Accounting Comparability and Cash Holdings in Vietnam

Liem Thanh Nguyen,Khuong Vinh Nguyen

doi:10.3390/ijfs9020027

Abstract

The management of cash requires careful considerations to allow firms to benefit from proper resource allocations while mitigating agency issues. Accounting comparability can play an important role in tackling information asymmetry and agency cost, thus enabling managers to hoard more cash. This research aims to investigate the link between accounting comparability and cash holdings in an emerging market. Using a sample of listed firms in Vietnam from 2010 to 2019 and System Generalized Method of Moments, the study finds that comparability is positively associated with corporate cash holdings, confirming the value of the former as an effective governance mechanism. Additionally, we find a non-linear impact of comparability on cash holdings; in other words, comparability specifically enhances cash holdings for firms with high levels of comparability. We further document that cash holdings improve firm performance only for firms with high levels of comparability. Such evidence implies that only firms with high levels of financial statement comparability show commitment to tackle agency cost and information asymmetry.

Highlights

Corporate resource allocations are crucial because good decisions in this field enhance firm value, and mitigate potential conflicts of interest between stakeholders (Kim et al 2020; Mehrabanpour et al 2020)
Accounting comparability can play an important role in tackling information asymmetry and agency cost, enabling managers to hoard more cash
The current research extends the literature in a number of ways. It investigates the relation between accounting comparability and cash holdings in Vietnam

Summary

Introduction

Corporate resource allocations are crucial because good decisions in this field enhance firm value, and mitigate potential conflicts of interest between stakeholders (Kim et al 2020; Mehrabanpour et al 2020). If cash is under-reserved, firms might face problems in sustaining operations in case of liquidity shortage, thwarting investments. Firms that reserve high levels of cash are more prone to face more serious opportunity costs, in addition to agency costs (Myers and Rajan 1998; Jensen 1986; Masulis et al 2009). Financial statements allow users to access the information to evaluate a firm’s cash flows, in terms of timing, amount and certainty (Kim et al 2013, 2016). According to Financial Accounting Standards Board (FASB) (2010), comparable information enables users to identify economic similarities and differences across firms. With better accounting comparability, investors find it cheaper, faster, and more convenient to obtain more pertinent and reliable information to make informed decisions

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Conclusion