Corporate governance, external financing, and earnings management: new evidence from an emerging market

Abstract

This study investigates the relationship between corporate governance, external financing, and earnings management in an emerging market. Using a sample of Vietnamese listed companies in the period of 2010–2020, the results indicate that corporate governance, which is measured by a principal component analysis (PCA) methodology, is a useful mechanism to control earnings management. However, when firms engage in external financing activities, corporate governance is not significantly associated with both accrual-based and real earnings management. In addition, the study also examines the role of corporate governance in moderating the effects of earnings management on firm value, and how it is encouraged by external financing needs. The study shows that while good corporate governance lessens the influence of earnings management on firm value, external financing needs only prompts earnings manipulation and have no effect on firm value, directly or indirectly. Therefore, the findings could provide implications for managers and regulators to enhance governance practice to alleviate firm devaluation caused by earnings management practice.