External financing and earnings management: Evidence in Vietnam

Figures & data

Figure 1. Research framework.

Table 1. Variable definition

Variable	Definition
Dependent variable
EM	Earnings management measure, defined as the absolute value of residual that is estimated in line with Peasnell et al. (2005). In addition, we use alternative measures as suggested in Jones (1991) and Dechow et al. (1995) for robustness checks.
Main Independent variables
XFIN	The net amount of cash flow received from external financing divided by total assets (Zhang et al., 2020; Bradshaw et al., 2006)
EQUITY	The net amount of cash flow received from the sale (or purchase) of common and preferred stock less cash dividends paid divided by total assets (Zhang et al., 2020; Bradshaw et al., 2006)
DEBT	The net amount of cash flow received from the issuance (or repayment) of debt divided by total assets (Zhang et al., 2020; Bradshaw et al., 2006)
Control variables
SIZE	Firm size, measured by the natural logarithm of market capitalization
ROA	Profitability, measured by the ratio of net income to total assets
PPE	Capital intensity, defined as fixed assets scaled by total assets
MB	Growth opportunities, defined as market value of equity scaled by the book value of equity

Table 2. Descriptive statistics

Variable	Mean	Median	Std. Dev.	Min	Max
EM	0.092	0.059	0.105	0.001	0.620
XFIN	−0.002	−0.010	0.129	−0.423	0.421
EQUITY	−0.018	−0.014	0.062	−0.212	0.276
DEBT	0.015	0.000	0.104	−0.347	0.340
SIZE	12.043	11.901	1.614	7.143	19.528
MB	0.956	0.759	0.732	0.162	4.636
ROA	0.064	0.047	0.074	−0.119	0.353
PPE	0.200	0.143	0.183	0.000	0.789
Number of obs.	3,780

Source: Authors’ calculation from research sample

Table 3. Comparison between highly and low externally financed firms

	Highly externally financed firms		Low externally financed firms		Tests for differences
Variable	NObs.	Mean	NObs.	Mean
EM	1,765	0.101	2,015	0.083	0.018***
SIZE	1,765	12.077	2,015	12.014	0.064
MB	1,765	0.955	2,015	1.021	−0.066*
ROA	1,765	0.045	2,015	0.080	−0.034***
PPE	1,765	0.180	2,015	0.218	−0.038***

Note: ***, **, and * indicate statistical significance at the 1, 5 and 10 percent level, respectively.

Table 4. Correlation matrix

	EM	XFIN	EQUITY	DEBT	SIZE	MB	ROA
XFIN	0.185***
EQUITY	0.167***	0.556***
DEBT	0.104***	0.842***	0.040**
SIZE	0.042***	0.039**	−0.043***	0.077***
MB	0.123***	−0.080***	−0.219***	0.046***	0.498***
ROA	0.106***	−0.210***	−0.394***	−0.008	0.298***	0.392***
PPE	−0.124***	−0.084***	−0.038**	−0.077***	0.086***	−0.007	−0.006

Note: ***, **, and * indicate statistical significance at the 1, 5 and 10 percent level, respectively.

Table 5. The variance inflation factor (VIF)

Variable	VIF
MB	1.46
SIZE	1.39
ROA	1.26
XFIN	1.07
PPE	1.02
Mean VIF	1.24

Table 6. The effect of external financing on earnings management

	(1)	(2)	(3)	(4)
XFIN	0.173***
	(0.019)
EQUITY		0.401***		0.404***
		(0.054)		(0.054)
DEBT			0.111***	0.114***
			(0.020)	(0.020)
SIZE	0.001	−0.002	0.005	−0.003
	(0.006)	(0.006)	(0.006)	(0.006)
MB	0.016**	0.021***	0.014*	0.020***
	(0.007)	(0.008)	(0.008)	(0.007)
ROA	0.189***	0.207***	0.171***	0.209***
	(0.040)	(0.040)	(0.041)	(0.040)
PPE	−0.047*	−0.062**	−0.064**	−0.046*
	(0.027)	(0.026)	(0.027)	(0.026)
Constant	0.066	0.101	0.021	0.105*
	(0.063)	(0.063)	(0.067)	(0.062)
R^2	0.070	0.070	0.041	0.083
F test	25.50***	19.15***	17.99***	23.76***
Number of obs.	3,780	3,780	3,780	3,780
Number of groups	494	494	494	494
Firm FE	Yes	Yes	Yes	Yes

