there are many empirical studies conducted to explore the
working capital subject like Lamberson, M (1995); Moussawi, Laplante and Kitschnick
(2006); Appuhami,B (2008); Melmet, S. and Eda, O. (2009); Owusu- Frimpong and
Martins (2010); Babatunde and Laoye (2011); etc. So the working capital subject is not
only an interesting study for many scholars but also contributes a major part in managing
business. However, most of studies do not research on determinants of working capital
requirement that are vital factors for making capital decision in running day to day
operation. The companys working capital requirement is decided by multiple factors
which are unique for each company and alter from time to time. In the study of
Financial management, Paramasivan and Subramanian (2009) and the study of
Working capital management, Ramamoorthy (1976) reviewed the preceding studies
that pointed out the determined factors affecting demand of working capital. Specifically,
it is classified categorized into two groups like internal factor that needs for own business
concern like nature and size of company, sales growth, financial leverage, operating
cycle, the companys profitability and external factor that can not be administered by the
internal management like the level of economic activity.

Nature of business
Generally, each company always has the representative business nature so the
working capital requirement is also determined differently from company to company as
well as from industry to industry and depends on the strategy that owner and manager
have directed for the development of business. Particularly, trading and financial firms
invest less in fixed asset and require a large amount of working capital since they must
conduct their business in the way of storing stock in trade, receivables and liquid cash.
Similarly, the retail stores contain a great amount of inventory to meet customers need,
manufacturing firms will have to hold more money as working capital and invest in fixed
asset. On the contrary, the public utilities need less working capital and more finances in

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fixed asset. In 2006, Pandey stated that the working capital requirement of public utilities
is normally small because they just provide service and cash sales rather than making
product so there is no fund related to receivables and inventory. Therefore, depending
upon the business manner, the working capital requirement can vary in different ways to
support the business process successfully.

Size of business
The prior studies have researched that size is one of the factors determining of
working capital. In particular, the study of Padachi (2006) conducted on small industrial
firms in Mauritania figured out that the large firms as well as small firms do stress the
working capital. Especially, the working capital takes a considerable role for operation of
small firms because small firms commonly have to contain a high amount of current
assets, less liquidity, volatile cash flow and high dependence on short-term financing.
Moreover, some researcher such as Chiou, Cheng and Wu (2006); Hill, Kelly and
Highfield (2010) had found that there is existence of the positive relationship between
size and working capital requirement. In fact, size is gauged in term of scale of operation.
Under the same kind of business, two firms will have diverse working capital needs that
are based on scale of operation or the level of business activity. The greater scale of
operation the company has, the more working capital it requires. However, in some cases,
small firms still need high level of working capital because of the obstacles getting longterm funds, high overhead expenses, the shortage of resource. For that reason, size of
business will specify the working capital requirement of company.

Operating cycle
In general, the operating cycle is defined as the length of time from
companys purchase for raw materials, processing into inventory to receiving cash from
selling final goods to customer. The length of operating cycle may be long or short and
depends on the nature of business. In most cases, the companies always want to keep the

13

operating cycle as the short as possible for numerous objective reasons, but in some
industries, the long operating cycle is the natural standard. For example, the companies
which produce the consumer products such as shampoo, soap, toothpaste, etc or food
products have the short operating cycle. In contrast, the companies which produce the
luxury products like car, jewelry normally have the long operating cycle. Moreover, a
short operating cycle also means faster return on investment for the companys inventory
while a long operating cycle will make more level of inventory bound with funds.
Consequently, the requirement of working capital moves in the positive direction with the
length of operating cycle. The longer operating cycle is, the more working capital
company demands. And this also implies that the higher inventory cost company incurs
and the more opportunity cost company loses because of the unavailability of investment
fund.

The sales growth of business

In most cases, every company has its own sale growth nature which varies
over time and affects appreciably the firms survival and development. During a year,
the companys manager will have various oriented strategies to expand operational
business by investing in current assets and fixed assets so the capital expenditures also
increase in the regard to the sale growth of business. Correspondently, the company will
require more working capital and the need of fund also changes from time to time.
Although there is no explicit regulation that verifies the specific number of relation
between the increase of sale level and capital needs, the company should create a
provision of working capital to keep up the expansion of production and sale growth. For
instance, the technology industry normally requires large amount of working capital to
support its sale expansion since it belongs to the growth industry and the investing capital
in technology spends a huge amount of money. To achieve the success, the rising of sale
capacity is an important aspect in enhancing the companys profitability. As a result, it

14

would not be denied that the growth of sale and working capital requirement move in the
positive direction.

Financial leverage
In business term, financial leverage is the degree to which a company borrows
money from outside to finance its business. Overall, the financial leverage helps company
to get fund resource for its growth and spending or even gain the tax shield associated to
borrowing. However, if company borrows lots of money and cannot afford to repay debt,
it will lead to the financial distress and the risk of insolvency. There is no steady relation
between financial leverage and working capital requirement in the substantial theoretical
framework undertaken. Nonetheless, from the previous empirical studies (Chiou et al,
2006; Nazir and Afza, 2009; Taleb et al, 2010; Olayinka, 2012), they concluded that the
leverage is negatively related to the working capital requirement. Therefore, in this case,
there would be the negative relationship between the financial leverage and working
capital requirement. Since the companies with high leverage would be inclined to require
lower level of working capital and employ less amount of current assets on their
operation as well as focus on the efficient of working capital management to avoid
binding much capital with inventory and account receivables.

The profitability of company

Another determinant, when it comes up with the profitability, the working
capital requirement and the profitability of company have the linear relation. When a
company has more profit which can imply that the company is running its business in the
favorable direction and has attained the prosperous position in the market so the company
should expand its capacity of production to create more products in meeting customers
need. Furthermore, the trade credit to customers is also enlarged by the plans of
company. As a company needs more funds for investing and financing, it will result in
higher working capital requirement. Or in another word, the more profitability company

15

has, the more working capital it requires. In addition, Shin and Soenen (1998); Petersen
and Rajan (1997) stated that the negotiation power with the suppliers has been
consolidated stronger for company with more profitability and the liquidity problem will
be got better through the competitive advantages of company. On the other hand, the
study of Deloof (2003) has confirmed that when there are more resources invested in
working capital for supporting high profitability, the company may lose the more
opportunity costs of investment in the potential projects. Despite of inconclusive studies,
from the empirical evidences, the study will expect the positive relation between the
working capital requirement and the profitability of company.

The level of economic activity

Most of firms performance usually relies on the change in demands of
customer for its goods and services. The changes in economic circumstances will have
the impact on the companys operational business. As a result, the working capital
requirement is also affected by the level of economic activity or business fluctuation.
Generally, the level of economic activity will go through two directions like upswing and
downswing. In the upswing of economy, the firm may experience the increase of sales
that leads to the increased investment in inventories, receivables and book debts. In
addition, to ensure the increase of capacity, the firm should have the additional plans to
invest in fixed assets. Accordingly, it will demand more working capital to maintain these
activities. The opposite case is the downswing of economy which will decrease the
volume of sale; in turn, the working capital requirement will be less due to the shrink of
inventory and short-term borrowing. Besides that, the study of Pandey (2006) also stated
that the correlation of business fluctuation and working capital requirement takes the firm
to deal with the production dilemma. For instance, in the boom period, the increase of
sale will associate with the enlargement of production that is quite expensive for firm; in
the same way, under recession period, the firm will confront the same cost of production

16

as in the ordinary period and also use inefficiently the physical facilities and labor force
to keep the operational business from day to day.
In summary, these above determinants have demonstrated the major impacts
on working capital requirement of a firm. From the study, it is necessary to verify the
determinants affecting working capital requirement. When the firm wants to run business
successfully, it will be aware of the association between these determinants and need of
working capital to decide an appropriate amount of working capital for its daily
operation.

