Effects of earnings management to investor decision – empirical evidence in Vietnam stock market

Abstract

Earnings result reflects business performance and hence earnings quality plays an important role in making investment decision of investors. However, little research has been done regarding the effects of earnings management on investor decision. In this study, we examine the effects of earnings management on investor decision and look for empirical evidences with a sample consisting of 2,980 firm-year observations from 669 companies listed on two main stock exchanges of Vietnam during the five-year period 2013-2017. This study conducts a multivariate linear regression, in which investor decision is the dependent variable and earnings management is one of the regressors. The random effect model, which is the most appropriate model in our study, reveals that the higher level of earnings management of a company, the more likely investors decide to own shares of that company, implying a warning sign for investors. Besides, investors prefer to own shares of companies with high ROE and low financial leverage, while investor’s decision is not significantly affected by type of auditors, revenue growth or asset size of the companies. However, price factor is not examined in this study and could be an extension of future research