Analysis Of The Interdependance Of Ownership Structure And Earnings Management In Vietnam
Insiders in a company such as managers tend to misrepresent financial information (Shen and Chih, 2007). According to Graham, Harvey and Rajgopal (2005), the strategy of reducing discretionary expense including research and development and advertising is chosen by 80 percent of participants. The misrepresentation of earnings can be caused by some motives such as compensation (Houmes and Skantz, 2010), stock market (Gelb and Zarowin, 2002) and behaviors of firms operating in the same industry (Othman and Zeghal, 2006). Moreover, ownership structure can affect these motives and monitor earnings management efficiently (Brown, Beekes and Verhoeven, 2011). Hence, several researchers examine the association between ownership structure and earnings management.
For example, Cornett, Marcus and Tehranian (2008) collect data of S&P 100 firms whose shares are largely held by institutions. They conclude that institutional investors are likely to monitor managers actively, thus detecting or preventing the inaccurate disclosure of earnings. Similarly, foreign ownership is negatively related to real earnings management (Cohen, Dey and Lys, 2008). Vietnam can be considered an interesting subject for the analysis of the relationship between ownership structure and earnings management. The transparency of information in Vietnamese listed companies is assessed as low by Asian Development Bank (2015), thus increasing earnings management (Hunton, Libby and Mazza, 2006). Moreover, effective ownership structure can enhance financial reporting quality measured by discretionary accruals, improving the transparency of financial reports (Adebiyi and Olowookere, 2016).
Additionally, in Vietnam, foreign ownership which represents around 20 percent of gross domestic products has an important role in the economy (General Statistics Office of Vietnam, 2017). The government of Vietnam has issued new regulations that can facilitate the foreign investment and contribute to the corporate governance improvement in listed companies, for example Circular 123/2015/TT-BTC and Circular 155/2015/TT-BTC. Nevertheless, I have acknowledged that literature about the effects of ownership structure on earnings management in the context of Vietnam is still limited. Brown et al. (2011) states that a range of prior studies concentrate on developed countries, for example United States due to reliable and available corporate governance data. In addition, although many researchers such as Claessens and Fan (2002) and Shen and Chih (2007) focus on Asian countries, they are likely to use a sample in Hong Kong, Korea, Malaysia, Taiwan and Thailand rather than a sample in Vietnam. Further, several previous studies about earnings management in Vietnam context investigate only accrual-based earnings management such as Essa, Kabir and Tuan. (2016) and Dang, Hoang and Tran. (2017).
Therefore, the need for analyzing the impact of ownership structure on monitoring real earnings in Vietnamese companies arises. Earnings management is defined as a process that managers change financial reports to either give some stakeholders the wrong impression about economic performance of the company or to maximize their earnings (Healy and Wahlen, 1999). However, Ronen and Yaari (2008) point out the advantage of efficient earnings management to the improvement in the transparency of financial reports. Earnings can be manipulated through accounting treatment known as accrual-based earnings management and economic decisions known as real earnings management (Healy and Wahlen, 1999). Managers’ earnings manipulation requires the following conditions: contracting deficiencies, limitation on stakeholders’ ability to understand management decisions and information asymmetry in the market (El Diri, 2017). Real earnings management is “management actions that deviate from normal business practices, undertaken with the primary objective of meeting certain earnings thresholds” (Roychowhury 2006, p. 336).
The concept is different from accrual-based earnings management which is related to the accounting choices, including depreciation and inventory valuation methods. Real earnings management can involve the increase in sales (Cohen and Zarowin, 2010), overproduction (Chi, Lisic and Mikhail, 2011) and controlling discretionary expenses, e. g. , research and development, advertising, selling and administrative expenses (Osma, 2008). One of the advantages of real earnings management is that it is less likely to cause auditors or regulators to scrutinize financial reports (Cohen and Zarowin, 2010). Moreover, managers who only use accrual-based methods can face the inability to adjust reported earnings below the threshold (Cohen and Zarowin, 2010). The paper explores the relationship between ownership structure and real earnings management in the context of Vietnam. More specifically, the objective of the paper is to examine to what extent ownership structure constraints the level of real earnings management in Vietnamese listed companies in 2017. This way the research contributes to the extension of limited research on this topic in Vietnam.