2.4 Review of empirical evidence on the determinants of working capital

requirement
To understand an important role of working capital in operating business,
there are some prior empirical studies that have researched the determinants of working
capital requirement in different countries. Particularly, in 1981, Nunn conducted the
research based on PIMS database to inspect the reason why some product lines need high
level of working capital requirement while other ones need low level of working capital
requirement. His study revealed that the recognized factors like production, sale,
competition position and industry affected the working capital requirement of the product
line perspective. In another research, Hawawini, Viallet and Vora (1986) found the
impact of industry on working capital need. Their study was researched on 1181
American enterprises over the time period of 1960-1979. The conclusion of all findings
was summarized that the industry practices and sale growth have a crucial effect on
companys investment in working capital need. Furthermore, they also suggested that
working capital policies of all firms depend on the industry performance and the
influence of these policies have been maintained stable over years.
In the Pakistani circumstance, Nazir, M.S. and Afza, T. (2008) investigated
204 manufacturing companies from 16 industries listed on Karachi Stock Exchange
(KSE) during a period 1998-2006 to point out the factors determining working capital

17

requirement. They have set working capital requirement as the dependent variable and
operating cycle of firm, leverage, growth of firm, level of economic activity, operating
cash flow, firm size, industry, return on asset and Tobins q as independent variables.
Accordingly, they concluded that the factors like leverage, operating cycle, return on
asset and Tobinq notably determined the firms working capital requirement. Then, in
2009, they also used the regression analysis on the panel data for 132 manufacturing
firms listed on Karachi Stock Exchange (KSE) during the period of 2004-2007. Their
study showed the positive relationships of operating cash flow, return on asset, Tobins q
and negative relationship of leverage with working capital requirement. However, they
did not find any statistical relationship between sale growth, firm size and the level of
economic activity with working capital requirement for the practice of Pakistani firms.
Furthermore, Amarjit Gill (2011) examined the factors influencing working
capital requirement on a sample of 166 Canadian firms listed on Toronto Stock Exchange
for the period of 2008- 2010 by applying the co-relational and non-experimental research
design. His study indicated that the operating cycle, leverage, return on asset,
internationalization of firm, Tobins q and firm size had the impacts on working capital
requirement in Canadian manufacturing industry, whereas the operating cycle, sales of
growth, firm size, the return on asset influence working capital requirement in Canadian
service industry. The research offered that the investor should have a prudent analysis of
firms before making decision about investment in debt and equity securities since
working capital requirement and working capital management differ from industry to
industry or even from country to country.
More recently, Suleiman M. Abbadi and Rasha T. Abbadi (2012) based on a
sample of 11 industrial listed companies for eight years (2004-2011) in Palestine
Securities Exchange to provide the empirical evidence of the determinants of working
capital requirement in Palestinian industrial corporations. They have used the multiple
regression techniques to test two models. The first model contained all variables,
including the internal factors and external factors that have effect on working capital of

18

Palestinian companies, while the second model excluded the external factors such as
interest rate, the economic growth and just examine the internal factors such as leverage,
operating cash flow, cash conversion cycle, profitability, firm size. On the basic of the
results of their study, there were five internal variables that were found as the significant
determinants of working capital requirement. The two external variables did not influence
working capital requirement, this specified the limited support for the straight association
between economic factors and working capital need in Palestine.
For the Asian emerging market, Asmawi Noor Saarani and FaridahShahadan
(2012) studied the determining factors of working capital need using accounting data of
285 Enterprise 50 (E50) firms for a period 2006-2008. The data were analyzed by the
Structure Equation Modeling (SME) technique of Partial Least Squares. In general, the
test confirmed the discriminated and convergent validity of construct for factors loading
and proved the representative developing model satisfactorily. They concluded that
profitability, non-debt tax shield, tangibility of assets and debt were the determinate
factors of working capital requirement for Enterprise 50 (E50) firms in Malaysia.
In one of the African cases, the study of OlayinkaOlufisayoAkinlo (2012)
estimated the determinants of working capital requirement in selected quoted companies
in Nigeria. Based on a panel data for 66 firms in Nigeria from 1997 to 2007, the three
estimations like pooled OLS, fixed effects and random effects were adopted in the study
to test the model specification. After running multiple regressions, the study found that
the operating cycle, growth of sales and size, economic activity and permanent of
working capital were the company specific behaviors positively relating to working
capital requirement but the leverage was negatively relative to working capital
requirement. Generally, the results of study implied the application of some insights from
modern finance theory in Nigeria.

19

2.5 Conceptual framework

Although there are already several earlier researches concerning determining
factors of working capital demand, the conclusive findings are different and dependent on
the country context. Hence, it is requisite to carry out the research on this subject matter,
especially in particular industries in Vietnam. All the above discussions take me to come
up with the conceptual framework for this study. The theoretical arguments and the
previous empirical studies have identified a major number of attributions about
determinants of working capital requirement. Due to the limitation and the application in
the circumstance of Vietnam, it cannot investigate all the factors determining working
capital requirement as the prior studies, instead, this study will focus and research on the
working capital policy, operating cycle, sales growth, profitability of company, financial
leverage, the nature and size of company as the internal company-associated factors and
the level of economic activity as the external macroeconomic factor. In specific, this
study will be hypothesized with the working capital requirement as the dependent
variable; the independent variables including operating cycle, sales growth, leverage,
profitability, company size, the nature of business and the level of economic activity.
Furthermore, the study will highlight the role of working capital policy in deciding
working capital need and the interrelationship between working capital requirement and
working capital policy that create more plentiful features for this study. Firstly, the
operating cycle involves the sum of days in inventory and days in account receivables so
if the company operates business in the industry which has longer operating cycle, it will
need more working capital to keep up day to day operation. Secondly, when the company
has the increase in its sales business over year, this also proves the companys growth
that is responsive to the accumulation of working capital in market. Thirdly, the size of
company influences on the overall working capital requirement; depending on the
industry and size of firm, each company will have different needs of working capital.
Fourthly, the financial leverage is considered as the financial debt ratio which determines
the relationship between the external financing and total assets of firm. Next, if the

20

company operates with short operating cycle, decrease in sales growth, small scale of
operation or high leverage, it might follow the aggressive working capital policy since it
demands a lower amount of working capital requirement and the company will invest less
in current assets as well as maintain the availability to pay short-term liability at maturity.
The conservative working capital policy, on the other hand, is adopted and working
capital requirement is high when the company operates with long operating cycle,
increasing in sales growth, large scale of operation and less leverage because it does not
ensure the future cash inflow and the company must put more investment in liquid assets.
Then, the nature of business has significant impact on working capital requirement and a
company with its own behavior needs different level of working capital. For example, the
manufacturing companies normally have higher level of working capital requirement than
public utility companies. Finally, when there is the upswing of economic activity, the
sales will be enhanced that makes the company require more working capital. Therefore,
the below model can be my summary about the expectation of deciding factors of
working capital requirement of companies listed on Ho Chi Minh stock exchange (Hose)
in Vietnam.

21

Operating cycle
(Sum of inventory days and
account receivable days)

Sales growth

(Annual percentage change in

sales)
Firm size

(Natural logarithm of total assets)

Financial leverage

Working capital requirement

(Current assets current liabilities)

(Total debts/equity)
Profitability

(ROA)

The nature of business

(Industry dummy)

The level of economic activity

(Year dummy)

Figure 2: The expected determinants of working capital requirement of companies

listed on Hose in Vietnam

22

From the above conceptual framework, the study will be researched with the
following hypotheses:
H1: The size of company will be positively related to working capital requirement
H2: The financial leverage will be negatively related to working capital requirement
H3: The profitability will be positively related to working capital requirement
H4: The operating cycle will be positively related to working capital requirement
H5: The sales growth will be positively related to working capital requirement
H6: The nature of business will be related to working capital requirement
H7: The level of economic activities will be related to working capital requirement

23

CHAPTER III

METHODOLOGY

The third chapter begins with the procedure of doing this study, then the
research data, model specification and variables selected in the study. Methodology with
different analysis techniques used to find out the significance of study.

