Board independence and earnings management – a study of listed companies on Ho Chi Minh stock exchange

Abstract

Board independence is reflected in many aspects, the most common of which is the existence of independent non-executive directors and the separation of Chairman and CEO roles. This study examines whether a highly independent board deters earnings management by its managers. Discretionary accruals are used to measure earnings management while current operating cash flow divided by lagged assets of current and future are used to measure manager's incentives. On a sample of 1230 observations from 244 HOSE listed companies that belong to VNX Allshare index in the period 2012-2017, this study provides significant evidence for corporate governance issues of Vietnamese listed companies. Specifically, the experimental results show that when the current period performance is poor and expected future period performance is good, and if one person holds both Chairman and CEO roles, he will carry out the transfer of a part of the future profits to the present to improve current year’s performance to satisfy personal interests. Unfortunately, all variables related to independent directors are statistically insignificant, confirming the fuzzy role of independent directors in monitoring and preventing earnings management in particular and agency problems in general. This study offers implications for the effectiveness and substance of the independent role of the board of directors in Vietnamese enterprises.