Firms’ default risk under economic freedom: the role of ownership structure

Abstract

This paper examines the impact of economic freedom and default risk of 1,496 nonfinancial firms in Vietnam over the period 2012-2020. We also evaluate the effect of ownership structure on the relationship between economic freedom and firms’ default risk. By using the GMM method of panel data, we find that trade freedom, monetary freedom and labor freedom increase the firms’ default risk while investment freedom and business freedom helps firms to reduce default risk. Our results also reveal that for foreign-owned firms, increased trade freedom and monetary freedom is associated with a higher insolvency risk level, whereas increased business freedom is linked a lower default risk level compared to non-foreign-owned firms. However, this study investigates that there is no difference in the effect of economic freedom and firm default risk between state-owned and non-state-owned firms in Vietnam. This finding has implications in recognizing the importance of foreign ownership and economic freedom in emerging markets and helps foreign shareholders to design appropriate policies to mitigate bankrupty risk.