3.1 Data
Data for this study will cover 265 companies listed on Hose in Vietnam.
However, due to the distinctive traits, there are 16 financial companies such as banks,
credit union, insurance companies and foreign-owned companies excluded from this
study. The secondary data used in the study are constructed from information collected
from companys financial statements during a period 2007-2012. And the data source is
got from Vietcombank Securities (http://www.vcbs.com.vn). In addition, the financial
statements of companies listed on Hose have been audited by reliable audit firms and
approved by State Securities Commission of Vietnam (SSC). Therefore, it will ensure the
credibility of the data.

3.2 Model specification

The nature of study is to find out the determinants of working capital
requirement of companies listed on Hose so this study utilizes the data into a panel data
set which is the combination of the two-dimensional data, including individual company
dimension (cross section) and the time dimension (time series). The panel data is a useful
method to research the quantitative data due to several reasons: firstly, it will help to

24

remove heterogeneity and minimize bias from the time-invariant omitted variables or
unobservable individual company-specific effect. Secondly, because of blending both
time series and cross section observation in panel data, it results in more informative data
points, the increase of degree of freedom as well as the decrease of collinearity among
dependent variable and independent variables. Thirdly, the intricate behavioral effects are
studied efficiently by panel data such as adding the dummy variables into the model
specification for individual disparities between the cross section and time variant. In this
case, the panel data will be analyzed quantitatively through the regression analysis to
estimate the model and show the industry and year effect on determinants of working
capital requirement.

3.3.1 The model specification

From the conceptual framework, the time - varying independent variables of
the study include the operating cycle, the sales growth, firm size, leverage, profitability,
the nature of business and the level of economic activity. Therefore, the model
specification for this study is:
WCRit = 0 + 1SIZit + 2 LEVit + 3ROAit+ 4OPCit +5SGRit + 6INDUSTRYit +
7YEARit +it (1)

3.3.2 Measurement of variables

Equation 1 states that the dependent variable is the working capital
requirement (WCR) measured as the difference between current assets and current
liabilities. The independent variables consist of the sales growth (SGR), operating cycle
(OPC), the firm size (SIZ), the financial leverage (LEV) and profitability (ROA), the
nature of business (INDUSTRY) and the level of economic activity (YEAR).
As far as the independent variables and dependent variable are considered, the
measurements of these variables are illustrated as below table:

25

Table 1: Summary dependent variable and independent variables

Variables

WCR

Measurement
Difference between current assets
and current liabilities

Company size

SIZ

Natural logarithms of total assets

Sales growth

SGR

Annual percentage change of sales

Leverage

LEV

Profitability

ROA

Operating cycle
The number of days in
account receivable
The number of days in
inventory

OPC

The ratio of total debts to equity

The ratio of net income to total
assets
Sum of days in inventory and days
in account receivables
(Accounts Receivable x 365)/ Sales

INVT

The nature of business

INDUSTRY

The level of economic

activities

YEAR

Working capital requirement

Abbreviation

ARE
(Inventory x 365)/ Cost of Goods
Sold
1 for manufacturing industry
0 for other industry

1 for year 2007

0 for other year

3.3 Estimation
In researching the determinants of working capital requirement of listed
companies in Hose, there are several estimation techniques like pooled Ordinary Least
Squares (pooled OLS), fixed effects and random effects.

26

3.3.1 The pooled OLS

In this approach, the heterogeneity across individuals will be ignored by the
pooled regression model. It implicitly supposes that the coefficients are the same for
individuals and there are no existences of individual or group effect among companies.
So the error terms have the same variance (homoskedasticity) and do not correlate with
the explanatory variables. Besides, the panel data takes care of the cross section effects
on companies or even on a set of group of companies. Consequently, the evaluation from
pooled OLS regression will have the biased and inconsistent results. In other to adjust
this problem, the pooled OLS should consider the exogeneity influence on the
orthogonality of variable to error term. And the fixed effects or random effects may
constitute the precise approach for panel data.

3.3.2 The fixed effects

The fixed effect model examines the individual disparities in the intercepts by
letting each individual to have its own intercept value. While the intercept value may
vary across individuals, the term fixed effect indicates that the slope coefficients are
constant across individuals. Moreover, the individual specific effect does not change over
time that is the time invariant and there is the correlation between the error component
and other regressors.

3.3.3 The random effects

In contrast to the fixed effects, the random effects estimates the error variance
to groups or times and assumes that there is no association between the individual effect
(heterogeneity) and any regressor. In this approach, the intercept and slopes of regressors
are identical across individuals and the differences among individuals or time variance
are presented in the individual explicit error, not in the intercepts. That is a reason why
the random effect model generally is called the error components model. Greene (2008:
200-201) stated that the number of parameters estimated will be decreased by random

27

effect model but these estimations are not consistent once the individual specific random
effect correlate with the regressors.

3.3.4. The Ramsey test

The Ramsey Regression Equation Specification Error Test (RESET) test is a
statistical hypothesis test in econometrics discovered by Ramsey (1969). It is normally
used to test whether there is existence of non-linear combination of fitted values which
aids to clarify the response variable. If there is any power in making clear the response
variables that is created by the non-linear combination, the model is in the mis - specified
perspective. The null hypothesis of this test is that there is no omitted variable, if the
Ramsey test rejects the null hypothesis, where the results show that the significant level is
lower than 5 percent. This implies that there has the omitted variable.

3.3.5 The Hausman test

Obviously, it is necessary to take care of the nature of unobservable individual
effect to examine the fixed effects model or random effects model which is more
appropriate and significant for the study framework. Therefore, the Hausman test is the
model specified test in econometric proposed by Hausman (1978) and is utilized by many
researchers to figure out both the theoretical and statistical basic in choosing between the
fixed effects and random effects. Under Hausman test, the null hypothesis is that the
individual effects have no correlation with any regressor in the model. And the alternative
hypothesis, on the other hand, is that the individual effects have the correlation with any
regressor in the model. Failing to reject the null hypothesis will result in favor of the
random effects model while the rejection of null hypothesis will support for the fixed
effects model. In this case, the decision of choosing the proper econometric framework is
very important for appreciating the relation between dependent variable and independent
variables. For instance, if there are the correlation of individual effect and conditioning
regressors, the evaluation of random effects will not adjust the endogeneity of

28

conditioning regressors which will give biased and inconsistent appreciation of

conditioning mean. Whereas the unobservable individual effect is taken out randomly
from given population and does not correlate with other conditioning regressor, the fixed
effects will result in consistent, but not efficient evaluation.

Data analysis will be assisted by using Stata software so the data is entered
into Stata and varied types of statistical methods will be used to produce the results for
quantitative analysis and support the rationale of study

29

CHAPTER IV

AN OVERVIEW OF WORKING CAPITAL REQUIREMENT OF COMPANIES

LISTED ON HO CHI MINH STOCK EXCHANGE (HOSE)

The fourth chapter will show the different working capital requirement among
industries, the working capital policy that an industry has managed its operation under.
Furthermore, the relationship between profitability and working capital need, the changes
between sale growth and working capital need are also explored to describe the general
picture about the business context of Vietnamese listed companies in Hose in Vietnam
from 2007 to 2012.

