Earning management and cost of debt financing: Evidence from Vietnamese listed companies
DOI:
https://doi.org/10.15549/jeecar.v11i5.1696Keywords:
Earning management, cost of debt, quantile regressionAbstract
While earnings management has been employed to conceal corporations' true performance, concerns have risen regarding its adverse impact on financing costs, particularly the cost of debt. This study, therefore, aims to examine the impact of earnings management on the cost of debt in Vietnam. Using data on 197 companies during 2016-2020 in a wide variety of industries and a quantile regression approach, which allows different magnitudes in the impact of earnings management on the cost of debt, the study indicates the negative impact of earnings management on the cost of debt. Earnings management leads to a higher cost of debt. The result supports the garbling theory that Vietnamese firms engage in earnings management exhibit a higher cost of debt as a form of punishment for gaming earnings. In Vietnam, the impact of earnings management is more severe at high levels of debt.
References
Alareeni, B. (2018). Does corporate governance influence earnings management in listed companies in the Bahrain bourse? Journal of Asia Business Studies, 12(4), 551-570. https://doi.org/10.1108/jabs-06-2017-0082 DOI: https://doi.org/10.1108/JABS-06-2017-0082
Amiram, D., & Owens, E. (2018). Sign reversal in the relationship between income smoothing and cost of debt. Journal of Business Finance & Accounting, 45(1-2), 40-71. https://doi.org/10.1111/jbfa.12295 DOI: https://doi.org/10.1111/jbfa.12295
Anderson, R. C., Mansi, S. A., & Reeb, D. M. (2004). Board characteristics, accounting report integrity, and the cost of debt. Journal of accounting and economics, 37(3), 315-342. https://doi.org/10.2139/ssrn.491883 DOI: https://doi.org/10.1016/j.jacceco.2004.01.004
Carmo, C. R., Moreira, J. A. C., & Miranda, M. C. S. (2016). Earnings quality and cost of debt: evidence from Portuguese private companies. Journal of Financial Reporting and Accounting, 14(2), 178-197. https://doi.org/10.1108/jfra-08-2014-0065 DOI: https://doi.org/10.1108/JFRA-08-2014-0065
Chen, D., Li, J., Liang, S., & Wang, G. (2011). Macroeconomic control, political costs, and earnings management: Evidence from Chinese listed real estate companies. China Journal of Accounting Research, 4(3), 91-106. https://doi.org/10.1016/j.cjar.2011.06.002 DOI: https://doi.org/10.1016/j.cjar.2011.06.002
Demski, J. S., & Frimor, H. (1999). Performance measure garbling under renegotiation in multi-period agencies. Journal of Accounting Research, 37, 187-214. https://doi.org/10.2307/2491353 DOI: https://doi.org/10.2307/2491353
Francis, J., LaFond, R., Olsson, P., & Schipper, K. (2005). The market pricing of accruals quality. Journal of accounting and economics, 39(2), 295-327. https://doi.org/10.1016/j.jacceco.2004.06.003 DOI: https://doi.org/10.1016/j.jacceco.2004.06.003
Gabrielsen, G., Gramlich, J. D., & Plenborg, T. (2002). Managerial ownership, the information content of earnings, and discretionary accruals in a non–US setting. Journal of Business Finance & Accounting, 29(7‐8), 967-988. https://doi.org/10.1111/1468-5957.00457 DOI: https://doi.org/10.1111/1468-5957.00457
Gong, G., Xu, S., & Gong, X. (2017). Bond covenants and the cost of debt: Evidence from China. Emerging Markets Finance and Trade, 53(3), 587-610. https://doi.org/10.1080/1540496x.2015.1095568 DOI: https://doi.org/10.1080/1540496X.2015.1095568
Graham, J. R., Harvey, C. R., & Rajgopal, S. (2005). The economic implications of corporate financial reporting. Journal of accounting and economics, 40(1-3), 3-73. https://doi.org/10.1016/j.jacceco.2005.01.002 DOI: https://doi.org/10.1016/j.jacceco.2005.01.002
Habbash, M. (2010). The effectiveness of corporate governance and external audit on constraining earnings management practice in the UK (Doctoral dissertation, Durham University).
