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31/07/2024
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Nguyen, V. D., Hoang, T. N., Mai, T. K. L., & Nguyen, V. C. (2024). Financial distress and earnings management: evidence from non-financial companies listed on the Ho Chi Minh Stock Exchange. Journal of International Economics and Management, 24(2), 54-72. https://doi.org/10.38203/jiem.024.2.0086
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Financial distress and earnings management: evidence from non-financial companies listed on the Ho Chi Minh Stock Exchange
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Abstract
The study examines the impact of financial distress on earnings management for Vietnamese non-financial companies. The System Generalized Method of Moments was employed to estimate a dynamic panel data model. Data were collected from non-financial companies listed on the Ho Chi Minh Stock Exchange from 2011 to 2020. The results show that financial distress has a positive impact on earnings management. Specifically, enterprises with good financial health and low risk of bankruptcy tend to make upward profit adjustments, while financially distressed enterprises tend to make downward profit adjustments. This may be due to the supervisory pressure of auditors and creditors, which makes the most affected enterprises no longer have the opportunity to undertake profit manipulation. At the same time, a company with high operating performance tends to maintain profit growth to impress investors in the market. The study results warn policymakers, enterprises, and investors when even financially sound enterprises are incentivized to undertake earnings management. This paper provides additional evidence that financial distress is positively associated with earnings management, which contradicts the findings of some prior studies.
Article Details
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
Keywords
Financial distress, Earnings management, Profit adjustments, Vietnam
References
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Ahmad-Zaluki, N.A., Campbell, K. and Goodacre, A. (2011), “Earnings management in Malaysian IPOs: the East Asian crisis, ownership control and post-IPO performance”, The International Journal of Accounting, Vol. 46 No. 2, pp. 111-137.
Alphonse, P. and Nguyen, H. (2015), “Financial distress and accrual anomaly: evidence from the Vietnamese Stock Market”, SSRN Electronic Journal, Available at http://ssrn.com/abstract=2565317 (Accessed 18 October, 2021).
Altman, E.I. (2000), “Predicting financial distress of companies: revisiting the Z-score and ZETA models”, in Bell, A.R., Brooks, C. and Prokopczuk, M. (Eds.), Handbook of Research Methods and Applications in Empirical Finance, Edward Elgar Publishing Limited, Cheltenham, pp. 428-456.
Altman, E.I. and Hotchkiss, E. (2011), Corporate Financial Distress and Bankruptcy: Predict and Avoid Bankruptcy, Analyze and Invest in Distressed Debt, 3rd Edition, Wiley, New Jersey.
Arellano, M. and Bover, O. (1995), “Another look at the instrumental variable estimation of error-components models”, Journal of Econometrics, Vol. 68 No. 1, pp. 29-51.
Ashari, N., Koh, H., Tan, S.L. and Wong, W. (1994), “Factors affecting income smoothing among listed companies in Singapore”, Accounting and Business Research, Vol. 24 No. 96, pp. 291-301.
Asquith, P., Gertner, R. and Scharfstein, D. (1994), “Anatomy of financial distress: an examination of junk-bond issuers”, The Quarterly Journal of Economics, Vol. 109 No. 3, pp. 625-665.
Barton, J. and Simko, P.J. (2002), “The balance sheet as an earnings management constraint”, Accounting Review, Vol. 77, pp. 1-27.
Becker, C.L., DeFond, M.L., Jiambalvo, J. and Subramanyam, K. (1998), “The effect of audit quality on earnings management”, Contemporary Accounting Research, Vol. 15 No. 1, pp. 1-24.
Blundell, R. and Bond, S. (1998), “Initial conditions and moment restrictions in dynamic panel data models”, Journal of Econometrics, Vol. 87 No. 1, pp. 115-143.
Boda, M. and Uradnicek, V. (2016), “The portability of Altman’s Z-score model to predicting corporate financial distress of Slovak companies”, Technological and Economic Development of Economy, Vol. 22 No. 4, pp. 532-553.