Note: Column (1) presents the regression results of Equation (1)(1) $\mathbf{E}{\mathbf{M}}_{\mathbf{i}\mathbf{t}}=\hspace{0.17em}{\beta }_{\mathbf{0}}+\hspace{0.17em}{\beta }_{\mathbf{1}}\mathbf{X}\mathbf{F}\mathbf{I}{\mathbf{N}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{2}}\mathbf{S}\mathbf{I}\mathbf{Z}{\mathbf{E}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{3}}\mathbf{M}{\mathbf{B}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{4}}\mathbf{R}\mathbf{O}{\mathbf{A}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{5}}\mathbf{P}\mathbf{P}{\mathbf{E}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\mu }_{\mathbf{i}\mathbf{t}}$(1) with XFIN representing total external financing. Column (2) present the regression results of Equation (1)(1) $\mathbf{E}{\mathbf{M}}_{\mathbf{i}\mathbf{t}}=\hspace{0.17em}{\beta }_{\mathbf{0}}+\hspace{0.17em}{\beta }_{\mathbf{1}}\mathbf{X}\mathbf{F}\mathbf{I}{\mathbf{N}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{2}}\mathbf{S}\mathbf{I}\mathbf{Z}{\mathbf{E}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{3}}\mathbf{M}{\mathbf{B}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{4}}\mathbf{R}\mathbf{O}{\mathbf{A}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{5}}\mathbf{P}\mathbf{P}{\mathbf{E}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\mu }_{\mathbf{i}\mathbf{t}}$(1) with XFIN representing equity financing. Column (3) present the regression results of Equation (1)(1) $\mathbf{E}{\mathbf{M}}_{\mathbf{i}\mathbf{t}}=\hspace{0.17em}{\beta }_{\mathbf{0}}+\hspace{0.17em}{\beta }_{\mathbf{1}}\mathbf{X}\mathbf{F}\mathbf{I}{\mathbf{N}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{2}}\mathbf{S}\mathbf{I}\mathbf{Z}{\mathbf{E}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{3}}\mathbf{M}{\mathbf{B}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{4}}\mathbf{R}\mathbf{O}{\mathbf{A}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{5}}\mathbf{P}\mathbf{P}{\mathbf{E}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\mu }_{\mathbf{i}\mathbf{t}}$(1) with XFIN representing debt financing. Column (4) present the regression results of Equation (1)(1) $\mathbf{E}{\mathbf{M}}_{\mathbf{i}\mathbf{t}}=\hspace{0.17em}{\beta }_{\mathbf{0}}+\hspace{0.17em}{\beta }_{\mathbf{1}}\mathbf{X}\mathbf{F}\mathbf{I}{\mathbf{N}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{2}}\mathbf{S}\mathbf{I}\mathbf{Z}{\mathbf{E}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{3}}\mathbf{M}{\mathbf{B}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{4}}\mathbf{R}\mathbf{O}{\mathbf{A}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{5}}\mathbf{P}\mathbf{P}{\mathbf{E}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\mu }_{\mathbf{i}\mathbf{t}}$(1) with XFIN representing both equity and debt financing. The values reported in parentheses are robust standard errors. ***, **, and * indicate statistical significance at the 1, 5 and 10 percent level, respectively.

Table 7. Alternative measures of earnings management

	Jones (1991)				Modified Dechow et al. (1995)
	(1)	(2)	(3)	(4)	(1)	(2)	(3)	(4)
XFIN	0.100***				0.114***
	(0.020)				(0.021)
EQUITY		0.190***		0.193***		0.218***		0.221***
		(0.046)		(0.046)		(0.046)		(0.046)
DEBT			0.084***	0.085***			0.096***	0.097***
			(0.022)	(0.022)			(0.023)	(0.023)
Constant	0.159***	0.171***	0.134***	0.174***	0.167***	0.180***	0.138***	0.184***
	(0.046)	(0.045)	(0.048)	(0.045)	(0.047)	(0.046)	(0.048)	(0.045)
R^2	0.036	0.03	0.027	0.04	0.039	0.032	0.028	0.043
F test	13.38***	12.41***	10.84***	12.30***	14.08***	13.16***	10.98***	13.30***
No of obs.	3,780	3,780	3,780	3,780	3,780	3,780	3,780	3,780
No of firms	494	494	494	494	494	494	494	494
Firm FE	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes

