Earnings management by real activities manipulations: a look at Vietnam

Abstract

This research thesis tests three hypothesizes: (i) In Viet Nam, the listed companies that meet earnings target (zero earnings and zero earnings growth) exhibit the proof of real activities manipulation (ii) Hypothesis 2: there is the difference between the extent of using real activities manipulation of the listed firm that meet benchmark and those that meet earning benchmark and have a high value of an asset (iii) there is no relationship between firm using real activities manipulation to just meet earnings benchmark and future performance. Our tests were based on data included 2374 firm-year observation covering 2005 to 2015.We focus on companies that satisfy one of the criteria: zero earnings or zero earnings growth. The firms meet the criteria call suspected firms or belong to suspected firms group. The rules identify the firms that more likely to using real activities manipulation. We examine three types of real earnings management: (1) cutting discretionary expenditures (2) acceleration of timing of sales (sale manipulation) (3) reducing the cost of production. To measure real earnings management, we follow the cross-section model developed by Roychowdhury (2006), Gunny (2010); and estimate abnormal production cost, abnormal discretionary spending (sum of SG&A, R&D, and advertising) and abnormal CFO. Our finding is that Vietnamese listed firmed apply real activities management to meet earnings benchmark. Besides, the degree effect of cutting production cost of the suspected firms with a high value of assets is highest (11.14%) among three types of real activities management (2.54% for sale manipulation and 0.398% for reducing discretionary expenses, which suggest the firm with a good reputation prefer employ cutting production cost to meet companies target. Final, the companies which engage in CFO manipulation or cutting discretionary expenses, as real earnings management to just meet earnings benchmarks have no impact on subsequent performance. In contrast, the companies which engage in production cost as real earnings management to just meet earnings benchmarks have negative impact on subsequent performance.