Burgstahler, D. and Dichev, I. (1997), “Earnings management to avoid earnings decreases and losses”, Journal of Accounting and Economics, Vol. 24 No. 1, pp. 99-126.
Campa, D. and Camacho-Miñano, M.-d.-M. (2015), “The impact of SME’s pre-bankruptcy financial distress on earnings management tools”, International Review of Financial Analysis, Vol. 42, pp. 222-234.
Charitou, A., Lambertides, N. and Trigeorgis, L. (2011), “Distress risk, growth and earnings quality”, Abacus, Vol. 47 No. 2, pp. 158-181.
Cheng, P., Aerts, W. and Jorissen, A. (2010), “Earnings management, asset restructuring, and the threat of exchange delisting in an earnings-based regulatory regime”, Corporate Governance: An International Review, Vol. 18 No. 5, pp. 438-456.
DeAngelo, H., DeAngelo, L. and Skinner, D.J. (1994), “Accounting choice in troubled companies”, Journal of Accounting and Economics, Vol. 17 No. 1, pp. 113-143.
Dechow, P., Sloan, R. and Sweeney, A. (1995), “Detecting earnings management”, Accounting Review, Vol. 70 No. 2, pp. 193-225.
DeFond, M.L. and Jiambalvo, J. (1994), “Debt covenant violation and manipulation of accruals”, Journal of Accounting and Economics, Vol. 17 No. 1-2, pp. 145-176.
Degeorge, F., Patel, J. and Zeckhauser, R. (1999), “Earnings management to exceed thresholds”, The Journal of Business, Vol. 72 No. 1, pp. 1-33.
Dichev, I.D. and Skinner, D.J. (2002), “Large-sample evidence on the debt covenant hypothesis”, Journal of Accounting Research, Vol. 40 No. 4, pp. 1091-1123.
Filip, A. and Raffournier, B. (2014), “Financial crisis and earnings management: the European evidence”, The International Journal of Accounting, Vol. 49 No. 4, pp. 455-478.
Friedlan, J.M. (1994), “Accounting choices of issuers of initial public offerings”, Contemporary Accounting Research, Vol. 11 No. 1, pp. 1-31.
Gandhi, K. (2021), “Financial distress, earnings benchmark and earnings management practices”, Vision: The Journal of Business Perspective, Online First.
Gombola, M.J., Ho, A.Y.-F. and Huang, C.-C. (2016), “The effect of leverage and liquidity on earnings and capital management: evidence from U.S. commercial banks”, International Review of Economics & Finance, Vol. 43, pp. 35-58.
Graham, J.R., Harvey, C.R. and Rajgopal, S. (2005), “The economic implications of corporate financial reporting”, Journal of Accounting and Economics, Vol. 40 No. 1, pp. 3-73.
Guidry, F.J., Leone, A. and Rock, S. (1999), “Earnings-based bonus plans and earnings management by business-unit managers”, Journal of Accounting and Economics, Vol. 26 No. 1, pp. 113-142.
Healy, P. and Wahlen, J.M. (1998), “A review of the earnings management literature and its implications for standard setting”, Accounting Horizons, Vol. 13 No. 4, pp. 365-383.
Iatridis, G. and Kadorinis, G. (2009), “Earnings management and firm financial motives: a financial investigation of UK listed firms”, International Review of Financial Analysis, Vol. 18 No. 4, pp. 164-173.
Jaggi, B. and Lee, P. (2002), “Earnings management response to debt covenant violations and debt restructuring”, Journal of Accounting, Auditing & Finance, Vol. 17 No. 4, pp. 295-324.
Jensen, M.C. and Meckling, W.H. (1976), “Theory of the firm: managerial behavior, agency costs and ownership structure”, Journal of Financial Economics, Vol. 3 No. 4, pp. 305-360.
Jeong-Bon Kim, C.H.Y. (2010), “Ownership structure, business group affiliation, listing status, and earnings management: evidence from Korea”, Contemporary Accounting Research, Vol. 23 No. 2, pp. 427-464.
