1047248

research-article20212021
SGOXXX10.1177/21582440211047248SAGE OpenTran and Dang

Original Research

SAGE Open

The Impact of Ownership Structure

July-September 2021: 1­–14
© The Author(s) 2021
DOI: 10.1177/21582440211047248
https://doi.org/10.1177/21582440211047248

on Earnings Management: journals.sagepub.com/home/sgo

The Case of Vietnam

Manh Dung Tran1 and Ngoc Hung Dang2

Abstract
This study is conducted to investigate the impact of ownership structure on earnings management in emerging countries and
Vietnam as the case study. In this research, we explore how three components of ownership structure, including ownership
concentration of managers, foreign ownership ratio, and state ownership ratio, influence earnings management. In addition, we also
consider whether ownership structure influences profit management during financial constraints. REM, FEM, GLS, and GMM
regression methods are employed for processing data. The results show that ownership structure with foreign ownership
has a positive effect on earnings management, whereas one with a proportion of state ownership has a contradicting
effect. While the degree of ownership concentration does not affect the profit management, in the context of financial
restrictions, the ownership ratio has an impact on the management of earnings. Control variables in the model such as firm
size, financial leverage, growth rate, profitability, and audit quality, all have an impact on earnings management. The results
could, potentially, be the basis to help firms in restricting earnings management behavior.

Keywords
ownership structure, earnings management, financial constraints, Vietnam

Introduction accounting scandals has pointed out the need to improve

the quality of information on financial statements by estab-
The information in the annual report of the enterprise plays lishing good governance structures. Good corporate gover-
the role of connecting a business with many different infor- nance allows maximizing corporate value and transparency
mation users outside the business as how enterprises provide in information disclosure. In the view of corporate gover-
useful information to a user, so that they can make rational nance system, the ownership structure is a component that
decisions to meet their goals. In particular, earnings informa- is paid attention to by many researchers. Ali et al. (2008)
tion is considered one of the most important financial infor- reveal that managers who own a significant portion of the
mation affecting all stakeholders of the business because equity of a firm have little incentive to manipulate account-
earnings value is an important indicator of the efficiency and ing information, so it may limit earnings management
growth prospects of the business. Hence, any intervention behavior. Shaikh and Shah (2012) argue that institutional
that may distort the accuracy of the information in the reports investors are more likely to detect earnings management
influences the decision of those using the financial state- issues than non-institutional investors because they have
ments. Financial scandals of Enron, WorldCom and Parmalat access to timely and relevant information. In these studies,
in the early 2000s in the world as well as in Vietnam such as the firm’s ownership structure has a significant influence
Bong Bach Tuyet, Vien Dong Pharmaceutical, all related to on earnings management, thereby influencing the earnings
distortions of financial statements. It has a significant impact quality information on the financial statements.
on the economy and influences the public’s confidence in the
quality of information on the financial statements of firms,
especially listed firms. 1
National Economics University, Hanoi, Vietnam
According to the agency theory, the separation of own- 2
Hanoi University of Industry, Vietnam
ers and managers leads to conflicts of interest between
them, thus monitoring managerial decisions can improve Corresponding Author:
Ngoc Hung Dang, Accounting and Auditing Department, Hanoi University
the alignment between management and interests of share- of Industry, 298 Cau Dien Street, Bac Tu Liem District, Hanoi 084,
holders while, at the same time, minimize the opportunity Vietnam.
behaviors due to conflicts of interest. In fact, the hike in Email: hungdangngockt@yahoo.com.vn

Creative Commons CC BY: This article is distributed under the terms of the Creative Commons Attribution 4.0 License
(https://creativecommons.org/licenses/by/4.0/) which permits any use, reproduction and distribution of
the work without further permission provided the original work is attributed as specified on the SAGE and Open Access pages
(https://us.sagepub.com/en-us/nam/open-access-at-sage).
2 SAGE Open