4.1 The working capital requirement of the industry sectors for the period from
2007 to 2012
According to the list of listed companies on Ho Chi Minh stock exchange
(Hose) by industrial classification 2011, there are actually fourteen diverse industries
which are based on Hoses standard about industrial classification. However, to utilize
data effectively, this study has been constructed through the major industries which have
large samples, including manufacturing; construction; whole sale and retail trade;
transportation and storage; real estate activities; service and the industries which have
small samples, including agriculture, forestry and fishing industry; information and
communication industry; mining and quarrying industry, are classified into the other
industries. As presented in the previous section, working capital requirement of each
company is measured by the difference between current assets and current liabilities. To

30

decrease the impact of company size, the measure of working capital requirement was
deflated by total assets. The detailed data (the data in Appendix 2) about working capital
requirement of the industries during a period 2007-2012 has been reported by the below
figure to clarify the alteration of working capital requirement among various industry
sectors

Figure 3: Working capital requirement of the industry sectors from 2007 to 2012

Overall, during 6 years, there is not existence of abnormal changes of working

capital requirement within one industry. The working capital requirement of each
industry is distinct in which real estate activities industry; manufacturing industry and
other industries required highest working capital whereas the services industry;

31

transportation and storage industry required the lowest working capital. This difference
partially has been given details in the review of related literature and has also supported
for the reason why each companies with typical nature of business has different working
capital requirement. Since real estate activities industry, manufacturing industry and other
industries which consist of agriculture, forestry and fishing industry; mining and
quarrying industry; information and communication industry have a greater need for
capital intense assets and longer operating cycle. Especially, the real estate activities
industry contains more unsold inventory in its stock over years, it naturally need largest
amount of working capital. On the other hand, the services industry invests less in current
assets, firstly because of the nature of cash transaction and secondly because of the
operational sales of service activities. Additionally, the transportation and storage
industry mostly invests more in fixed assets rather than the current assets.
Besides, within one industry, working capital requirement has also changed
over year. Generally, working capital requirements of most industries in 2007 and 2010
were higher than other years. This may be explained by the facts that these two years
were the times of starting up and development the business of many companies or the
companies have incurred the influence of economic crisis during this period. Therefore,
the companies must require more working capital to support their enlargement or sustain
their business in the difficult circumstances. In addition, working capital requirement of
manufacturing industry; whole sale and retail trade industry; services industry slightly
varied from 2007 to 2012 compared to other industries. Based on the character of
business, these industries must hold a stable working capital for the following reasons:
firstly, these industries have the steady demand over year so they have to maintain their
operation at the constant level to ensure meeting customers demand; secondly, to rush up
the competition among companies, the guarantee of availability of goods is very
important especially in whole sale and retail trade industry.

32

4.2 Working capital policy

Figure 4: Working capital policies of the industry sectors, 2007- 2012

To correspond with the working capital requirement, each industry also has
different working capital policy. Weinraub and Visscher (1998) figured out the issue of
conservative and aggressive working capital policy through ten different industry groups
in American companies. They concluded that the working capital policy for each industry
was unique and displayed significant constancy over time study period. A company may
follow the conservative working capital policy with high level of current assets as the
percentage of total assets for investing decision or low level of current liabilities as the
percentage of total liabilities for financing decision.

33

In this study, working capital policy is classified into 2 main policy sectors
that are (1) aggressive working capital policy, (2) conservative working capital policy.
And to get a concrete insight of working capital requirement and to point out which
working capital policy each industry has operated, the working capital policy was
analyzed by calculating the ratio of current assets to total assets. As referred to the review
of related literature, the aggressive working capital policy has resulted in investing less in
current assets versus fixed assets and in using high amount of current liabilities which
exposes the liquidity on risk. That also means that the industry which has the lower ratio
of current assets to total assets and higher ratio of current liabilities to total liabilities has
run its business with aggressive working capital policy. In contrast, with the conservative
working capital policy, the industry holds large level of capital in current assets with the
opportunity cost of a smaller amount of profitability that results in higher ratio of current
assets to total assets and less level of current liabilities that results in lower ratio of
current liabilities to total liabilities.
The result shown in figure 4, during period from 2007 to 2012, most of
industries listed on Hose have operated their business under the conservative working
capital policy. Because they have had the ratio of current assets to total assets over
average number 0.5. And there are only two industries such as transportation and storage
industry; services industry which have had the ratio of current assets to total assets below
average number 0.5 have operated their business under the aggressive working capital
policy that are depicted by two depression points in the figure 4. These two industries
also have the lower working capital requirement than different industries which is
illustrated in figure 3.

34

4.3 The relationship between working capital requirement and profitability of

the industries

Relationship between working capital requirement

and profitability
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0

WCR
ROA

Figure 5: The relationship between working capital requirement and profitability

of listed companies in Hose from 2007 to 2012

According to figure 5, there is the existence of relationship between working

capital requirement and profitability. The industries like real estate activities industry;
manufacturing industry; other industries have high level of working capital requirement
in accordance with the conservative working capital policy. And the industries like
service industry; transportation and storage industry have low level of working capital

35

requirement in accordance with the aggressive working capital policy. As a result, over 6
years, the other industries have the highest profitability which is measured by return on
asset (ROA). Since the other industries, including the agriculture, forestry and fishing
industry; mining and quarrying industry; information and communication industry, have
contributed significantly to Vietnamese economy. As Vietnam is a developing country in
Southeast Asia, the national economy has been increasing to become a top agricultural
exporter and attracts many foreign investors. For recent years, the agriculture, forestry
and fishing industry has played critical role in rising of national economy;
simultaneously, it is considered as the shelter in the downswing of economy. In 2012,
the agriculture, forestry and fishing industry kept on being the bright point in the context
of Vietnamese economy with the production value increased to 3.4%. Moreover,
manufacturing industry; information technology and high-tech industries have
contributed to a fast growth for economic enlargement. Although the services industry
required the lowest working capital from 2007 to 2012, it had the third highest
profitability. In the past six years, the development of services industry had outweighed
all other industry groups and today accounts for 37 percent of GDP. Because the services
industry has run its operation under the aggressive policy, as stated in review of related
literature, the aggressive working capital policy is considered as the high risk- high return
strategy.
The real estate activities industry, in contrast, had the highest working capital
requirement, it also was the lowest profitability industry compared to others from 2007 to
2012. In current years, the real estate market is still frozen and the commercial
transaction has not been yet improved considerably due to the difficulties of economy as
well as the psychology of customers about reduced sale price. Furthermore, the real estate
activities industry is in the ever hard state when it has got the pressure of large inventory,
the interest rate burden and the new rules about real estate activities industry are tighter
than previous time. Therefore, the real estate activities industry should have more

36

positive changes to overcome the difficulties and improve the profitability in the near
future.

4.4 The alterations of working capital requirement and sale growth over 6 years

Billion VND

THE CHANGES OF WORKING CAPITAL

REQUIREMENT AND SALES GROWTH

500
450
400
350
300
250
200
150
100
50
0

1.4
1.2
1
0.8
0.6

WCR

0.4

SGR

0.2
0
2007

2008

2009

2010

2011

2012

Year

Figure 6: The changes of working capital requirement and sales growth from 2007
to 2012

The figure 6 shown as above has pointed out the direction of changes between
working capital requirement and sales growth for a period from 2007 to 2012. The red
line denoted sales growth of Vietnamese listed companies in Hose has drastically moved
up and down over time whereas the blue line denoted working capital requirement has
moved at the reasonable degree over time. This indicates the obvious difference about
alterations of sales growth and working capital requirement during 6 years. Through the

37

figure, it also implies that working capital requirement does not alter too much across
time periods but there are the obvious changes of working capital requirement across
industry sectors as presented previous. The probable explanation for this disparity might
come from the business indicators of company. High deviation in sales growth also
implied high deviation in demand and the unstable economic condition that make
company get more obstacles in determining the rational level of inventory corresponding
with sales volatility. It is hard for all companies to find the optimal way how to raise
inventory level rapidly in response to increase of sales or to reduce the inventory level in
response to decrease of sales.
Furthermore, the study of Deloof and Jegers in 1996 researched over a sample
of Belgian industrial and wholesale companies stated that there is no relation between the
sale volatility and receivables.