Jones, J. (1991), “Earnings management during import relief investigations”, Journal of Accounting Research, Vol. 29 No. 2, pp. 193-228.
Kothari, S.P., Leone, A.J. and Wasley, C.E. (2005), “Performance matched discretionary accrual measures”, Journal of Accounting and Economics, Vol. 39 No. 1, pp. 163-197.
Le, T.P.V. (2020), “Financial distress and earnings management: empirical evidence from listed companies in Vietnam”, Journal of Asian Business and Economic Studies, Vol. 31 No. 2, pp. 23-44.
Livnat, J. and Santicchia, M. (2006), “Cash flows, accruals, and future returns”, Financial Analysts Journal, Vol. 62 No. 4, pp. 48-61.
McLeay, S. and Omar, A. (2000), “The sensitivity of prediction models to the non-normality of bounded and unbounded financial ratios”, British Accounting Review, Vol. 32 No. 2, pp. 213-230.
OECD (2020), OECD Economic Outlook: Statistics and Projections, Vol. 2020 No. 2, OECD iLibrary.
Ohlson, J.A. (1980), “Financial ratios and the probabilistic prediction of bankruptcy”, Journal of Accounting Research, Vol. 18 No. 1, pp. 109-131.
Platt, H.D. and H. Platt, M.B. (2002), “Predicting corporate financial distress: reflections on choice-based sample bias”, Journal of Economics and Finance, Vol. 26, pp. 184-199.
Platt, H. and Platt, M.B. (2004), “Industry-relative ratios revisited: the case of financial distress industry-relative ratios revisited: the case of financial distress”, presented at 2004 Financial Management Association’s (FMA) Annual Meeting, New Orleans, USA.
Rakshit, D., Chatterjee, C. and Paul, A. (2021), “Financial distress, the severity of financial distress and direction of earnings management: evidences from Indian economy”, FIIB Business Review, Online First.
Raman, K. and Shahrur, H. (2008), “Relationship-specific investments and earnings management: evidence on corporate suppliers and customers”, The Accounting Review, Vol. 83 No. 4, pp. 1041-1081.
Richardson, S.A., Sloan, R.G., Soliman, M.T. and Tuna, I. (2005), “Accrual reliability, earnings persistence and stock prices”, Journal of Accounting and Economics, Vol. 39 No. 3, pp. 437-485.
Robin, A. and Wu, Q. (2015), “Firm growth and the pricing of discretionary accruals”, Review of Quantitative Finance and Accounting, Vol. 45 No. 3, pp. 561-590.
Rosner, R.L. (2010), “Earnings manipulation in failing firms”, Contemporary Accounting Research, Vol. 20 No. 2, pp. 361-408.
Ross, S., Westerfield, R. and Jaffe, J. (2012), Corporate Finance, 10th Edition, McGraw-Hill Education, New York.
Saleh, M.N. and Ahmed, K. (2005), “Earnings management of distressed firms during debt renegotiations”, Accounting and Business Research, Vol. 35 No. 1, pp. 69-86.
Schipper, K. (1989), “Commentary on earnings management”, Accounting Horizons, Vol. 3 No. 4, pp. 91-102.
Shan, Y., Taylor, S. and Walter, T. (2010), “Errors in estimating unexpected accruals in the presence of large changes in net external financing”, SSRN Electronic Journal, Available at https://ssrn.com/abstract=1710586 (Accessed 25 March, 2020).
Skinner, D.J. and Sloan, R. (1999), “Earnings surprises, growth expectations, and stock returns or don’t let an earnings torpedo sink your portfolio”, Review of Accounting Studies, Vol. 7, pp. 289-312.
Spohr, J. (2005), Essays on Earnings Management, Doctoral Thesis, Swedish School of Economics and Business Administration, Helsinki.
Sweeney, A.P. (1994), “Debt-covenant violations and managers’ accounting responses”, Journal of Accounting and Economics, Vol. 17 No. 3, pp. 281-308.