Note: Table 7 provides robustness check with alternative measures of earnings management. Column (1) presents the regression results of Equation (1)(1) $\mathbf{E}{\mathbf{M}}_{\mathbf{i}\mathbf{t}}=\hspace{0.17em}{\beta }_{\mathbf{0}}+\hspace{0.17em}{\beta }_{\mathbf{1}}\mathbf{X}\mathbf{F}\mathbf{I}{\mathbf{N}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{2}}\mathbf{S}\mathbf{I}\mathbf{Z}{\mathbf{E}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{3}}\mathbf{M}{\mathbf{B}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{4}}\mathbf{R}\mathbf{O}{\mathbf{A}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{5}}\mathbf{P}\mathbf{P}{\mathbf{E}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\mu }_{\mathbf{i}\mathbf{t}}$(1) with XFIN representing total external financing. Column (2) present the regression results of Equation (1)(1) $\mathbf{E}{\mathbf{M}}_{\mathbf{i}\mathbf{t}}=\hspace{0.17em}{\beta }_{\mathbf{0}}+\hspace{0.17em}{\beta }_{\mathbf{1}}\mathbf{X}\mathbf{F}\mathbf{I}{\mathbf{N}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{2}}\mathbf{S}\mathbf{I}\mathbf{Z}{\mathbf{E}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{3}}\mathbf{M}{\mathbf{B}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{4}}\mathbf{R}\mathbf{O}{\mathbf{A}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{5}}\mathbf{P}\mathbf{P}{\mathbf{E}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\mu }_{\mathbf{i}\mathbf{t}}$(1) with XFIN representing equity financing. Column (3) present the regression results of Equation (1)(1) $\mathbf{E}{\mathbf{M}}_{\mathbf{i}\mathbf{t}}=\hspace{0.17em}{\beta }_{\mathbf{0}}+\hspace{0.17em}{\beta }_{\mathbf{1}}\mathbf{X}\mathbf{F}\mathbf{I}{\mathbf{N}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{2}}\mathbf{S}\mathbf{I}\mathbf{Z}{\mathbf{E}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{3}}\mathbf{M}{\mathbf{B}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{4}}\mathbf{R}\mathbf{O}{\mathbf{A}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{5}}\mathbf{P}\mathbf{P}{\mathbf{E}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\mu }_{\mathbf{i}\mathbf{t}}$(1) with XFIN representing debt financing. Column (4) present the regression results of Equation (1)(1) $\mathbf{E}{\mathbf{M}}_{\mathbf{i}\mathbf{t}}=\hspace{0.17em}{\beta }_{\mathbf{0}}+\hspace{0.17em}{\beta }_{\mathbf{1}}\mathbf{X}\mathbf{F}\mathbf{I}{\mathbf{N}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{2}}\mathbf{S}\mathbf{I}\mathbf{Z}{\mathbf{E}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{3}}\mathbf{M}{\mathbf{B}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{4}}\mathbf{R}\mathbf{O}{\mathbf{A}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{5}}\mathbf{P}\mathbf{P}{\mathbf{E}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\mu }_{\mathbf{i}\mathbf{t}}$(1) with XFIN representing both equity and debt financing. 2. The values reported in parentheses are robust standard errors adjusted for heteroskedasticity. ***, **, and * indicate statistical significance at the 1, 5 and 10 percent level, respectively.

Table 8. System GMM estimates

	(1)	(2)	(3)	(4)
L.EM	0.126***	0.100***	0.136***	0.125***
	[8.62]	[5.21]	[7.77]	[9.86]
XFIN	0.168***
	[5.69]
EQUITY		0.454***		0.575***
		[4.04]		[7.03]
DEBT			0.0811***	0.0730***
			[2.84]	[3.01]
SIZE	0.006	0.01	0.006	0.003
	[1.32]	[0.74]	[1.01]	[0.51]
MB	0.00983**	0.0111*	0.00729*	0.0118**
	[2.45]	[1.90]	[1.79]	[2.50]
ROA	0.327***	0.271***	0.332***	0.326***
	[6.83]	[3.84]	[5.41]	[6.64]
PPE	−0.143***	−0	−0.129**	−0.155***
	[−3.00]	[−0.15]	[−2.16]	[−3.50]
CONSTANT	0.006	−0.000	0.003	0.057
	[0.12]	[−0.04]	[0.04]	[1.00]
No of obs	3286	3286	3286	3286
AR(1) test p-value	0.000	0.000	0.000	0.000
AR(2) test p-value	0.479	0.448	0.530	0.469
Hansen test p-value	0.168	0.317	0.192	0.111