Theoretical Framework other management decisions, for the purpose of presenting

profits that are different from the actual profits in the man-
Earnings Management agers’ knowledge. At the same time, this concept also
Earnings management is an issue that many researchers are implies that legal or illegal earning management is mislead-
much interested in and have commented on. However, there ing when providing valuable information to users of finan-
is, at least for the time being, still no consensus on the defini- cial statements, affecting the quality of financial statements
tion of earnings management (Beneish, 2001). According to of the business.
Schipper (1989), earnings management is understood as the We could here argue that earnings management is a pur-
adjustment of profits to achieve the management’s previ- poseful action of managers by using income-controlling
ously set goals, which is a deliberate intervention in the pro- methods such as accounting policy selection or through per-
cess of providing financial information to achieve personal forming economic operations, using management actions
goals. Levitt (1998) defines earnings management as a dark intended to be misleading when providing information to
area where accounting is being wronged because the admin- users to gain certain benefits. Most studies such as Lo
istrator has “cut” its aspects according to their wishes. (2008), Graham et al. (2005), Dang et al. (2017) grouped
Therefore, the comprehensive income statement reflects the earnings management into two categories including real
management’s wishes rather than the actual financial situa- earnings management as an effect of cash flow, and earnings
tion of the business. In addition, Healy and Wahlen (1999) management based on accrual accounting variable (accrual
argue that earnings adjustments occur when managers use management) through changes in accounting policies and
accounting estimates or internal transactions to influence accounting estimates. However, there are many opinions
financial statements, in order to mislead some related parties supporting that managers would employ the approach of
about the company’s business situation or affect contracts accrual accounting adjustments to change revenue shifting
which have commitments based on accounting earnings between accounting periods or in deferred spending
targets. Akers et al. (2007) define earnings management as (Dechow et al., 1995; Jones, 1991). Hence, for the purpose
management efforts to influence or “manipulate” income of this study, we employ the accrual accounting variable to
statements using special accounting methods (or methods are identify earnings management.
changing), recognition of an item at a non-recurring level,
delaying or accelerating the recording of cost or revenue
Ownership Structure
transactions, or other methods designed to influence short-
term income. Beneish (2001) argues that earnings is a delib- In the overall system of corporate governance, the ownership
erate intervention to provide useful and truthful financial structure is a component that many researchers pay attention
information about the business situation of enterprises to to. The concept of ownership structure is an important topic
investors and stakeholders to help them make financial deci- in the broad concept of corporate governance. Jensen and
sions related to the business. Meckling (1976) employ the concept of “ownership struc-
Summarizing the previous concepts of earnings manage- ture” to refer to the capital held between members inside the
ment, Fogel-Yaari and Ronen (2020) classified earning company (the direct management component) and outside
management into three groups of white, gray, and black. The the company (investors not having direct management roles).
white group represents earnings management in a beneficial Similarly, according to Dinga (2005), the ownership struc-
way and increases the quality of financial statement; the ture in the model of firms surveyed is basically fractionated
gray group involves the manipulation of accounting data ownership, for example shareholders holding certain capital
within or outside the permitted limits for the purpose of holdings. In a company, this is an important mechanism to
opportunity or (supposedly) economic efficiency, while the raise a large amount of capital for a modern business organi-
black group reveals the use of tactics to falsify or reduce the zation and create wealth through issuing shares. Thus, the
transparency of financial statements. Since then, Fogel- ownership structure is understood as the allocation of equity
Yaari and Ronen (2020) has presented a general concept according to the correlation of equity ratio held by the own-
covering all aspects of earnings management. According to ers. Ownership structure has a very important influence in
them, earnings management is viewed as a set of manage- running a business because it affects the decision-making of
ment decisions resulting in a failure to report the status quo managers. Ownership structure can be defined in two aspects
in the short term, maximizing the value of earnings accord- of the degree of ownership concentration and the ownership
ingly to management expectations. Earnings management of shares.
can be beneficial, harmful, or neutral. If it is a beneficial The degree of ownership concentration includes (i) First,
signal, then the value is long-term; harmful, then concealing the centralized ownership structure is viewed as an individ-
short-term; long-term and neutral values will detect the true ual or a group of related individuals or organizations own a
performance in the short term. As such, this concept not majority of the equity of an enterprise and have the right to
only includes the management of earnings but also states manage the decisions of the enterprise. Major shareholders
Tran and Dang 3

control the business directly by joining the board of directors supervise managers for reducing representation. For that
and management staff. A major shareholder may not own the reason, the agency theory emphasizes that owners need to
whole capital but has significant voting rights, so it can still have appropriate mechanisms to limit the divergence of ben-
control the business. (ii) Second, distributed ownership efits between owners and managers by establishing appropri-
structure means that no individual or group of individuals or ate incentive mechanisms for managers through the company’s
organizations own the majority of the firm’s capital and have shareholding ratio and effective monitoring mechanisms to
the right to dominate the enterprise. For this form of struc- limit managerial self-interest by increasing concentration
ture, a company has many shareholders. Each shareholder ownership, ownership of institutional investors, and owner-
owns a number of shares, and control of business activities is ship of foreign investors.
held by the Board of Directors. Small shareholders have little
incentive to closely monitor operations and do not want to Information asymmetry. The theory of asymmetric informa-
participate in running the business. tion was first mentioned in the study of Akerlof (1970), then
With regards to the shareholders different ownership rates further developed by Spence (1973). This theory refers to the
related to the characteristics of shareholders such as foreign existence of information asymmetry. Asymmetric informa-
ownership ratio, private ownership rate, state ownership tion occurs when one party has less information than the
ratio, institutional ownership. other or has incorrect information. This causes the less
informed party to make incorrect decisions when making a
transaction, and the more informed party will also have
Basic Theories
behaviors detrimental to the other party when performing the
Agency theory. In a joint stock firm, the authorizing parties transaction obligation. The consequence of asymmetric
or owner are the shareholders who hire the manager—the information is the disadvantage caused when the information
representative who performs the control and day-to-day is concealed before signing the contract and a moral hazard
decision-making so as to bring the best benefits to the share- after signing the contract.
holders. However, in the process of operation, managers can In the enterprise, asymmetric information appears in the
make decisions to benefit themselves rather than the inter- relationship of managers with shareholders and businesses
ests of shareholders and tend to forget the interests of share- with investors. Firms that do not send signals or send signals
holders when they can achieve certain profitability (Jensen incorrectly will be detrimental to investors. Or the adminis-
& Meckling, 1976). The separation between ownership and trator who directly manages will know the business informa-
control of the company gives rise to representation. At the tion but intentionally conceal it causing adverse choices for
same time, when managers have a better knowledge of the shareholders and the moral hazard of the manager. The lack
future value of the company than shareholders and creditors, of information from these organizations will make investors
they are more likely to take advantage of the owner once the not fully understand the business and production situation of
monitoring is ineffective. From the agency theory, it can be enterprises, securities trading activities, market trends lead-
seen that there are always contradictions between owners ing to inaccurate investment decisions. The interests of
and managers. Contrary to the owner’s expectations of max- affected investors could lead to the stock market crash. The
imizing their benefits, managers sometimes have their own asymmetric information theory is employed to explain the
goals and, because of that, these managers make profit signaling to the market or enhance the disclosure of good
adjustments. On the other hand, the manager is also the information to help investors distinguish good and bad secu-
information provider of the business. For their own benefit, rities of public joint stock firms. It also helps explain the
the manager tends to provide little or hide information to the relationship between information status.
owner. Such action may prevent a financial statement from
accurately and reasonably reflecting the company’s opera-
tions and fail to provide useful information to its users.
Literature Review
To minimize this behavior, shareholders should align Studies on the relationship between ownership structure and
managers with the common interests of shareholders and earnings management are investigated in many contexts
businesses by salaries, bonuses, or partial ownership of the around the world and are mainly empirical research using
company’s shares. It is thus necessary to have a mechanism quantitative methods. Studies around the world have explored
to monitor managers’ decisions to increase shareholder value and explained quite fully about the impact of ownership
and disclose information in financial statements accurately structure on earnings management, but there are differences
and transparently. The level of concentration of ownership in results in other countries. These differences might be due
has a strong incentive to actively monitor and manage the to the difference in the selection of determinants related to
company to protect their investments. Similarly, institu- the ownership structure that affects the earnings manage-
tional investors as well as foreign investors in the company ment behavior or the model of the earnings management
with resources and financial expertise are motivated to behavior in each country; differences in experimental sample
4 SAGE Open