Teoh, S.H., Wong, T.J. and Rao, G.R. (1998), “Are accruals during initial public offerings opportunistic?”, Review of Accounting Studies, Vol. 3 No. 1, pp. 175-208.
Trombetta, M. and Imperatore, C. (2014), “The dynamic of financial crises and its non-monotonic effects on earnings quality”, Journal of Accounting and Public Policy, Vol. 33 No. 3, pp. 205-232.
Vo, V.N. and Hoang, C.T. (2013), “Profit adjustment behavior and bankruptcy risk of companies listed on the Ho Chi Minh City Stock Exchange”, Journal of Economic Development, Vol. 276 No. DS, pp. 48-57.
Ahmad-Zaluki, N.A., Campbell, K. and Goodacre, A. (2011), “Earnings management in Malaysian IPOs: the East Asian crisis, ownership control and post-IPO performance”, The International Journal of Accounting, Vol. 46 No. 2, pp. 111-137.
Alphonse, P. and Nguyen, H. (2015), “Financial distress and accrual anomaly: evidence from the Vietnamese Stock Market”, SSRN Electronic Journal, Available at http://ssrn.com/abstract=2565317 (Accessed 18 October, 2021).
Altman, E.I. (2000), “Predicting financial distress of companies: revisiting the Z-score and ZETA models”, in Bell, A.R., Brooks, C. and Prokopczuk, M. (Eds.), Handbook of Research Methods and Applications in Empirical Finance, Edward Elgar Publishing Limited, Cheltenham, pp. 428-456.
Altman, E.I. and Hotchkiss, E. (2011), Corporate Financial Distress and Bankruptcy: Predict and Avoid Bankruptcy, Analyze and Invest in Distressed Debt, 3rd Edition, Wiley, New Jersey.
Arellano, M. and Bover, O. (1995), “Another look at the instrumental variable estimation of error-components models”, Journal of Econometrics, Vol. 68 No. 1, pp. 29-51.
Ashari, N., Koh, H., Tan, S.L. and Wong, W. (1994), “Factors affecting income smoothing among listed companies in Singapore”, Accounting and Business Research, Vol. 24 No. 96, pp. 291-301.
Asquith, P., Gertner, R. and Scharfstein, D. (1994), “Anatomy of financial distress: an examination of junk-bond issuers”, The Quarterly Journal of Economics, Vol. 109 No. 3, pp. 625-665.
Barton, J. and Simko, P.J. (2002), “The balance sheet as an earnings management constraint”, Accounting Review, Vol. 77, pp. 1-27.
Becker, C.L., DeFond, M.L., Jiambalvo, J. and Subramanyam, K. (1998), “The effect of audit quality on earnings management”, Contemporary Accounting Research, Vol. 15 No. 1, pp. 1-24.
Blundell, R. and Bond, S. (1998), “Initial conditions and moment restrictions in dynamic panel data models”, Journal of Econometrics, Vol. 87 No. 1, pp. 115-143.
Boda, M. and Uradnicek, V. (2016), “The portability of Altman’s Z-score model to predicting corporate financial distress of Slovak companies”, Technological and Economic Development of Economy, Vol. 22 No. 4, pp. 532-553.
Burgstahler, D. and Dichev, I. (1997), “Earnings management to avoid earnings decreases and losses”, Journal of Accounting and Economics, Vol. 24 No. 1, pp. 99-126.
Campa, D. and Camacho-Miñano, M.-d.-M. (2015), “The impact of SME’s pre-bankruptcy financial distress on earnings management tools”, International Review of Financial Analysis, Vol. 42, pp. 222-234.
Charitou, A., Lambertides, N. and Trigeorgis, L. (2011), “Distress risk, growth and earnings quality”, Abacus, Vol. 47 No. 2, pp. 158-181.