Hart, O. D., & Moore, J. (1994). Debt and seniority: An analysis of the role of hard claims in constraining management. In: National Bureau of Economic Research Cambridge, Mass., USA. DOI: https://doi.org/10.3386/w4886
Healy, P. M. (1985). The effect of bonus schemes on accounting decisions. Journal of accounting and economics, 7(1-3), 85-107. https://doi.org/10.1016/0165-4101(85)90029-1 DOI: https://doi.org/10.1016/0165-4101(85)90029-1
Heckman, J. J. (1979). Sample selection bias as a specification error. Econometrica: Journal of the econometric society, 153-161. https://doi.org/10.2307/1912352 DOI: https://doi.org/10.2307/1912352
Jensen, M. C., & Meckling, W. H. (1998). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.94043 DOI: https://doi.org/10.2139/ssrn.94043
Jones, J. J. (1991). Earnings Management During Import Relief Investigations. Journal of Accounting Research, 29(2), 193. https://doi.org/10.2307/2491047 DOI: https://doi.org/10.2307/2491047
Kallunki, J.-P., & Martikainen, M. (2003). Earnings management as a predictor of future profitability of Finnish firms. European Accounting Review, 12(2), 311-325. https://doi.org/10.1080/0963818032000089409 DOI: https://doi.org/10.1080/0963818032000089409
Kim, J. H., Lee, S. H., & Keun Yoo, Y. (2020). Real earnings management and the cost of debt capital: international evidence. Asia-Pacific Journal of Accounting & Economics, 27(2), 151-172. https://doi.org/10.1080/16081625.2018.1518148 DOI: https://doi.org/10.1080/16081625.2018.1518148
Koenker, R., & Hallock, K. F. (2001). Quantile Regression. Journal of Economic Perspectives, 15(4), 143–156. https://doi.org/10.1257/jep.15.4.143 DOI: https://doi.org/10.1257/jep.15.4.143
Le, H. T. T., Vo, X. V., & Vo, T. T. (2021). Accruals quality and the cost of debt: Evidence from Vietnam. International Review of Financial Analysis, 76, 101726. https://doi.org/10.1016/j.irfa.2021.101726 DOI: https://doi.org/10.1016/j.irfa.2021.101726
Le, T. P. V., & Phan, T. B. N. (2017). Capital structure and firm performance: Empirical evidence from a small transition country. Research in international business and finance, 42, 710-726. https://doi.org/10.1016/j.ribaf.2017.07.012 DOI: https://doi.org/10.1016/j.ribaf.2017.07.012
Li, S., & Richie, N. (2016). Income smoothing and the cost of debt. China Journal of Accounting Research, 9(3), 175-190. https://doi.org/10.1016/j.cjar.2016.03.001 DOI: https://doi.org/10.1016/j.cjar.2016.03.001
Magnanelli, B. S., & Izzo, M. F. (2017). Corporate social performance and cost of debt: The relationship. Social Responsibility Journal, 13(2), 250-265. https://doi.org/10.1108/srj-06-2016-0103 DOI: https://doi.org/10.1108/SRJ-06-2016-0103
Margaritis, D., & Psillaki, M. (2010). Capital structure, equity ownership, and firm performance. Journal of banking & finance, 34(3), 621-632. https://doi.org/10.1016/j.jbankfin.2009.08.023 DOI: https://doi.org/10.1016/j.jbankfin.2009.08.023
Nguyen, Q., Kim, M. H., & Ali, S. (2024). Corporate governance and earnings management: Evidence from Vietnamese listed firms. International Review of Economics & Finance, 89, 775-801. https://doi.org/10.1016/j.iref.2023.07.084 DOI: https://doi.org/10.1016/j.iref.2023.07.084
Orazalin, N., & Akhmetzhanov, R. (2019). Earnings management, audit quality, and cost of debt: evidence from a Central Asian economy. Managerial Auditing Journal, 34(6), 696-721. https://doi.org/10.1108/maj-12-2017-1730 DOI: https://doi.org/10.1108/MAJ-12-2017-1730
Ortiz-Molina, H. (2006). Top management incentives and the pricing of corporate public debt. Journal of Financial and Quantitative Analysis, 41(2), 317-340. https://doi.org/10.1017/s0022109000002088 DOI: https://doi.org/10.1017/S0022109000002088
Prevost, A. K., Rao, R. P., & Skousen, C. J. (2008). Earnings management and the cost of debt. Available at SSRN 1083808. https://doi.org/10.2139/ssrn.1083808 DOI: https://doi.org/10.2139/ssrn.1083808
Sánchez-Ballesta, J. P., & García-Meca, E. (2011). Ownership structure and the cost of debt. European Accounting Review, 20(2), 389-416. https://doi.org/10.1080/09638180903487834 DOI: https://doi.org/10.1080/09638180903487834
Tran, N. H., & Le, C. D. (2020). Ownership concentration, corporate risk-taking, and performance: Evidence from Vietnamese listed firms. Cogent Economics & Finance, 8(1), 1732640. https://doi.org/10.1080/23322039.2020.1732640 DOI: https://doi.org/10.1080/23322039.2020.1732640
Zaher, N. A., Mohamed, E. K., & Basuony, M. A. (2020). The effect of timely loss recognition and accrual quality on corporate bond spread: The influence of legal and financial institutions. Journal of International Financial Markets, Institutions, and Money, 64, 101171. https://doi.org/10.1016/j.intfin.2019.101171 DOI: https://doi.org/10.1016/j.intfin.2019.101171
Zietz, J., Zietz, E. N., & Sirmans, G. S. (2008). Determinants of house prices: a quantile regression approach. The Journal of Real Estate Finance and Economics, 37, 317-333. https://doi.org/10.1007/s11146-007-9053-7 DOI: https://doi.org/10.1007/s11146-007-9053-7
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2024 Ngoc Mai Tran
This work is licensed under a Creative Commons Attribution 4.0 International License.
The JEECAR journal allows the author(s) to hold the copyright and publishing rights of their own manuscript without restrictions.
This journal applies the Creative Attribution Common License to works we publish, and allows reuse and remixing of its content, in accordance with a CC-BY 4.0 license.
Authors are free to: Share — copy and redistribute the material in any medium or format and Adapt — remix, transform, and build upon the material for any purpose, even commercially.
Under the following terms: Attribution — You must give appropriate credit, provide a link to the license, and indicate if changes were made. You may do so in any reasonable manner, but not in any way that suggests the licensor endorses you or your use.
No additional restrictions — The author may not apply legal terms or technological measures that legally restrict others from doing anything the license permits.
The JEECAR Journal is committed to the editorial principles of all aspects of publication ethics and publication malpractice as assigned by the Committee on Public Ethics.