selection (effects of economic, political, and cultural environ- earnings. Park and Shin (2004) show that the presence of
ment in each country); differences at the time of the study board members from financial intermediaries and institu-
(time period chosen for sampling); differences in economic tional shareholders reduces the earnings management behav-
development levels of countries at different time periods. ior. At the same time, the study also shows that increasing the
According to agency theory, the separation of ownership proportion of external board members increases the earnings
and control leads to a divergence in the pursuit of managerial management behavior, contrary to the view that increasing
interests and owner interests (Jensen & Meckling, 1976), the proportion of external board members will help the Board
thus overseeing management decisions becomes necessary of Directors increase its independence and resolutions for
to ensure the interests of shareholders, and to ensure that conflicts of interest between small shareholders and major
financial statements are prepared reliably and fully. Corporate shareholders. Meanwhile, Ali et al. (2008) show that the level
governance provides a mechanism to monitor the behavior of managerial ownership can limit earnings management. At
of managers resulting from conflicts of interest. And the role the same time, the study also points out that there is a positive
of the corporate governance structure in financial statements relationship between firm size, and the relationship between
is to ensure compliance with the financial accounting system management ownership and earnings management. Although
and maintain the reliability of financial statements (Bushman managerial ownership may reduce earnings management
& Smith, 2003). As such, the properly structured corporate behaviors, other factors such as firm size might also influence
governance mechanism will reduce earnings management this behavior. Management ownership is an effective moni-
behavior since it monitors the performance of managers dur- toring mechanism, especially in small firms, so it should be
ing the preparation, presentation, and disclosure of financial encouraged in small firms to replace the weakness of other
statements. A number of studies have demonstrated that the corporate governance mechanisms. Research of Kim and
management manager’s opportunity is limited by corporate Yoon (2008) shows that the independence of the Board of
governance (Dechow et al., 1996; Jiambalvo, 1996). The Directors, ownership concentration, foreign ownership, lever-
ownership structure of a company is viewed to be an impor- age ratio, and firm size significantly influence the accumu-
tant management oversight mechanism. It can curb profit lated accruals adjustments and cumulative sum. Yang et al.
management ensuring that financial statements provide (2009) find that the rate of earnings management of listed
accurate accounting information. There have been many firms in Malaysia was about 16% of total assets the previous
studies, both theoretical and empirical, that the ownership year and most firms’ earnings management increased, not
structure can influence earnings management. The presence decreased. At the same time, the results have no evidence to
of a major shareholder can limit the discretionary behavior of prove the relationship between the magnitude of earnings
managers to manipulate income, encouraging them to release management and the proportion of outside directors and insti-
appropriate and reliable information (Demsetz & Lehn, tutional shareholders.
1985; Shleifer & Vishny, 1986). Klein (2002) reports that the Wang and Yung (2011)’s research shows that the level of
degree of ownership concentration reduces earnings man- accumulation of profit management of state-owned firms is
agement in US firms thereby improving the quality of finan- lower than that of private firms, which is contrary to the
cial information disclosure. author’s hypothesis as well as the belief of the majority that
Alves (2012)’s research in Portugal finds that different state ownership is at the root of all inefficiencies in firms.
types of ownership have different relationships with earnings Shaikh and Shah (2012) reveal that institutional ownership
management of businesses, both negative and positive rela- has the negative effect on adjusted accruals. Lakhal (2015)
tionships. In the study of Aygun et al. (2014), two compo- shows that the relationship between earnings management
nents of the ownership structure are the ownership of the and the level of information disclosure is in the opposite
manager and the ownership of the organization, find that the direction, that is, less transparent firms have the ability to
organization’s ownership has a negative impact on earnings participate in earnings management activities. The study also
management, while the effect of the management’s owner- finds that family ownership and many major shareholders
ship on earnings is positive. Klai and Omri (2011) also have a negative influence on earnings. Finally, the presence
examine the impact of ownership structure on earnings man- of institutional investors, which has a supervising role and
agement, thereby affecting the quality of financial statements. influences decisions made by managers, is likely to mini-
The results show that the control by foreign countries and mize earnings management behavior.
ownership concentration is positively correlated with earn- Earnings overstatement can help management have trust
ings, while the control of the state and financial institutions is from creditors and benefits in negotiating contents in credit
negatively correlated with earnings management. Disagreeing agreements (Anagnostopoulou & Tsekrekos, 2017). In
with Klai and Omri (2011), Roodposhti and Chashmi (2011) contrast, earnings understatement can help adjust debt repay-
conclude that high ownership concentration has the effect of ment (Rodríguez-Pérez & van Hemmen, 2010). The magni-
reducing earnings management behavior, while firms having tude of adjusted earnings seems to know the role of earnings
high amount of organization-owned stocks have considerable management. In this aspect, creditors have more prudence
Tran and Dang 5

Table 1. Summary of Measurement Variables and Hypotheses.

