The impact of earnings management on cash holdings of listed firms in Vietnam

Abstract

Research on the impact of earnings management on corporate cash holdings has yielded inconsistent results. In this research, we investigate the relationship between earnings management and cash holdings of non-financial firms listed on the Vietnamese stock market over the period 2011- 2019. The research results show the negative effect of earnings management on cash holdings, which exists especially for businesses facing high agency costs. This evidence suggests that the negative relationship stems from the adverse impact of earnings management on financial reporting quality. This result is robust to a variety of approaches to deal with the endogenous problems and defects of the model, as well as the use of two different measures of agency cost. An implication from the result is such management increases information asymmetry, which makes it unfit for businesses to keep more cash due to the excessive increase in agency costs. Therefore, the research results have important theoretical contributions and practical implications for both investors and policymakers: earnings management is an important indicator of corporate cash-holding policy.