Substitution between Accrual and Real Earnings Management: Impact of Firm Characteristics, Audit Quality, and Institutions

We study the trade-off between real earnings management activities (REM) and accrual-based earnings management (AEM) among newly listed Vietnamese firms from2009 to 2019. First, we found that firms exhibit REM as well as AEM around listing events to beat earnings targets. We further explore whether managers use REM and AEMas substitutes, considering both internal factors- firms’ characteristics and external factors like audit quality and institutional environments. Our results indicatethat companies employ a greater amount of AEM and less REM when they have a higher firm size, measured by total assets, experience higher levels of liquidity. Nevertheless,firms experiencing higher levels of cash flow from operating activities, net operating assets are more likely to engage in REM and but less likely to use AEM. However,when considering external factors including audit quality and institutional environments, there is limited evidence of a trade-off between the two methods. While auditquality appears to constrain only AEM, the corruption index has a negative impact on REM. Interestingly, consistent with previous studies, we also provide evidence thatmanagers make adjustments to the level of accruals after the fiscal year-end based on the actual level of real earnings realized during the year.