Over time, the companies with high sales volatility

possibly get troubles in predicting dairy liquidity resource and financing that make
determining working capital requirement become more difficult. Therefore, in general,
company will not respond to the deviation of sales growth by changing working capital
requirement severely.

38

CHAPTER V

ANALYSIS, RESULTS AND DISCUSSIONS

The fifth chapter states the statistical findings after analyzing collected data in
Stata software. The descriptive statistics, correlation and regression analysis are presented
in this part. Then, it expresses to the discussion of findings and puts forward the final
outcomes about driver factors of working capital requirement.

5.1 Descriptive statistics

Table 2: Descriptive statistics result (means by year)

Total sample
Mean
Std.dev
Means by year
2007
2008
2009
2010
2011
2012

WCR

SIZ

SGR

LEV

ROA

OPC

315.9963
877.7419

27.3121
1.1615

0.671
6.9344

1.7155
2.6716

0.0845
0.0928

404.315
795.982

184.7495
174.8095
287.0730
388.1641
393.1327
468.0487

26.8229
27.0095
27.2671
27.4776
27.6025
27.6517

0.7124
0.4859
0.8666
1.3254
0.5815
0.0525

1.6082
1.912
1.7517
1.5092
1.8424
1.6601

0.0861
0.0814
0.0954
0.0884
0.0758
0.0786

300.964
375.054
404.29
390.004
473.643
470.81

The descriptive statistics of the collected dependent variable and independent

variables have been shown in table 2 for 265 Vietnamese listed companies in Hose over a

39

period of 6 years from 2007 to 2012. From table 2, the statistics present that the mean,
standard deviation of total sample and means by year of all variables used in this study.
The working capital requirement variable has a mean value of 315.9968 billion VND.
The value of working capital requirement deviates from mean to both sides by 877.7419.
Moreover, the working capital requirement had highest mean value in 2012 and lowest
value in 2008. In general, the positive and high value of working capital requirement has
implied that during a period of 2007-2012, the listed companies in Hose tended to operate
their business under the moderately slack policy relating with working capital need.
The size of company is measured by the natural logarithm of total assets. The
mean value of size is 27.3121 whereas the standard deviation is 1.1615. On average
company size was increasing with the length of time from 2007 to 2012 that had
increased respectively from 26.8229 to 27.6517.
During 6 years, the average values of sales growth have varied appreciably,
ranging from the minimum value 0.0525 in 2012 to the maximum value 1.3254 in 2010.
This may probably be caused by the change of Vietnamese real GDP growth and the
increase in oil price. Since the change of real GDP can reflect the change of company
production over year and the increased oil price might influence on customers
consumption.
Furthermore, the leverage which is measured by the ratio of total debts to
equity has mean value 1.7155. This also indicates that most of companies listed on Hose
from 2007 to 2012 possibly have operated their business with high debt. As long as
profitability is concerned, the average profitability measured by ROA was approximately
8.45 percent with the standard deviation of 0.0928 which was quite high during this
period. Additionally, both leverage and profitability had a tendency to be stable over
years.
The operating cycle is considered as the proxy to state the length of time from
purchase the raw material to receiving money for selling final products. In this case, the
companies must take an average 404 days from initial process to collect payment against

40

sales with the standard deviation of 796 days. From 2007 to 2012, the means value of
operating cycle did not alter notably which shows the steady credit policy among
companies.

5.2 Correlation statistics

Table 3: Pearson correlation coefficient

SIZ
SGR
LEV
ROA
OPC

SIZ
1
0.0195194
0.1354120
-0.1189578
0.1321511

SGR

LEV

ROA

OPC

1
-0.0168812
-0.0195530
0.0645634

1
-0.3029658
0.0311131

1
-0.1697503

Theoretically, the definite strength and direction of association between the

different variables are verified by the Pearson correlation analysis. From the correlation
matrix, it represents the outcome of correlation coefficients among independent variables
which consist of comprise size, sales growth, leverage, profitability and operating cycle.
In the bivariate distribution, when independent variables have the cause and effect
relations, they will have strong correlation which leads to the multicollinearity between
variables. Since the intention of this study is to find out the determinants of working
capital requirement of listed companies in Hose; if there is the existence of
multicollinearity, it will distort the results of regression analysis. The result from table 3
indicates that the correlation coefficients of independent variables used in the study are
not sufficiently high to cause the multi-collinear problem among independent variables.
Therefore, the multiple regression analysis was used later to investigate the fundamental
consequence between dependent and independent variables.
As examined the table 3, the result has demonstrated that there are some
correlation coefficients that have higher degree than others. The correlation matrix also

41

showed the leverage has correlated negatively with the profitability of companies
(0.3029658), when the companies operate with more leverage, the possible
rationalization is that the companies must pay more interest for their debt that will shrink
the profitability. Although the companies can get the tax shield with more borrowing,
they have to find the effective solution in avoiding financial distress rather than focusing
on running business which may make the disruption of operation and sales lost.
Furthermore, the negative relation between the operating cycle and profitability of
company (0.1697503) was existed. Since there was the higher inventory cost and more
opportunity cost in accordance with the longer operating cycle. As a result, the more
operating cycle company has, the lower profit company has attained in running operation.
Due to the crisis of economy over recent years, the companies may not use their
profitability to re-invest in assets for the increasing in scale of operation or when the
companies have experienced the growth process, they will incur the hidden costs of
growth which have made the size of companies correlate negatively with their
profitability (0.1189578). On the other hand, there is positive relationship between size of
company and leverage (0.1354120). This may be explained that when a company
expands its business size, it will need more capital to support the operation which
involves high debt level.

42

5.3 Regression results for separate years

Table 4: Regression analysis during a period from 2007 to 2012
Independent variables
SIZ
LEV
ROA
OPC
SGR
Construction
Other industries
Real estate activities
Services
Transportation and
storage
Wholesale and retail
trade
Constant
F
P-value
Observations
R-squared
Ramsey test

Year2007

Year2008

Year2009

Year2010

Year2011

Year2012

273.0***
(36.55)
-93.4***
(19.79)
397.8
(394.4)
0.147**
(0.0610)
2.512
(26.47)
9.110
(46.81)
-12.80
(121.3)
30.46
(114.4)
-146.5
(105.1)
-112.6*
(62.98)
-39.53
(50.88)
-7,07***
(980.5)
7.84
0.0000
167
0.587

171.1***
(52.91)
-48.5***
(12.32)
706.6*
(359.2)
0.0207
(0.0309)
5.887
(22.78)
-12.30
(51.14)
-205.5
(170.1)
84.00
(114.7)
-30.43
(76.87)
-181.5***
(56.86)
-102.8**
(41.87)
-4,40***
(1,413)
3.28
0.0004
221
0.297

357.1***
(70.05)
-24.32*
(13.42)
1,471***
(506.0)
0.0262
(0.0821)
-3.098
(6.935)
17.02
(55.65)
68.68
(152.7)
379.1
(253.2)
137.9
(209.5)
-214.6**
(92.99)
-16.86
(51.77)
-9,60***
(1,906)
10.13
0.0000
254
0.407

534.0***
(99.42)
-97.97***
(33.92)
2,007***
(718.8)
0.143
(0.107)
-3.911***
(0.888)
-48.00
(87.10)
80.04
(263.8)
453.5**
(203.2)
129.9
(186.4)
-187.4*
(113.0)
57.25
(84.27)
-14,43***
(2,708)
4.68
0.0000
258
0.495
0.0000

534.8***
(138.2)
-37.51*
(20.77)
3,094**
(1,203)
0.164
(0.123)
-2.589
(3.021)
-5.501
(94.50)
-10.84
(397.9)
38.69
(260.8)
147.6
(232.8)
-92.96
(117.3)
36.08
(87.67)
-14,61***
(3,791)
17.41
0.0000
243
0.389