Coding Variables Measurement Expectation

EM Earnings management The absolute value of the adjustable accrual
accounting variable—Modified Jones model
FO Foreign ownership ratio Percentage of shares held by foreign investors +
SO State ownership ratio The percentage of shares held by state shareholders −
MAO The degree of ownership The ratio of major shareholders in the board (≥5% +
concentration total shares)
SIZE Company’s size Log (total assets) +
LV Financial structure Liabilities/total assets −
GROWT Growth rate ( Revenuet − Revenuet −1) / Revenuet −1
BIG4 Audit firm’s size Dummy variable: 1 if a firm is audited by a Big 4 firm, +
and 0 if vice versa
ROA Return on assets ROA = earnings after taxes/total assets +

and supervision increase with firms having high leverage. ∆RECit = RECt − RECt −1 ;
Anyway, in the studies of Fung and Goodwin (2013) with
∆REVit = REVt − REVt −1 ;
current liabilities, Lazzem and Jilani (2018) with non-current
liabilities, supervision is not enough to control management PPEit : Fixed asset costs;
in earnings management. Recently, some studies have been Ait −1 : Total assets at the end of year t − 1; (2)
conducted relating to ownership structure, financial distress α1 , α 2, α3 : parameters;
such as Jacoby et al. (2019) and El Moslemany and Nathan
(2019). ε : residual equivalent of discrectionary accruals
Nguyen et al. (2020) reveals that state ownership has a
positive impact on earnings management whereas manage- Variable measuurement and expectation of hypotheses
ment’s ownership has a negative impact on it. Wu et al.
are presented in Tablle 1.
(2020), Tran (2020) warn the necessity in designing proper
policies for reducing earnings management behaviors from
policy makers for providing reliable financial information. Model 1 :
Saona et al. (2020) find the evidence of earnings manage- EM it = β0 + β1FOit + β2SOit it + β3 MAOit
ment reduction in case of high vote rate of shareholders and
+ β4 SIZEit + β5 LVit + β6 GROWTit
a negative relationship between ownership of employees and
earnings management. + β6 BIG 4it + β6 ROA it + εit

Research Methodology Model 2 :

Research Model EM it = β0 + β1FOit + α1FO × DCFit + β2SOit + α 2SO × DCFit
+ β3 MAOit + α3 MAO × DCFit + β4 SIZEit + β5 LVit
To identify earnings management, researchers consider the
choice of firms’ accounting policies or measure accruals. We + β6 GROWTit + β6 BIG 4it + β6 ROAit + εit
employ Modified Jones’s model (Dechow et al., 1995) to cal-
culate cumulative accounting variables representing earn- After examining the impact of ownership structure on
ings management. The Modified Jones model is a variant of earnings management, we continue to check whether the fact
the Jones’ model (Jones, 1991), and improved by Dechow that the company is financially constrained or not affects
et al. (1995) by replacing the change of turnover with the asymmetrically. Based on the practical situations in Vietnam,
change of receivable debt. The modified model was devel- this research employs two criteria to classify the sample as
oped to reduce the original model’s error in identifying limited and not limited financially. The financial constraint
abnormal cumulative variables: dummy (DCF) has a value of 1 for firms that are facing
financial constraints and has a value of 0 for firms that are
1 ∆REVit − ∆RECit PPEit less likely to face financial distresses. There are some mea-
NDAit = α1 + α2 + α3 (1) sures of financial constraints used in previous studies to dis-
Ait −1 Ait −1 Ait −1
tinguish firms that are facing financial constraints and those
In which: that are less likely to face financial constraints. However,
NDAit is non discretionary accruals which is the best one is still a controversial issue. Therefore,
6 SAGE Open

this study classifies firms according to the existence of finan- Yoon (2008) and Klai and Omri (2011) conclude a positive
cial constraints as below: correlation between earnings management and the degree of
Dividend payment: Firms with financial constraints tend ownership concentration. Thus, the results of the relation-
not to pay dividends (or pay dividends at a low rate) to reduce ship between ownership concentration and profit manage-
the risk of future internal funding shortages, reducing the ment are different. We could not predict the trend of the
likelihood of having to mobilize capital from the outside. concentration of ownership rights on earnings management,
Based on studies of Fazzari et al. (1988), Almeida et al. so the first hypothesis is designed as:
(2004), and Faulkender and Wang (2006), we classify the
extent of financial constraints by firms according to the ratio H1: The degree of ownership concentration has an impact
pay dividends. Therefore, for firms paying dividends higher on earnings management behavior
than the average in the sample, the DFC variable has a value
of 0, and for firms with lower dividends than the average, the State ownership and earnings management. Studies on the
DFC variable is 1. impact of state ownership on earnings management are still
Size: Faulkender and Wang (2006) show that small firms limited and inconsistent. Specifically, Ding et al. (2007) and
often face information asymmetry, agency costs, which leads Wang and Yung (2011) find that at a low level of state owner-
to the inability to access external capital markets at a lower ship there is a positive effect with earnings management and
cost. Since funding is often higher than that of large firms, a negative effect on earnings management when there is a
small firms are more likely to face financial constraints than high level of state ownership. In contrast, Firth et al. (2007)
large firms. Firms that are larger than the average of the sam- conclude that state-owned firms are more likely to engage in
ple are generally less likely to be financially constrained with earnings management than non-state firms. Meanwhile, Liu
DFC receiving a value of 0. In contrast, firms that are lower and Lu (2007) reveal that the relationship is insignificant
than the average of the sample are more likely to be finan- between earnings management and state ownership. Most
cially constrained, their DFCs have a value of 1. people believe that state owned enterprises (SOEs) are more
Data were collected from Vietnam Stock Exchange in the likely to manipulate income (Wang & Yung, 2011). This is
period from 2009 to 2019, from annual reports, audited because corporate governance is ineffective, market disci-
financial statements of listed firms after eliminating firms in pline is inadequate, there are many conflicts of interests, and
the fields of banking, securities, and insurance. After deter- for the benefits of the SOE controls, management is more
mining the criteria, the data used to perform the analysis and likely to perform its discretion in reporting accounting infor-
regression contains 5,431 observations. mation (Wang & Yung, 2011). Vietnam is in the process of
reforming SOEs with a focus on equitizing SOEs. Many
joint-stock firms were reformed, with the state still holding a
Hypotheses Design large percentage of ownership. However, equitized SOEs
The degree of ownership concentration and earnings management. are, for a long time, in the subsidy and planning mechanism
The degree of ownership concentration, also known as and still have not escaped from centralization of financial
blockholders, is the percentage of shares (usually more than bureaucracy, organizational structure, and management
5%) owned by a certain percentage of shareholders. It is mechanisms, leading to poor corporate governance in SOEs
argued that major shareholders have a strong incentive to (Shleifer, 1998) and opportunistic behavior of managers for
actively monitor and manage the company to protect their personal gains rather than for the benefit of shareholders
investments (Shleifer & Vishny, 1986). Major shareholders through earnings management. Based on the above argu-
are expected to monitor managers’ actions, reducing the ments and the agency theory, we design a hypothesis as:
opportunity for managers to distort earnings management
(Dechow et al., 1996). However, firms with concentrated H2: The state’s ownership ratio has a negative effect on
ownership may experience conflicts of interest between earnings management
majority and minority shareholders. According to Shleifer
and Vishny (1997), large shareholders can exercise their Ownership of foreign investors and earnings management. In
controls to create personal benefits, sometimes appropriat- the world, foreign investment capital plays an increasingly
ing the interests of minority shareholders. Therefore, major important role in the development of each country. This
shareholders may interfere with the management, and may source of capital includes direct investment (FDI) and indi-
encourage managers to have earnings management for max- rect investment (FPI). While FDI capital has a direct role to
imizing their own interests (Jaggi & Leung, 2007). Studies promote production, FPI has a stimulating effect on the
of the relationship between ownership concentration and development of the financial market in the direction of
earnings management have also produced heterogeneous improving operational efficiency, expanding scale, and
results. Ali et al. (2008) and Roodposhti and Chashmi increasing transparency, facilitating domestic firms to easily
(2011) find a negative correlation between ownership con- access new capital; improve the role of state management
centration and earnings management. In contrast, Kim and and corporate governance quality. Therefore, the opening of
Tran and Dang 7