Note: Table 8 provides robustness check with System GMM estimator. Column (1) presents the regression results of Equation (1)(1) $\mathbf{E}{\mathbf{M}}_{\mathbf{i}\mathbf{t}}=\hspace{0.17em}{\beta }_{\mathbf{0}}+\hspace{0.17em}{\beta }_{\mathbf{1}}\mathbf{X}\mathbf{F}\mathbf{I}{\mathbf{N}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{2}}\mathbf{S}\mathbf{I}\mathbf{Z}{\mathbf{E}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{3}}\mathbf{M}{\mathbf{B}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{4}}\mathbf{R}\mathbf{O}{\mathbf{A}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{5}}\mathbf{P}\mathbf{P}{\mathbf{E}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\mu }_{\mathbf{i}\mathbf{t}}$(1) with XFIN representing total external financing. Column (2) present the regression results of Equation (1)(1) $\mathbf{E}{\mathbf{M}}_{\mathbf{i}\mathbf{t}}=\hspace{0.17em}{\beta }_{\mathbf{0}}+\hspace{0.17em}{\beta }_{\mathbf{1}}\mathbf{X}\mathbf{F}\mathbf{I}{\mathbf{N}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{2}}\mathbf{S}\mathbf{I}\mathbf{Z}{\mathbf{E}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{3}}\mathbf{M}{\mathbf{B}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{4}}\mathbf{R}\mathbf{O}{\mathbf{A}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{5}}\mathbf{P}\mathbf{P}{\mathbf{E}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\mu }_{\mathbf{i}\mathbf{t}}$(1) with XFIN representing equity financing. Column (3) present the regression results of Equation (1)(1) $\mathbf{E}{\mathbf{M}}_{\mathbf{i}\mathbf{t}}=\hspace{0.17em}{\beta }_{\mathbf{0}}+\hspace{0.17em}{\beta }_{\mathbf{1}}\mathbf{X}\mathbf{F}\mathbf{I}{\mathbf{N}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{2}}\mathbf{S}\mathbf{I}\mathbf{Z}{\mathbf{E}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{3}}\mathbf{M}{\mathbf{B}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{4}}\mathbf{R}\mathbf{O}{\mathbf{A}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{5}}\mathbf{P}\mathbf{P}{\mathbf{E}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\mu }_{\mathbf{i}\mathbf{t}}$(1) with XFIN representing debt financing. Column (4) present the regression results of Equation (1)(1) $\mathbf{E}{\mathbf{M}}_{\mathbf{i}\mathbf{t}}=\hspace{0.17em}{\beta }_{\mathbf{0}}+\hspace{0.17em}{\beta }_{\mathbf{1}}\mathbf{X}\mathbf{F}\mathbf{I}{\mathbf{N}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{2}}\mathbf{S}\mathbf{I}\mathbf{Z}{\mathbf{E}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{3}}\mathbf{M}{\mathbf{B}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{4}}\mathbf{R}\mathbf{O}{\mathbf{A}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\beta }_{\mathbf{5}}\mathbf{P}\mathbf{P}{\mathbf{E}}_{\mathbf{i}\mathbf{t}}+\hspace{0.17em}{\mu }_{\mathbf{i}\mathbf{t}}$(1) with XFIN representing both equity and debt financing. The values reported in parentheses are test statistics. ***, **, and * indicate statistical significance at the 1, 5 and 10 percent level, respectively.

Table 9. Nonlinear relationship between external financing and earnings management

	FE-EQUITY	FE-DEBT	GMM-EQUITY	GMM-DEBT
L.EM			0.132***	0.129***
			[7.68]	[7.93]
EQUITY	0.373***		0.330**
	[4.15]		[2.46]
EQUITY2	0.484**		0.954*
	[2.18]		[1.83]
DEBT		0.0968***		0.0888*
		[3.11]		[1.72]
DEBT2		0.0967*		0.527
		[1.65]		[1.32]
SIZE	0.016	0.0254*	0.002	0.00859*
	[1.43]	[1.96]	[0.36]	[1.79]
MB	0.0126**	0.00910*	0.00993*	0.00766**
	[2.24]	[1.93]	[1.89]	[2.13]
ROA	0.154**	0.148**	0.197***	0.326***
	[2.48]	[2.29]	[2.61]	[5.23]
PPE	−0.111	−0.1	−0.0996*	−0.120**
	[−1.41]	[−1.41]	[−1.87]	[−2.12]
_cons	−0.098	−0.2	0.050	−0.038
	[−0.78]	[−1.44]	[0.70]	[−0.67]
No of Obs	3780	3780	3780	3780
AR(1) test p-value			0.000	0.000
AR(2) test p-value			0.467	0.528
Hansen test p-value			0.125	0.195

Note: Table 9 provides results of nonlinear test. FE-EQUITY and FE-DEBT columns show results of fixed effects model. GMM-EQUITY and GMM-DEBT columns show results of System GMM model. The values reported in parentheses are test statistics. ***, **, and * indicate statistical significance at the 1, 5 and 10 percent level, respectively.

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