UNDERSTANDING THE NEXUS BETWEEN INFORMATION ASYMMETRY, INTERNAL FINANCE, AND INVESTMENT EFFICIENCY: INSIGHTS FROM LISTED FIRMS IN VIETNAM

Abstract

To explore the influence of information asymmetry on the link between internal finance and investment efficiency with a specific focus on innovation implications, this study analyses data from 507 non-financial listed firms in Vietnam from 2006 to 2019. The results indicate a proclivity among Vietnamese firms to engage in overinvestment as opposed to underinvestment. Notably, free cash flow significantly influences investment in both positive and negative cash flow scenarios. Furthermore, this investigation identifies that internal financing, represented explicitly by free cash flow, plays a pivotal role in both under- and overinvestment scenarios. Asymmetric information factors such as financial constraints and agency costs intricately shape the relationship between internal finance and investment efficiency. Firms experiencing high financial constraints tend to underinvest when facing an internal finance deficit. Conversely, firms with elevated agency costs show increased investment fuelled by their free cash flows, leading to overinvestment. The insights gained from this research can provide strategic measures for Vietnamese firms to foster innovation and optimise internal finance utilisation.