Cheng, P., Aerts, W. and Jorissen, A. (2010), “Earnings management, asset restructuring, and the threat of exchange delisting in an earnings-based regulatory regime”, Corporate Governance: An International Review, Vol. 18 No. 5, pp. 438-456.
DeAngelo, H., DeAngelo, L. and Skinner, D.J. (1994), “Accounting choice in troubled companies”, Journal of Accounting and Economics, Vol. 17 No. 1, pp. 113-143.
Dechow, P., Sloan, R. and Sweeney, A. (1995), “Detecting earnings management”, Accounting Review, Vol. 70 No. 2, pp. 193-225.
DeFond, M.L. and Jiambalvo, J. (1994), “Debt covenant violation and manipulation of accruals”, Journal of Accounting and Economics, Vol. 17 No. 1-2, pp. 145-176.
Degeorge, F., Patel, J. and Zeckhauser, R. (1999), “Earnings management to exceed thresholds”, The Journal of Business, Vol. 72 No. 1, pp. 1-33.
Dichev, I.D. and Skinner, D.J. (2002), “Large-sample evidence on the debt covenant hypothesis”, Journal of Accounting Research, Vol. 40 No. 4, pp. 1091-1123.
Filip, A. and Raffournier, B. (2014), “Financial crisis and earnings management: the European evidence”, The International Journal of Accounting, Vol. 49 No. 4, pp. 455-478.
Friedlan, J.M. (1994), “Accounting choices of issuers of initial public offerings”, Contemporary Accounting Research, Vol. 11 No. 1, pp. 1-31.
Gandhi, K. (2021), “Financial distress, earnings benchmark and earnings management practices”, Vision: The Journal of Business Perspective, Online First.
Gombola, M.J., Ho, A.Y.-F. and Huang, C.-C. (2016), “The effect of leverage and liquidity on earnings and capital management: evidence from U.S. commercial banks”, International Review of Economics & Finance, Vol. 43, pp. 35-58.
Graham, J.R., Harvey, C.R. and Rajgopal, S. (2005), “The economic implications of corporate financial reporting”, Journal of Accounting and Economics, Vol. 40 No. 1, pp. 3-73.
Guidry, F.J., Leone, A. and Rock, S. (1999), “Earnings-based bonus plans and earnings management by business-unit managers”, Journal of Accounting and Economics, Vol. 26 No. 1, pp. 113-142.
Healy, P. and Wahlen, J.M. (1998), “A review of the earnings management literature and its implications for standard setting”, Accounting Horizons, Vol. 13 No. 4, pp. 365-383.
Iatridis, G. and Kadorinis, G. (2009), “Earnings management and firm financial motives: a financial investigation of UK listed firms”, International Review of Financial Analysis, Vol. 18 No. 4, pp. 164-173.
Jaggi, B. and Lee, P. (2002), “Earnings management response to debt covenant violations and debt restructuring”, Journal of Accounting, Auditing & Finance, Vol. 17 No. 4, pp. 295-324.
Jensen, M.C. and Meckling, W.H. (1976), “Theory of the firm: managerial behavior, agency costs and ownership structure”, Journal of Financial Economics, Vol. 3 No. 4, pp. 305-360.
Jeong-Bon Kim, C.H.Y. (2010), “Ownership structure, business group affiliation, listing status, and earnings management: evidence from Korea”, Contemporary Accounting Research, Vol. 23 No. 2, pp. 427-464.
Jones, J. (1991), “Earnings management during import relief investigations”, Journal of Accounting Research, Vol. 29 No. 2, pp. 193-228.
Kothari, S.P., Leone, A.J. and Wasley, C.E. (2005), “Performance matched discretionary accrual measures”, Journal of Accounting and Economics, Vol. 39 No. 1, pp. 163-197.
Le, T.P.V. (2020), “Financial distress and earnings management: empirical evidence from listed companies in Vietnam”, Journal of Asian Business and Economic Studies, Vol. 31 No. 2, pp. 23-44.
Livnat, J. and Santicchia, M. (2006), “Cash flows, accruals, and future returns”, Financial Analysts Journal, Vol. 62 No. 4, pp. 48-61.
