The disappearance of investment-cash flow sensitivity under monetary policy surprises: evidence from an emerging market

Bao Cong Nguyen To, Bao Khac Quoc Nguyen and Khanh Hoang

International Journal of Managerial Finance, 2026, vol. 22, issue 5, 1021-1047

Abstract: PurposeThis paper examines how monetary policy surprises (MPS) affect investment–cash flow sensitivity (ICF) among Vietnamese listed firms during 2010–2023, with a particular focus on ownership-based heterogeneity in monetary policy transmission. Vietnam provides a unique setting due to its bank-based financial system, dominant state ownership, and transitional market structure, which together generate heterogeneous financing responses to MPS.Design/methodology/approachWe employ firm-level panel regressions with multiple fixed effects and interaction terms to examine how MPS affect ICF across ownership structures. To address endogeneity concerns, the study applies instrumental-variable techniques to identify exogenous MPS.FindingsThe results suggest that increases in MPS weaken, and in some specifications eliminate, ICF at the aggregate level. However, state-owned enterprises (SOEs) remain dependent on internal funds, indicating persistent financing rigidities and the continued presence of ICF, consistent with the pecking order theory. In contrast, foreign-owned firms exhibit no significant ICF, suggesting that non-state and foreign firms are better able to leverage lower interest rates to obtain external capital. Additional analysis shows that firms increase cash holdings and reduce financial investments following MPS, reflecting a short-term “wait-and-see” response, whereas SOEs and foreign firms do not.Practical implicationsThe findings suggest that policymakers should maintain a balanced and transparent monetary policy stance to improve the effectiveness of liquidity transmission and reduce financing frictions among non-state firms. For corporate managers, the results highlight the importance of liquidity management and flexible financing strategies when responding to unexpected monetary shocks.Originality/valueThis study extends the traditional investment–cash flow sensitivity (ICF) framework by treating monetary policy surprises as exogenous liquidity shocks and provides new firm-level evidence on how ownership structure shapes monetary policy transmission in an emerging market context.

Keywords: Monetary policy surprises; Investment-cash flow sensitivity; Cash holdings; Financial investment; Vietnam (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijmfpp:ijmf-05-2025-0241

DOI: 10.1108/IJMF-05-2025-0241

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