The Impact of Earnings Management on Stock Crash Risk in Vietnam: The Moderating Role of Accounting Conservatism

Abstract

Background: This research is motivated by concerns regarding the role of financial reporting quality in influencing extreme negative stock price movements. The study contributes to the limited body of literature examining the impact of earnings management on stock price declines in Vietnam, while providing additional insights into the moderating role of accounting conservatism within this relationship.

Objective: This study examines the impact of earnings management on stock crash risk and investigates whether accounting conservatism serves as a mitigating factor.

Methodology: Utilising a panel dataset and applying fixed-effects or random-effects regression models based on the Hausman test, the study analyses firm-level data to test two primary hypotheses. The first hypothesis posits that earnings management, proxied by discretionary accruals, positively influences stock crash risk (measured using negative conditional return skewness and asymmetric volatility). The second hypothesis examines whether accounting conservatism, quantified using the C-Score methodology, mitigates the adverse effects of earnings management. The study analyses a sample of 324 firms listed on the Ho Chi Minh City Stock Exchange from 2019 to 2023. The empirical models incorporate firm-specific control variables, including return on equity, stock return volatility, leverage, market-to-book ratio, ownership concentration, and institutional ownership, to ensure robustness.

Results: The findings provide strong evidence that firms engaging in aggressive earnings management exhibit a higher likelihood of stock price crashes. This aligns with the premise that manipulated earnings conceal negative information, which eventually leads to abrupt price corrections. Furthermore, accounting conservatism significantly moderates this relationship, as conservative financial reporting practices help mitigate the risks associated with aggressive earnings management.

Conclusion: The study underscores the importance of accounting conservatism in reducing information asymmetry and protecting investors from stock price crashes.

Unique Contribution: This research bridges the gap between accounting quality and market stability in an emerging economy context, empirically demonstrating that conservative reporting acts as a structural safeguard against the market distortions caused by earnings manipulation.

Key Recommendation: The findings offer significant implications for regulators, investors, and policymakers. It is recommended that regulators carefully calibrate the enforcement of conservative accounting standards to enhance market stability and minimise potential distortions.