Table 2. Regression Results for the Model of Earnings Management.

Variables Pooled OLS FEM REM

1/Ait-1 −15.64*** [−39.33] −16.81*** [−38.62] −15.64*** [−39.33]
ΔREVit/Ait-1 −0.800*** [−11.48] −0.774*** [−10.62] −0.800*** [−11.48]
PPEit/Ait-1 0.348* [1.83] 0.625*** [3.04] 0.348* [1.83]
_cons 0.893*** [7.09] 0.884*** [9.86] 0.893*** [7.09]
N 5,431 5,431 5,431
R2 .2264 .2268 .2264
F (Wald-χ2) Wald χ2(3) = 1,799.06 F(3, 5,881) = 574.94 Wald χ2(3) = 1,799.06
Prob > χ2 = .0000 Prob > F = .0000 Prob > χ2 = .0000

Note. t statistics in brackets.

*p < .1. **p < .05. ***p < .01.

Table 3. Descriptive Statistics.

Variables No. of observations Mean Std. dev. Min Max

EM 5,431 0.722 1.048 0.005 7.425
FO 5,431 0.091 0.132 0 0.805
SO 5,431 0.241 0.248 0 0.970
MAO 5,431 0.122 0.176 0 0.833
SIZE 5,431 27.001 1.547 20.720 33.632
LV 5,431 0.496 0.227 0.000 2.031
GROWT 5,431 0.205 0.622 −0.761 6.401
BIG 5,431 0.250 0.433 0 1
ROA 5,431 0.062 0.086 −1.77871 0.7837

the economy to foreign trade and investment in many coun- Results and Discussion
tries in recent years has brought about significant changes in
corporate governance. Liberalizing cross-border capital We conduct a regression analysis of the earnings manage-
flows in developing economies makes sense on two levels. ment recognition model according to Modified Jones’s
First, foreign financial institutions, when compared to public model (Dechow et al., 1995): three Pooled OLS, FEM, and
financial institutions, might be more motivated to oversee REM models. The results are shown in Table 2.
corporate management to ensure a higher return on their From the above estimation results, we can see that the
investments. Second, foreign organizations might own more variables ∆REVit and PPEit are statistically significant.
efficient instruments for supervisory managers than domes- Ait−1 Ait−1
tic private financial institutions in developing economies. Based on the findings, then earnings management level can
The ownership ratio of foreign investors is to reduce the be calculated according to equation (1) and take the absolute
level of earnings management to improve the transparency of value. We calculated the level of earnings management for
information disclosure (Firth et al., 2007), therefore a the sample.
hypothesis is designed as below: The data will be presented in the form of descriptive sta-
tistics shown in Table 3, including the following items of
H3: The ownership ratio of foreign investors has a positive variable name, variable meaning, observed sample number,
effect on earnings management. min value, max, average, and standard deviation. Table 3
illustrates that the total number of observations is 5,431 in
In addition to the factors of ownership structure discussed the period from 2009 to 2019. The highest level of earnings
above, earnings management is also affected by firm charac- management of firms in the sample is 7,425 and the smallest
teristics such as Klai and Omri (2011), Roodposhti and is 0.005, the average value is 0.722 with a standard deviation
Chashmi (2011), Xie et al. (2003), and Ali et al. (2008). of 1,048 greater than the average. This shows that the level of
Controllable variables are then included in the regression earnings management between firms is relatively large. The
model to effectively assess the impact of ownership structure percentage of foreign ownership (FO) has an average rate of
variables on earnings management behavior including firm 9.1%, while the state ownership (SO) averages 24.1%, the
size, financial leverage, growth rate, profitability, and audit proportion of board members being a major shareholder
quality. accounts for 12.2%. The firm size (SIZE) by asset value with
8 SAGE Open

Table 4. Correlation Matrix.

EM FO SO MAO SIZE LV GOWRT BIG ROA

EM 1
FO −0.11 1
SO 0.008 −0.15 1
MAO 0.085 −0.12 −0.35 1
SIZE −0.6 0.308 −0.03 −0.15 1
LV −0.21 −0.2 0.078 0.073 0.313 1
GROWT 0.085 0.011 −0.11 0.008 0.078 0.043 1
BIG −0.21 0.332 0.052 −0.18 0.479 0.031 0.03 1
ROA 0.069 0.183 0.095 −0.12 −0.05 −0.41 0.084 0.077 1

Table 5. Multivariate Regression Results.