711.7***
(171.0)
-103.7**
(44.87)
4,097**
(1,659)
0.0286
(0.0835)
125.6
(157.7)
55.48
(146.9)
129.7
(434.6)
442.9
(288.8)
143.2
(289.9)
-94.07
(166.3)
131.0
(151.5)
-19,43***
(4,740)
7.08
0.0000
224
0.425

The robust standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1

43

The results of pooled OLS for several industries over 6 years are recorded in
table 4. As mentioned earlier, there are seven industries which are utilized in the study
but in the table 4, there are six industry dummies presented. The industry dummy for
manufacturing industry is excluded to avoid the dummy variable trap that is the state of
perfect collinearity problem and also used as the reference industry for the dummy
industry variables. The R square for findings ranges from 0.297 to 0.587, the high R
square specifies the explanatory variables explanation more meaningful of cross
sectional variation in working capital requirement.
From 2007 to 2012, the regression coefficients size of company and
profitability with working capital requirement are positive and significant at all levels but
in 2007, there is no statistically significant relation between working capital requirement
and profitability. Meanwhile, the leverage has significant and negative relation with
working capital requirement at all levels. However, the regression coefficients of
operating cycle are positive and significant only in 2007 while regression coefficients of
sales growth are negative and significant only in 2010. Taken together, these findings
point out that the size, leverage and profitability are the major determinants which have
influence on working capital requirement of Vietnamese companies listed on Hose in
accordance with the general level of economic activities.
Similarly, the real estate activities industry has positive and significant
relation with working capital requirement and this industry has required 453.5 times of
working capital compared to the manufacturing industry in 2010. Moreover, the
wholesale and retail trade industry has negative and significant relation with working
capital requirement. In the comparison with manufacturing industry, it needed less 102.8
times of working capital in 2008. Additionally, the transportation and storage industry
has negative and significant with working capital requirement in 2007, 2008 and 2009.
The findings do not show the significant relation between working capital requirement

44

and other remaining industries during 6 years. In conclusion, throughout time periods, the
determinants have different impacts on companys working capital requirement.

5.4 Regression results of pooled OLS, manufacturing industry and conservative

working capital policy
Table 5: Regression results of pooled OLS, manufacturing industry and
conservative working capital policy
Independent variables
SIZ
LEV
ROA
OPC
SGR
Construction
Other industries
Real estate activities
Services
Transportation and
storage

The entire sample

(1)

Manufacturing
(2)

448.0***
(50.42)
-49.91***
(13.06)
2,118***
(414.4)
0.0993**
(0.0489)
-2.514***
(0.744)
-14.04
(38.43)
42.48
(134.2)
221.2**
(99.06)
85.17
(86.56)
-144.2***
(45.26)

417.3***
(55.18)
-118.6***
(31.52)
2,924***
(744.2)
0.145
(0.117)
-24.78
(40.70)

45

Conservative
working capital
policy (3)
479.4***
(58.66)
-65.28***
(12.69)
1,978***
(446.0)
0.103**
(0.0516)
-2.346***
(0.756)
-4.070
(39.65)
53.87
(139.1)
195.5*
(99.71)
0
(0)
0
(0)

Wholesale and retail

trade
2008
2009
2010
2011
2012
Constant
F
P-value
Observations
R-squared
Ramsey test

-6.862
(34.10)
-58.65
(41.40)
-79.25*
(43.88)
-63.07
(48.95)
-66.64
(53.66)
-8.103
(65.76)
-12,033***
(1,379)
9.7
0
1,367
0.371

24.12
(48.56)
-123.9**
(55.01)
-108.1**
(52.95)
-52.25
(69.62)
-14.72
(90.73)
-11,172***
(1,510)
13.9
0
528
0.462
0

9.229
(35.28)
-64.36
(45.92)
-76.68
(47.74)
-72.86
(54.48)
-92.76
(59.85)
-34.31
(74.10)
-12,846***
(1,599)
10.94
0
1,151
0.385

The robust standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1

Investigating from table 5, the empirical results that are robust for the
determinants of working capital need of listed companies on Hose are shown by
analyzing data through three groups: group (1) across industries and time variance, group
(2) across manufacturing industry and time variance, group (3) across industries which
have operated their business under the conservative working capital policy and time
variance. The R square, which shows the amount of variance of dependent variable
explained by all independent variables, for above three groups varies from 0.3708 to
0.462.
Firstly, the result of group (1) indicates the transparent effects of all proposed
determinants using pooled OLS estimation for the whole sample. According to pooled
OLS estimation, four independent variables, including size, sales growth, leverage and
profitability, have statistically significant relationship with dependent variable at 1

46

percent level and the fifth independent variable operating cycle has statistically
significant with dependent variable at 5 percent level. This means that working capital
requirement has the linear relationship with all independent variables.
Secondly, to get a concrete picture of determining factors of working capital
requirement, the study has analyzed data across the manufacturing industry. Since this
industry can verify the specific measurement of inventory and account receivable
compared to other industries like real estate activities industry, construction industry. In
addition, the manufacturing industry also has the largest sample which helps analyzing
data more efficient, particularly the independent variables of group (2) has high power of
explanation as R square 0.462. Besides, the result of group (2) has confirmed that three
independent variables such as size, leverage and profitability have significant relationship
with dependent variable working capital requirement whereas other independent
variables such as sales growth and operating cycle have no significant relationship with
dependent variable.
Thirdly, group (3) shows the result of determinants related to the conservative
working capital policy that is the different feature of the study compared to the previous
empirical studies. As the transportation and storage industry; the service industry have
run their business with aggressive policy, there is no coefficient between dependent
variable and services industry dummy as well as transportation and storage industry
dummy . Similar to the result of group (1), there is existence of statistically significant
relationship between dependent variable and independent variables. This possibly
exposes that with the conservative working capital policy, the working capital
requirement of a company is high which regards to the condition of business like the
large size of company, the high profitability, the high operating cycle and low level of
leverage.
To study the relationship between each determinant and working capital
requirement, we discuss the findings of regression analysis reported in table 5.
Throughout the results of three groups, there is the positive relation between working

47

capital requirement and the size of company and the size determinant has relatively
moderate degree of impact on working capital requirement, relevant to other significant
determinants in the results. This proves that large Vietnamese companies listed on Hose
normally invest more in working capital requirement. Since lager companies can have the
better approach to capital market as well as the alternative availability of financing
resource, their working capital requirements are met easily while the smaller companies
need less amount of working capital requirement due to the limited capital resource and
the small scale of operation. Therefore, the findings support the hypothesis 1 that the size
of company is positively related to working capital requirement. This is consistent with
the results of Almeida, Campello and Weishbach (2004); OlayinkaOlufisayoAkinlo
(2012) but contradicts with findings of Amrjit Gill (2011); Suleiman M. Abbadi and
RashaT.Abbadi (2012) who found the negative relation between size of company and
working capital requirement as well as Nazir and Afza (2009) who found that there is no
significant relation between company size and working capital requirement.
The findings indicate that working capital requirement is negatively relative to
the leverage of company. While the world economy as well as Vietnamese economy has
not yet exposed the strong signal of recovery, Vietnamese companies are recently facing
the financial pressures so the high leverage companies need to have the sensitive and
careful plans in demand of working capital. As a result, with the increase of debt to
equity ratio, the companies have to require lower level of working capital because of high
cost of funds investing in working capital. In the difficult economic environment, when
Vietnamese companies cannot afford to pay the old debt, the cost of high debt is high for
companies which hold lots of capital tied inventories and account receivables. The
studys findings are similar to other prior studies researching about determinants of
working capital requirement in Pakistan (Nazir and Afza 2009), in Taiwan (Chiou, J.R
and Cheng, L. 2007), in Brazil (Nakamura et al 2007) and in Malaysia (Saarani, A.N and
Shahadan, F. 2012). In short, the findings support the hypothesis 2.

