Board Characteristics and Earnings Management in Vietnam

Introduction1.1    Research Background and Research Motivation

In current years, developing markets have got much academic consideration because of the development of their economy and weighty engagement within the worldwide economy (Hoskisson et al., 2000). In spite of rapid growths, the precision and quality of financial reporting information conducted by numerous companies in those nations continue to be a doubt for users and scholars (Wang and Yung, 2011; Li, Ho Park and Shuji Bao, 2014; Switzer, Tu and Wang, 2018). Over the past few decades, several accounting scandals divulge the unethical behaviors and underline significance of reliability and clarity of financial information (Lang and Lundholm, 2000). Managers have abused the flexibility of accounting policy to manage earnings (Parfet, 2000). Thus, earnings management can be seen as a vital concern in the emerging markets since it may influence corporate partnerships and foreign investment in the markets (Chen, Elder and Hsieh, 2007). For instance, managers sometimes manipulate accounting figures on financial statements to lower their risks and encourage the users of financial statements (Healy and Wahlen, 1999). For this reason, it is advised that using earnings management might negatively influence the ones who use the financial information.

Earnings management has resulted from corporate failures which become a significant concern for investors. In particular, boards of directors are responsible for decision-making. Conversely, there are some reasons why decisions made by managers no longer maximize the shareholders’ wealth and result in corporate failures. In this case, agency theory is mentioned (Jensen and Meckling, 1976). Also, Argüden (2010) showed that the quality of corporate governance should be determined by board composition, the decision process, and firm’s organizational structure. The board of directors is considered as the heart of the firm with the authorities to set strategies, structure and supervise the whole firm (Pudjiastuti and Mardiyah, 2007).

Furthermore, a large number of scholars concentrates on testing the impacts of corporate governance and board characteristics on earnings manipulation in the developed marketplaces such as U.K and U.S. (for example: Teoh, Welch, and Wong (1998); Peasnell, Pope, and Young (2005); Xie, Davidson III, and DaDalt (2003); Park and Shin (2004); Klein (2002); Erickson and Wang (1999); Bédard, Chtourou, and Courteau (2004). There is a scarcity of empirical and comprehensive study on this association in developing markets (Wang and Yung, 2011). It is more interesting that there is a big difference in some test results among the research in different developing countries, depending on various factors including the year of data, industry, and sample size. For example, in Malaysia, Saleh, Iskandar, & Rahmat (2005) found that board size is negatively correlated to earnings manipulation, demonstrating that larger scope of board will reduce earnings management level. In the subsequent year, Abdul Rahman & Haneem Mohamed Ali (2006) proved a positive association between earnings manipulation and board size, with an insignificant correlation between management of earnings and other corporate governance factors. In China and India, some scholars discovered a positive association between earnings manipulation and CEO duality (Sarkar, Sarkar and Sen, 2008; Gulzar, 2011), while earnings management has been found not to be positively influenced by CEO duality and indicated that there are dual positions of owners in 85% of Mexican listed companies (Castañeda, 2000).

1.2    Research Objective

Some abovementioned findings showed the impacts of board characteristics and business governance on earnings manipulation in several developing countries. Although this approach is interesting, no one to the best of our knowledge has done the research on this issue in Vietnam circumstance except for two recent pieces of research. They are likely to be inadequate since one paid attention to research on the correlation between earnings management and state ownership (Hoang, Indra, & Ma, 2014), Hoang, Indra, & Ma (2015) also conducted the other study which concentrated on the influence of board diversity on earnings manipulation using listed company samples in Vietnam. Thoroughly differ from developed markets in Western countries; Vietnam is an emerging market in the early stage of growth. According to prior studies, firms in developing countries tend to have more earnings management than those in developed countries (Li, Selover and Stein, 2011; Li, Ho Park and Shuji Bao, 2014). Therefore, Vietnam is an appealing context to accurately inspect this issue. This is the first research, as far as we know, exploring the effect of board characteristics on earnings manipulation using Vietnamese listed firm sample.

1.3 . Contribution

The research gives contributions to earnings management literature in following aspects. It gives considerable insight into earnings manipulation practice which is influenced by boards in Vietnamese context. Due to the importance of boards in a firm who are familiar with the firm’s financial system, it will be easier for them to manipulate earnings works. It will further shed light on potent impacts of board characteristics on earnings manipulation in Vietnamese listed firms. The research is beneficial to provide a broad insight for policy-makers to make the approriate policy and corporate governance mechanism. Moreover, investors might know how to evaluate the performance of business instead of using conventional channel, particularly financial statements.

1.4    Research Outline

The overall structure of the research forms five chapters, involving this introductory chapter. Chapter 2 begins by laying out an overview of the theoretical background and hypothesis development. Chapter 3 is concerned with the sample and methodology applied for this research. Chapter 4 describes the study results. The final chapter gives the conclusion, limitation, and scope for further research into this area.

CHAPTER TWO