Variables VIF FEM REM GLS GMM

FO 1.4 0.256*** 0.292*** 0.513*** 0.294***
SO 1.15 −0.195*** −0.149*** 0.0556 −0.291***
MAO 1.02 0.147 −0.1 0.0566 0.0995
SIZE 1.12 −0.371*** −0.392*** −0.436*** −0.344***
LV 1.52 0.346*** 0.300*** 0.00388 0.430***
GROWT 1.16 0.192*** 0.196*** 0.246*** 0.178***
BIG 1.52 0.0102 0.0702 0.188*** 0.0579***
ROA 1.02 1.084*** 0.985*** 0.0268 1.465***
_cons 10.49*** 11.09*** 12.36***
N 5,431 5,431 5,431 4,631
R2 0.3806 0.3947
F-test F(8, 4748) = 127.25
Prob > F = 0.0000
LM-test Wald Wald
χ2(8) = 1,455.90 χ2(8) = 3,430.21
Prob > χ2 = .0000 Prob > χ2 = .0000
Hausman test χ (8) = 39.35
2

Prob > χ2 = .0000

Modified Wald test χ2(661) = 3.334
Prob > χ2 = .0000
Wooldridge test F(1, 614) = 63.474
Prob > F = 0.0000
AR(2) 0.492
Hansen test 0.311

Note. t statistics in brackets.

*p < .1. **p < .05. ***p < .01.

an average post-logarithmic value of 27,001, the average than 0.8, so it is less likely to have multicollinear phenom-
ratio of liabilities to total assets (LV) is 49.6%, average rev- ena. So we employed VIF to verify.
enue growth rate is 20.5%, the rate of ROA is 6.2%, and Regression results using FEM, REM, GLS, and GMM
financial statements audited by Big 4 firms are 25%. methods with the option of overcoming variance and auto-
Table 4 reveals the correlation coefficients between the correlation are presented in Table 5. Ordinary Least
variables, whose purpose is to examine the close correlation Squares (OLS) or Fixed Effects Model (FEM), Random
between independent and dependent variables to eliminate Effects Model (REM) have been employed in many stud-
factors that may lead to multicollinearity before running ies (Anagnostopoulou & Tsekrekos, 2017; Fung &
regression models. The correlation coefficient between inde- Goodwin, 2013; Lazzem & Jilani, 2018). These tech-
pendent variables in the model does not have any pair greater niques do not repair heteroscedasticity and endogenous
Tran and Dang 9

Table 6. Regression Result of Constraint Financial Variables.

GLS GMM

Variables Dividend Scale Dividend Scale

FO 0.723*** 0.687*** 0.328*** 0.106**
FO*DCF −0.350** −0.509*** −0.367*** −0.298***
SO 0.106 0.284*** −0.333*** −0.726***
SO*DCF −0.0898 −0.499*** 0.0250*** 0.624***
MAO −0.263*** 0.0856 −0.217*** −0.337***
MAO*DCF 0.536*** −0.0223 0.295*** 0.666***
SIZE −0.433*** −0.480*** −0.391*** −0.326***
LV −0.0165 −0.0176 0.456*** 0.644***
GROWT 0.244*** 0.249*** 0.195*** 0.194***
BIG 0.186*** 0.176*** 0.00835 0.0242***
ROA 0.0135 0.0644 1.274*** 1.281***
_cons 12.28*** 13.56***
N 5,431 5,431 4,631 4,631
AR(2) 0.415 0.368 0.485
Hansen test 0.277 0.79 0.765

**p < .05. ***p < .01, statistical significance at 5% and 1%, respectively.

variables exist in the research model. That is why, this on assets (ROA), growth rates, and Big 4 audits all have a
study is conducted to have some contributions by investi- positive impact on the level of earnings management and are
gating the impact level of ownership structure, financial all statistically significant at the 1% level.
distress on earnings management by conducting General To examine the effect of ownership structure on earnings
Method of Moments (GMM) for reducing limitations of management in the context of financial constraints, the study
OLS, FEM, REM, and GLS, and presented in Table 6. focused on the combinations of FO × DCF , SO × DCF and
Based on the regression results according to GMM MAO × CF . When classifying data according to dividend
model, there are two out of three independent variables in payment policy, the coefficient of estimation for the com-
ownership structure affect the level of earnings manage- bined variable FO × DCF is statistically significant and
ment statistically significant, that is the state ownership shows that compared to firms without financial limitation,
ratio and the ownership ratio of foreign investors. In addi- firms in limited financial terms tend to reduce earnings man-
tion, all five controlled variables included in the model agement. Similarly, when financial constraints are deter-
influence the level of earnings management with statistical mined by size, the estimated coefficients of SO × DCF ,
significance at the 1% significance level, which are the MAO × DCF variables for financially constrained firms
firm size, financial leverage, growth rate, ROA, and audit often increase earnings management.
firm size. The remaining variable of the degree of owner- From the results of empirical study above, we see that for
ship concentration has no impact on the level of earnings the concentration of ownership variable, previous studies
management. have found mixed findings, the results of Kim and Yoon
The rate of foreign investors’ ownership variable (FO) (2008), Klai and Omri (2011) have a positive effect on
with regression coefficient β1 = 0.294 and P value = 0.000 the degree of earnings management while the results of
shows that the ownership ratio of foreign investors has a Roodposhti and Chashmi (2011), Alves (2012) have the
positive effect on the degree of earnings management with opposite effect. However, the findings of this study did not
1% significance level, that is increasing the ownership ratio find evidence linking the degree of ownership concentration
of foreign investors will help increase the level of earnings and earnings management, but in the situation of financial
management. The state ownership ratio (SO) variable has a constraints, ownership concentration has a positive impact
regression coefficient of β2 = −0.291 and the t-test has on earnings management.
P value = 0.000, indicating that the state ownership ratio is The state ownership is inversely related to the level of
negatively correlated with earnings management with the earnings management. This result shows that firms with
significance level of 1%. large state ownership have less earnings management, which
For controlled variables, only the firm size (SIZE) has the is contrary to the initial hypothesis that state ownership has a
negative effect that limits earnings management, while the positive effect with earnings management. This finding is in
remaining four variables of financial leverage (LEV), return line with the findings of Wang and Yung (2011) studying the
10 SAGE Open