48

With regarding to the hypothesis 3, the profitability of company has a positive

relation with working capital requirement. Moreover, from table 5, the results have
figured out that the standardized regression coefficient of profitability determinant has a
fairly strong influence among various determinants. This also means that the profitability
of company has a significant impact on the strategy which a company has defined the
demand of capital for its operation. Accordingly, Vietnamese listed companies in Hose
have operated in manufacturing and trade sectors, where the profitability of these
companies is relatively stable and high over years. To meet the increase of profitability,
the companies will need more working capital in other to expand the development of
business and demands of customer. Niskanen, J. and Niskanen, M. (2006); Mahomet and
Eda (2009); Wu (2011) have confirmed the positive relation between working capital
requirement and company profitability. Therefore, the findings provide the verification to
support hypothesis 3.
Although the studys results indicate that there is a positive relation between
working capital requirement and operating cycle of company, the operating cycle
determinant has small degree of influence on working capital requirement compared to
other significant determinants in the model. The positive coefficient of operating cycle
implies that the companies with longer operating cycle tend to require more working
capital which confirms the hypothesis 4. As long as the profitable plans are focused on
managers concern, it is essential to control the operating cycle at the optimum level.
Since this has been illustrated in the correlation statistics, the operating cycle and
profitability have a negative significantly correlation. These findings are again consistent
with the findings of Nazir and Afza (2009); Taleb et al (2010) and Amrjit Gill (2011).
Respecting to the sales growth factor, the findings confirm the negative
relation between working capital requirement and sales growth that is contrary to the
expectation in hypothesis 5. These results opposite to the studies of Taleb et al (2010),
Olayinka Olufisayo Akinlo (2012) who found the positive relation between working
capital requirement and sales growth. To investigate the reason why the findings do not

49

support hypothesis 5, one possible explanation for this may be derived from the
characteristics of explanatory variables. As the purpose of study is to find out the
explanatory variables, including leverage, sales growth, profitability, size and operating
cycle, that have affected independently the dependent variable working capital
requirement. In fact, there are many other factors which have impact on both explanatory
variables and dependent variable like management skills, business environment,
etcConsequently, in the

model specification of the study, there is existence of

endogenous variables whose value is decided by the conditions of other variables in the
structures. In the state of time series analysis of causal system, the concept of
endogeneity is also particularly related. Generally, some factors within the causal system
depend for their value in this period and on the value of another in previous periods. For
example, the degree of leverage is independent from other factors in this year, but is
affected by the degree of sales growth or profitability in the prior year. Therefore, the test
of model specification in this study has the omitted variables which have influence on
these variables. In addition, the results of R square from table 5 are low compared to
previous empirical studies that may reveal the signal of appearance of omitted variable.
In other to test for omitted variables, the Ramsey test was used for all regression analysis.
The result is illustrated as below:
Ho: the model has no omitted variables
F (3, 1394) = 464.61
Prob> F= 0.0000
It results in rejecting the null hypothesis because the p-value is less than the
usual threshold of 0.05, it means that the value is significant at 5 percent. Thus, we
conclude that the model has the omitted variables which made the model specification be
no longer valid. In another words, the studys regression analysis possibly experienced
the endogeneity bias in the form of omitted variable bias. This is also the limitation of the
study, as in this time, it is impossible to adjust the model due to the limited time and other

50

objective factors. The model specification is only valid when all variables whose value
are determined independently by factors outside the causal structure under the research.
In this case, sales growth determinant has impact on working capital requirement but the
endogeneity dilemmas have made the relationship between working capital requirement
and sales growth become more complicated. In fact, the sales of company can be
enhanced by the loose credit and inventory policy in one period. And concurrently, the
increase of credit and inventory policy in one period also results in accumulation of more
amount of working capital. As a result, in this case, the increase of sales growth dose not
independently make company require more working capital, but the rising of working
capital need has incurred the impact of other factors that cause the inverse causal relation
when the sales growth is used contemporaneously as an independent variable. The study
of Molina and Preve in 2009 stated that when a company has attained the sales growth
strategy, it may have a tendency to make tighter its credit policy. This might indicates
that the preceding sales growth will lead to net financing context and when the sales of
company is gradually falling into the growth stage, the company with high growth should
not loosen up its trade credit term. Thus, it may result in reverse relation between sales
growth and working capital requirement but the result may not be precise because of the
existence of endogeneity bias.
Furthermore, two last independent variables such as industry dummies and year
dummies are presented in results of three groups. From group (1), there are two industry
dummies like real estate activities industry which is positive and significant at 5 percent;
transportation and storage industry that is negative and significant at 5 percent level as
well as year dummy 2009 is significant at 10 percent. These findings show that the real
estate industries has run its business with conservative working capital policy so it has
positive relation with working capital requirement and required more 212.2 times
working capital compared to manufacturing industry while the transportation and storage
industry has run its business with aggressive working capital policy so it has negative
relation with working capital requirement and required less 144.2 times of working

51

capital compared to manufacturing industry. In addition, year dummy 2009 has the
negative relation with working capital requirement and also indicates the working capital
need in 2009 is less 79.25 times compared to in 2007 that is the reference year dummy.
On the other hand, the findings of group (2) across manufacturing industry,
there are only two year dummies 2009 and 2010 are significant at 5 percent. Finally, the
findings of group (3) across companies which have operated with conservative working
capital policy indicate only the significance of industry dummy for real estate activities
industry. So the findings of these two independent variables have supported the
hypotheses 6, 7. Besides that, the reason for finding few relations between working
capital requirement and industry dummy, year dummy variables is that the small sample
and short year periods may not figure out specifically the influence of these two
independent variables on the companys working capital demand. Generally, most of
significant year dummies have negative relation with working capital requirement. This
also means that the working capital requirement may be expected to relate negatively
with the variation of general economic activity in long time. It can be hard for companies
to increase more capital throughout the fluctuation of economic context where the money
market usually is tightened. Consequently, to keep smoothly dairy operation, the
company must require a moderate level of working capital and it will lead to the business
indicator become a negative proportional of working capital.

5.5 Fixed effects and random effects results

52

Table 6: The results of fixed effects and random effects

Independent variables
SIZ
LEV
ROA
OPC
SGR
Construction
Other industries
Real estate activities
Services
Transportation and storage
Wholesale and retail trade
2008
2009
2010
2011
2012

Fixed effects
158.7***
(45.88)
-24.03**
(11.65)
1,001***
(316.9)
0.0713***
(0.0269)
-0.919
(2.184)
0
(0)
0
(0)
0
(0)
0
(0)
0
(0)
0
(0)
-30.13
(47.77)
15.73
(48.82)
67.20
(52.60)
72.49
(56.27)
145.9**
(59.07)

53

Random effects
356.0***
(29.32)
-32.37***
(10.12)
1,309***
(293.2)
0.0776***
(0.0259)
-1.858
(2.110)
-44.55
(132.7)
224.5
(145.9)
289.7**
(132.7)
111.5
(166.1)
-155.7
(141.8)
-49.90
(124.8)
-48.58
(48.03)
-49.43
(47.71)
-36.78
(49.16)
-49.48
(51.17)
12.81
(53.09)

Constant
F
P-value
Observations
R-squared
Hausman test

-4,132***
(1,238)
8.2
0
1,367
0.3379

-9,490***
(794.2)
262.4
0
1,367
0.3618
0

The robust standard errors in parentheses; *** p<0.01, ** p<0.05, * p<0.1

As the pooled OLS estimation assumes that there are no individual effects
across companies, the data of this study is set in form of panel data which has observation
cross section individuals and cross time periods. In other to take the consideration into
this problem, the fixed effects or random effects may be used. Thus, the below result of
Hausman test is shown in the study to point out an appropriate estimation:
Ho: The individual effects are not correlated with any regressor
Chi 2(9) = 35.97
Prob> chi2 = 0.0000
From this result, the null hypothesis is rejected, it also means that the
individual effects correlated with any regressor. As presented in the methodology section,
the fixed effects estimation is appropriate for the study. Moreover, in the study, the
company specific unobservable factors will cause the disparity in working capital
requirement across companies, which correlated with the independent variables will
create the bias result from pooled OLS estimation. Since the study has to suffer from
omitted variable bias, the fixed effects may improve this dilemma. The fixed effect
explores within group variation over times and if the unobservable factors are time
invariant, the omitted variable bias will be partially removed by the fixed effects.
Investigating the findings of fixed effect shown in table 6, the results are
consistent as the rational level compared to the pooled results. Nevertheless, the results of
coefficients between the dependent variable and explanatory variables are different from

