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Earnings management by real activities manipulation: a look at Vietnam

(A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOPMENT ECONOMICS, VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS)

By Nguyen Duy Anh (VNP 21)

Academic Supervisor: Dr. Vu Viet Quang


This paper examines whether the companies in Viet Nam employ real activities manipulation to meet the income target. 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. 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) 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 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.

Keywords: Capital markets; Accounting choice; Earnings manipulation.

Abbreviations: RM - Real management; REM - Real earnings management.

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