impact of state ownership on earnings management in listed manager realizes that the risk of failing to meet the profit
firms in the context of China. plan this year, the manager tends to level profit margins
Ownership of foreign investors has the most positive between accounting periods to ensure a sustainable profit
impact on earnings management. This results is inconsistent trend in the long run. In recent years, the situation of huge
with the findings of Kim and Yoon (2008) but is in agree- differences between unaudited financial statements and
ment with the finding of Klai and Omri (2011). The explana- audited figures has generated a lot for firms listed on
tion for this result might be that, at the same time, foreign Vietnam’s stock market. In particular, there are many firms
investors, especially the controlling shareholders, have the that make investors or shareholders “fall” when profits fall
right to attend senior management meetings with advanced sharply, from profit to loss or vice versa. The reason for the
management knowledge and skills while having more effec- profit adjustment was explained by the auditors, the main
tive tools to oversee firm management. Thus, we accept the deviation from the firm’s wrong application of accounting
hypothesis H 3 , that is increasing the ownership ratio of for- policies such as provisioning, depreciation of fixed assets;
eign investors has the effect of increasing earnings manage- erroneous recording of revenues, expenses, which is the tip
ment behavior. However, in Vietnam, due to legal barriers, for earnings management.
the increase of foreign ownership of domestic firms still Audit firm size (Big 4) has a positive relationship with
faces many difficulties. The main reason is partly because earnings management, that is, firms audited by Big 4 audit
the government wants to protect domestic firms from the firm have higher earnings management than firms that have
process of deep integration with the world. On the other been unaudited by Big 4. This result is contrary to the initial
hand, with the financial potential of foreign firms, if the for- prediction and to the finding of Ali et al. (2008). Houqe
eign ownership ratio increases more than 51%, the govern- et al. (2011) argue that there is a negative relationship
ment might find it difficult to control economic sectors as between the presence of a Big 4 audit firm and earnings
well as essential goods. management. In Vietnam, the majority of large scale listed
For firm size (SIZE), it is inversely related to earnings firms, foreign invested firms tend to choose Big 4 or large
management, meaning the larger the firm size, the lower local audit firms. Large, established reputation, a long-
the level of earnings management. The findings of this standing brand, even though the cost of auditing firms is
study are similar to the results of Xie et al. (2003), Abdul much higher than that of small-sized audit firms. As the
Rahman and Haneem Mohamed Ali (2006), but contrast to presence of large audit firms like Big 4 will provide higher
several studies showing that there is a positive relationship quality audit services than small ones because they have to
between firm size and earnings management (Hung et al., maintain their reputation, which shows a signal for better
2018; Klai & Omri, 2011; Roodposhti & Chashmi, 2011). oversight mechanism for disclosing financial information
The reason is that large firms have a team of qualified is also a question to be asked.
accountants, and have better control over earnings manage-
ment. Financial leverage (LEV) has a positive impact on
management of earnings, meaning that the more financially
Conclusion and Suggestions
leverage a firm has (debt ratio), the more likely it is to The purpose of this study is to analyze the impact of owner-
engage in earnings management. This result is consistent ship structure on earnings management through data col-
with the finding of Roodposhti and Chashmi (2011). lected from annual reports of firms listed on Vietnam’s
Currently, listed firms in Vietnam in some sectors are main- stock market. Financial statements, serving as a useful ref-
taining a high debt ratio. Firms with a higher debt ratio erence for related users such as investors, business manag-
means a large debt situation, a high risk of default, so that ers, auditors, state management agencies, and others in
in order to secure a loan contract and create good confi- the context of Vietnamese firms are currently concerned.
dence for creditors, managers often perform the act of con- Determinants related to the ownership structure included in
trolling revenue in the direction of inflating profit. For the the model are the concentration of ownership, state owner-
growth determinant (GROWT), it has a positive relation- ship, and foreign ownership. Data were collected from
ship with earnings management—the possible cause to annual reports from 2009 to 2019 with 5,431 observations.
achieve growth targets, investment expansion, so firms will Data organized as tabular data shows the advantages that
naturally take measures to increase the level of earnings cross-data and time series data do not. Regression analysis
management form giving them a better picture of financial results found two variables of ownership structure includ-
statements to attract investors. ing the state ownership rate, the ownership ratio of foreign
For return on assets (ROA), which is positively corre- investors affecting the management of earnings statistically
lated with profit management, this result is consistent with significant at the 1% significance level (except for the per-
the initial prediction as well as previous results confirming centage of managerial ownership with statistical signifi-
that profitable firms will arrange a number of methods cance at 5%). Meanwhile, the concentration ratio of
for manipulating income (Dechow et al., 1995). If the ownership has an impact on profit management in the
Tran and Dang 11