54

the results of pooled OLS. These differences may derive from the pooled OLS estimation
that the company specific differences in working capital requirement do not been taken
care of. According to the findings of fixed effects, the explanatory variables like size,
leverage, profitability and operating cycle are statistically significant at 1 percent, 5
percent and keep the same sign relation as for the pooled OLS findings while the sales
growth determinant is insignificant at all levels. From the discussions of descriptive
statistics and figure 6, during a period from 2007 to 2012, the sales growth of companies
listed on Hose has changed dramatically whereas the working capital requirement and
other determinants have changed but followed a reasonable direction. Therefore, the
heterogeneous changes between sales growth and working capital requirement make sales
growth determinant become insignificant.

55

CHAPTER VI

CONCLUSION

The last chapter comes up with the final conclusion for the study.
Simultaneously, it also exposes the limitations of study as well as offers the suggestions
for future relevant researches.

The study is carried out to point out the determining factors which affect the
working capital requirement. Through the findings of research analyzed a sample of
Vietnamese listed companies in Hose for a period from 2007 to 2012, this study not only
investigates the impact of determinants regarded to company behaviors, but also offers a
general outlook about working capital requirement among various industries. In
particular, there are two major concerns that are recognized and explored.
Firstly, on average, Vietnamese companies utilize working capital
requirement about 21.78 percent of total assets that is quite high because of the instability
of economic context and limited availability for getting the external financing in recent
years. Over 6 years, when the real estate activities industry has the highest level of
working capital requirement, the services industry has the lowest level of working capital
requirement. This also represents that depending on the typical nature of business,
different industries will need different amount of working capital in keeping its operation
alive. Through projecting demand of working capital, a company can organize reasonably
the circulation of total assets as well as inspect comprehensively the circumstances of
production, supply and consumption of customer. Once a company encounters the risks,
fluctuation of price or even sudden damages, the insufficient working capital requirement

56

makes company not to stand steadily in the fierce environment. Accordingly, working
capital requirement is considered as an indispensable material condition for any company
in the market economy, especially Vietnamese economy. Moreover, most industries
presented in the study have operated their business under the conservative working
capital policy which is proportionate to the high working capital requirement. From 2007
to 2012, almost all companies listed on Hose may follow the low risk low return
strategy by maintaining investment more in current assets and less in current liabilities.
Secondly, the findings reveal that size, leverage, operating cycle and
profitability are the main drivers of working capital requirement in which profitability,
size of company and operating cycle have positive influence on the need of working
capital but leverage has negative influence on need of working capital. In contrast to
preliminary expectation, the findings show that the sales growth does not come out to
influence on working capital requirement. These results are relatively constant with
previous empirical studies that are conducted in Brazil by Nakamura et al (2003), in
Pakistan by Nazir and Afza (2009), in Canada by Amarjit Gill (2011), in Nigeria by
OlayinkaOlufisayoAkinlo (2012) and among others. Even though, there exists the
contrary with some studies on this subject, these findings moderately reflect the real
business context in Vietnam and provide some fundamental implications for Vietnamese
managers. As determining a proper level of working capital is gradually becoming the
essential problem for many managers today. It should be identified that if working capital
requirement may not be decided appropriately, it can lead to the dilemmas such as
incurring high fund cost, inefficient use of current assets or short term liquidity trouble.
For that reason, Vietnamese managers should take consideration for the necessary of
defining working capital requirement in other to improve the efficient use of working
capital in managing business.
Although the study has demonstrated the consistent findings in comparison
with similar studies, it still has various limitations. This research just collected and
analyzed data for a period from 2007 to 2012, maybe it is not short time but the study

57

only shows the findings for these years and cannot be applied for the future
circumstances due to unpredictable variation in the future. To get a specific trend about
the changes of working capital requirement across industries as well as time periods and
simultaneously state the significant impact of determinants on working capital
requirement, it should expand more time series. In addition, as mentioned in the scope of
study, the sample of study includes the companies listed on Hose which expresses the
definite economic condition for the Southern area in Vietnam not for the whole country
so the results do not represent for business characteristics of all Vietnamese companies.
Another limitation is some financial data of companies in 2012 have not been yet audited
but it may not affect the results of study too much. More important, from the data
analysis and discussion section, the primary limitation of the study is that the invalidity of
the model specification and the appearance of omitted variables bias that may have a
considerable effect for the study.
Despite above limitations, this study can be used as the reference for further
studies in the future. To guarantee the implication and reality of the study, the application
framework should be conducted in the situations that have identical political and
economic traits like in Vietnam. According to this research, the difference and similarity
about the effects of given determinants reported in prior studies that Vietnamese
companies listed on Hose should be aware of making decision about the need of working
capital compared with other countries. With this subject, future researchers can extend
the scope of study or discover more explanatory variables as the proxy for driver of
working capital requirement to remedy the defects of omitted variables in this study as
well as improve the validity of model specification. Further research might examine the
implementation of relevant researches to confirm the findings of this study as well as
make clear the causal effect of explanatory variables in demand of working capital
among developing and developed countries.

58

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61

APPENDICES

Appendix 1
Selected companies by industrial sectors
Industrial sectors

Number of companies
100
29
35
25

Manufacturing
Construction
Wholesale and Retail trade
Transportation and Storage
Real estate activities
Services
Others

35
18
23
Appendix 2

Working capital requirements across industries and time series

Year2007

Year2008

Year2009

Year2010

Year2011

Year2012

Manufacturing

0.25218

0.22477

0.22282

0.23233

0.20277

0.19777

Construction

0.18488

0.15993

0.17191

0.17423

0.20474

0.17461

Wholesale and Retail trade

0.17652

0.15883

0.16956

0.17478

0.17039

0.13120

Transportation and Storage

0.16336

0.13321

0.13267

0.15470

0.13231

0.09822

Real estate activities

0.38490

0.31587

0.37836

0.41010

0.36808

0.39484

Services

0.15123

0.13246

0.11217

0.11544

0.09385

0.10580

Others

0.31392

0.20790

0.22885

0.25250

0.25041

0.27569

Industrial sectors

62

Appendix 3
Data of working capital policy
Industrial sectors

Ratio of current assets to total assets

Manufacturing

0.645902868

Construction

0.643492662

Wholesale and Retail trade

0.64302057

Transportation and Storage

0.355951891

Real estate activities

0.711745442

Services

0.297577927

Others

0.557826926

Appendix 4
Data of profitability and working capital requirement across industry groups

Industrial sectors
Manufacturing
Construction
Wholesale and Retail trade
Transportation and Storage
Real estate activities
Services
Others

Working capital
requirement
0.222106288
0.178382958
0.16354654
0.135743765
0.375357208
0.120542758
0.254880162

63

Profitability of
companies
0.088925303
0.056010278
0.062999571
0.080163333
0.054991238
0.080630098
0.153694524

Appendix 5
Data of changes in sale growth and working capital requirement from 2007 to 2012
Year
2007
2008
2009
2010
2011
2012

Working capital requirement

203.1478178
176.1388979
287.0763686
388.1641232
391.9649438
475.2218767

64

Sales growth
0.7124
0.4859
0.8666
1.3254
0.5815
0.0525