McLeay, S. and Omar, A. (2000), “The sensitivity of prediction models to the non-normality of bounded and unbounded financial ratios”, British Accounting Review, Vol. 32 No. 2, pp. 213-230.
OECD (2020), OECD Economic Outlook: Statistics and Projections, Vol. 2020 No. 2, OECD iLibrary.
Ohlson, J.A. (1980), “Financial ratios and the probabilistic prediction of bankruptcy”, Journal of Accounting Research, Vol. 18 No. 1, pp. 109-131.
Platt, H.D. and H. Platt, M.B. (2002), “Predicting corporate financial distress: reflections on choice-based sample bias”, Journal of Economics and Finance, Vol. 26, pp. 184-199.
Platt, H. and Platt, M.B. (2004), “Industry-relative ratios revisited: the case of financial distress industry-relative ratios revisited: the case of financial distress”, presented at 2004 Financial Management Association’s (FMA) Annual Meeting, New Orleans, USA.
Rakshit, D., Chatterjee, C. and Paul, A. (2021), “Financial distress, the severity of financial distress and direction of earnings management: evidences from Indian economy”, FIIB Business Review, Online First.
Raman, K. and Shahrur, H. (2008), “Relationship-specific investments and earnings management: evidence on corporate suppliers and customers”, The Accounting Review, Vol. 83 No. 4, pp. 1041-1081.
Richardson, S.A., Sloan, R.G., Soliman, M.T. and Tuna, I. (2005), “Accrual reliability, earnings persistence and stock prices”, Journal of Accounting and Economics, Vol. 39 No. 3, pp. 437-485.
Robin, A. and Wu, Q. (2015), “Firm growth and the pricing of discretionary accruals”, Review of Quantitative Finance and Accounting, Vol. 45 No. 3, pp. 561-590.
Rosner, R.L. (2010), “Earnings manipulation in failing firms”, Contemporary Accounting Research, Vol. 20 No. 2, pp. 361-408.
Ross, S., Westerfield, R. and Jaffe, J. (2012), Corporate Finance, 10th Edition, McGraw-Hill Education, New York.
Saleh, M.N. and Ahmed, K. (2005), “Earnings management of distressed firms during debt renegotiations”, Accounting and Business Research, Vol. 35 No. 1, pp. 69-86.
Schipper, K. (1989), “Commentary on earnings management”, Accounting Horizons, Vol. 3 No. 4, pp. 91-102.
Shan, Y., Taylor, S. and Walter, T. (2010), “Errors in estimating unexpected accruals in the presence of large changes in net external financing”, SSRN Electronic Journal, Available at https://ssrn.com/abstract=1710586 (Accessed 25 March, 2020).
Skinner, D.J. and Sloan, R. (1999), “Earnings surprises, growth expectations, and stock returns or don’t let an earnings torpedo sink your portfolio”, Review of Accounting Studies, Vol. 7, pp. 289-312.
Spohr, J. (2005), Essays on Earnings Management, Doctoral Thesis, Swedish School of Economics and Business Administration, Helsinki.
Sweeney, A.P. (1994), “Debt-covenant violations and managers’ accounting responses”, Journal of Accounting and Economics, Vol. 17 No. 3, pp. 281-308.
Teoh, S.H., Wong, T.J. and Rao, G.R. (1998), “Are accruals during initial public offerings opportunistic?”, Review of Accounting Studies, Vol. 3 No. 1, pp. 175-208.
Trombetta, M. and Imperatore, C. (2014), “The dynamic of financial crises and its non-monotonic effects on earnings quality”, Journal of Accounting and Public Policy, Vol. 33 No. 3, pp. 205-232.
Vo, V.N. and Hoang, C.T. (2013), “Profit adjustment behavior and bankruptcy risk of companies listed on the Ho Chi Minh City Stock Exchange”, Journal of Economic Development, Vol. 276 No. DS, pp. 48-57.