situation of financial distress. In addition, all controlled earnings management. Therefore, these firms need to
variables included in the model also influence the earnings take measures, especially corporate governance
management including firm size, financial leverage, growth mechanisms to strengthen supervision to limit abuse
rate, ROA, and audit firm size. Based on the findings, some of power or take advantage of loopholes to gain per-
policies are proposed for reducing earnings management sonal benefits of the management, restricting the act
for listed firms, as below: of earnings management.
(iii) Foreign investor ownership has a positive impact
(i) The results show that increasing the ownership ratio on earnings management, that is firms with a high
of managers will reduce earnings management. foreign ownership ratio tend to promote earnings
According to agency theory, associating the interests management. Therefore, listed firms should imple-
of the manager with the common benefit of the com- ment policies to attract foreign investors form
pany reduces the separation of ownership and control improving their financial, governance, scientific,
of the manager. Therefore, firms should enhance the and technical skills. It is necessary to enhance the
association of the interests of managers with the ability to supervise and manage the company, limit-
common interests of the company for reducing mana- ing earnings management.
gerial self-interest, thereby reducing earnings man-
agement. Specifically, there should be an incentive We hope that the findings of this research help manage-
mechanism for managers to participate in the owner- ment, policy makers and investors have an overall view of
ship of the company’s capital through preferential earnings management in a firm, especially in case the
priorities on stock options or stock awards. At the impact of ownership and financial distress. Specifically, the
same time, the company needs to build a rewarding implications of financial distress and earnings management
criteria for the management team based on perfor- relationship help investors, analysts and auditors as well
mance evaluation for a whole period, but this can be have more prudent views in accessing financial statements.
a double-edged sword because if the managers own This pushes some pressure on management to reduce or
one a large share of the company and become a major have more prudence in conducting earnings management of
shareholder, they can gain control, dominate the the firms having financial distress. This study also reveals
important activities of the company and may harm that in a big firm, earnings management is reduced in case
the interests of minority shareholders, so firms need of having the participation of investment from organiza-
to consider what is appropriate for their firms. In tions, especially foreign ones. This means that apart from
order to increase the ownership of managers of listed fulfilling accounting framework and supervision for reduc-
firms, it is necessary to consider in terms of specific ing earnings management, more joining from organization
characteristics of the capital structure, the current investments, especially from foreign ones should be pro-
shareholding ratio, and the working efficiency (of mulgated in policies. That is why it helps have peer review,
managers) of the listed firms to get the appropriate improve financial performance, protect benefits of inves-
levels up. tors, and improve the transparency and reliability of finan-
(ii) Also according to the findings, state ownership has a cial statements.
negative effect on earnings management, that is However, this research investigates the impact of owner-
increasing state ownership has the effect of reducing ship structure in the constraint of new finance in terms of size
earnings management. Therefore, it is necessary to and dividends. In the future, we will extend other aspects of
strengthen and accelerate the equitization of SOEs finance constraints and in specific sectors as well as scruti-
and divest from state capital invested in industries nize the impact of the role of corporate governance and
and fields that are not in the main business lines of macro-economic policies on earnings management. So the
the enterprises. This is the case for equitized firms future research will provide more interesting outcomes with
that reduce state ownership, which can increase a case study of Vietnam, an emerging country.
12 SAGE Open

Appendix 1. Definition of All Variables.

Coding Variables Definitions

EM Earnings management EM = DACCj: Discretionary accruals calculated as the residual from the performance adjusted
modified Jones model estimated for each industry (4-digit SIC)-year requiring at least 10
observations per industry-year.
Specifically, ACjt = α + β0(1/AVGATjt) + β1ΔCASHREVjt + β2PPEjt + β3ROAjt − 1
+ β4ROAjt + εjt
where
ACjt is total accruals for firm j in year t, defined as net income from continuing operations
minus operating cash flow scaled by average total assets.
AVGATjt is average total assets for firm j based on assets at the beginning and end of year t.
ΔCASHREVjt is the change in cash sales (i.e., change in revenue minus change in accounts
receivable) for firm j at the end of year t scaled by average total assets.
PPEjt is net property, plant, and equipment for firm j at the end of year t scaled by average
total assets.
ROAjt − 1(jt) is income before extraordinary items for firm j in year t − 1(t) scaled by total
assets at the end of year t − 1(t).
FO Foreign ownership ratio Shares held, as a percentage of shares outstanding, by all foreign institutional investors of firm j at
the year end.
SO State ownership ratio Shares held, as a percentage of shares outstanding, by all State institutional investors of firm j at
the year end.
MAO The degree of ownership Shares held, as a percentage of shares outstanding, by all shareholders of firm j at the end of year.
concentration The ratio of major shareholders in the board (≥5% total shares)
SIZE Firm’s size The natural logarithm of total assets (AT) at the end of the most recent fiscal year.
LV Financial structure Leverage, calculated as book value of debt scaled by the sum of book value of debt and total
assets at the end.
GROWT Growth rate Sales growth in year t for firm j, calculated as ( Revenuet − Revenuet −1) / Revenuet −1
BIG4 Audit firm’s size An indicator variable equal to one if auditor is Big 4, and zero otherwise.
ROA Return on assets Return-on-assets ratio, calculated as net income (NIQ) during year divided by the average total
assets of year.

Authors’ Note evidence. Managerial Auditing Journal, 21(7), 783–804.

https://doi.org/10.1108/02686900610680549
Dang Ngoc Hung is Associate Prof. Dr. at Hanoi University of
Akerlof, G. A. (1970). The market for “lemons”: Quality uncer-
Industry, Vietnam. He is an honorary member of CPA Vietnam. He
tainty and the market mechanism. The Quarterly Journal of
teaches and researches in accounting and finance. There have been
Economics, 84(3), 488–500.
many articles published in reputable magazines.
Akers, M. D., Giacomino, D. E., & Bellovary, J. L. (2007).
Earnings management and its implications. The CPA
Declaration of Conflicting Interests Journal, 77(8), 64–68.
The author(s) declared no potential conflicts of interest with respect Ali, S. M., Salleh, N. M., & Hassan, M. S. (2008). Ownership
to the research, authorship, and/or publication of this article. structure and earnings management in Malaysian listed
companies: The size effect. Asian Journal of Business and
Funding Accounting, 1(2), 89–116.
Almeida, H., Campello, M., & Weisbach, M. S. (2004). The cash
The author(s) disclosed receipt of the following financial support flow sensitivity of cash. The Journal of Finance, 59(4), 1777–
for the research, authorship, and/or publication of this article: 1804. https://doi.org/10.1111/j.1540-6261.2004.00679.x
This research is funded by Vietnam National Foundation for Alves, S. (2012). Ownership structure and earnings management:
Science and Technology Development (NAFOSTED) under Evidence from Portugal. Australasian Accounting Business
Grant no. 502.02-2019.302. and Finance Journal, 6(1), 57–73.
Anagnostopoulou, S. C., & Tsekrekos, A. E. (2017). The effect of
ORCID iD financial leverage on real and accrual-based earnings manage-
ment. Accounting and Business Research, 47(2), 191–236.
Ngoc Hung Dang https://orcid.org/0000-0002-6666-4905
Aygun, M., Ic, S., & Sayim, M. (2014). The effects of corporate
ownership structure and board size on earnings management:
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