Firm’s financial flexibility, corporate governance, and investment efficiency: The evidence from an emerging country

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Using data from Vietnamese non-financial listed companies between 2010 and 2024, this study investigates the determinants of investment efficiency, specifically focusing on the dual problems of overinvestment and underinvestment. To achieve these research objectives, the study employs the System Generalised Method of Moments (SGMM) estimation technique to analyse the data and obtain robust empirical results. First, our empirical findings reveal that higher financial flexibility provides firms with readily available internal funds. However, these abundant financial resources tend to weaken external monitoring and increase managerial discretion, thereby fostering overinvestment. Similarly, state ownership exhibits a positive and significant relationship with investment inefficiency. This aligns with the soft-budget-constraints theory, where anticipated state backing dilutes financial discipline and drives overinvestment. Conversely, firm size is negatively correlated with investment inefficiency, indicating that the superior monitoring and governance inherent in larger firms effectively restrain managerial discretion. At the macro level, economic booms and loosened lending standards further amplify free cash flow problems and soften firms’ budget constraints, thereby exacerbating investment inefficiency. Ultimately, the findings of this study provide policymakers and managers with actionable recommendations to strengthen the Vietnamese corporate finance landscape and promote greater investment efficiency.