The impact of earnings quality on the investment inefficiency of listed companies in Vietnam

- THE IMPACT OF EARNINGS QUALITY ON THE INVESTMENT INEFFICIENCY OF LISTED COMPANIES IN VIETNAM.
- The purpose of this research is to study the impact of earnings quality on investment inefficiency of listed companies on Vietnam stock market.
- The research concentrated on the effect of two main proxies, namely persistence and predictability earning on inefficiency investment.
- However, in the same period, predictability earning, state ownership and financial leverage causes negative effects on inefficiency investment..
- Investment is an important activity stimulating the development of businesses as well as the growth of the economy.
- Investing through investment projects not only facilitates the development of infrastructure and increases the employment growth but also boosts the development of the capital market.
- In the world, there are numerous studies on several investment aspects such as measuring and evaluating investment efficiency.
- investment policies of firms are determined based on factors such as the overall economy, macro monetary policy, capital market as well as factors of the company's operations.
- This is one of the issues that many researchers concern about because it comes from the conflict of interests between shareholders and managers.
- In Vietnam, there has not been any specific studies on the investment status of firms whether they have over-investment or under-investment problems especially for listed companies which are important parts of the economy and express the power of the economy.
- Prior studies have also focused on the factors affecting investment inefficiencies such as financial reporting quality (FRQ), factors from management such as overconfidence or redundancy in cash flow.
- Earnings quality is one of the remarkable factors.
- In particular, earnings quality (EQ) is researched further in academic after a series of accounting scandals have occurred around the world during the last decade.
- In this study, from acquiring prior studies on how the financial reporting quality affects investor's decisions, we study the relationship of earnings quality and decision of business owners..
- Accounting information plays an important and essential role in the management of micro and macro levels taking on the role of managing information resources for businesses.
- Accounting information is used by many objects in the economy, so the financial reporting quality is a remarkable issue.
- Besides, the earning is assessed as a comprehensive measure reflecting most closely with the financial situation and operation of the business.
- Therefore, earnings quality becomes a major concern for both inside and outside entities and attracts many research scholars.
- (2010) summed up 300 earnings quality studies in leading accounting journals, thereby giving broader definition of earnings quality which is an useful characteristic for any economic decision made by any entities.
- They point out that the measures of earnings quality consist of two groups which are characteristics of earnings quality and the level of investor’s responsibility when considering the published profit.
- Besides, the authors also added a proxy to assess the earnings quality through external evidences about errors in reported earning information..
- In addition to the theoretical background research, there are specific studies of earnings quality associated with specific events such as Jennifer Francis et al.
- (2006) examined the signification of earnings quality in capital market.
- This research indicates the idea that factors such as the auditor size, the independence of the board of manager or the ownership structural influence earnings quality.
- (2013) study about earnings quality in the microfinance industry, administrate generally the earnings quality metrics developed in the accounting literature.
- The authors conclude that the earnings quality in the microfinance industry to be inferior to that of other corporations.
- However, earnings quality in microfinance industry is assessed through scores on several earnings proxies such as smoothness, persistence, predictability or earrnings management almost similar to other industries, appropriated in prior (Dechow and Dichev 2002.
- Moreover, there are many studies on the impact of earnings quality on economic entities as evaluating earnings quality in U.K.
- However, the majority of researchers often analysis factors affecting earnings quality such as Auditor Industry.
- Specialization and Earnings Quality (Balsam, S., Krishnan, J., and Yang, JS (2003), founding family ownership and earnings quality, (Wang, D.
- (2006), the impact of product market competition on earnings quality (Cheng, P., Man, P., and Yi, H (2013.
- onsequently, studying in earnings quality is a searching branch which is being interested by scholars and researchers in the literature on financial reporting quality in particular and financial accounting in general.
- One of the key reasons is that investment contributes a great deal to encourage economic activities, increase national output and save foreign exchange or even increase foreign investment.
- of money in the present to buy real or financial assets with the aim of gaining greater profits in the future (Haming and Basalamah, 2010).
- In this paper, earnings quality indicators will be used to evaluate the impact on investment efficiency.
- Earnings quality is a summary indicator of the overall quality of financial reports in providing necessary information for investors when evaluating the efficiency operation of enterprises (Earnings Quality, Jennifer Francis, Per Olsson and Katherine Schipper, 2008)..
- Based on the theory and research overview, the research team proposed the following research hypotheses:.
- Hypothesis 1: The persistence of earning has a negative impact on the inefficiency investment of enterprises.
- Hypothesis 2: The predictable earning effects negatively on ineffective investment in the company..
- This allows them to invest in the under- performing projects rather than effective projects, which created overinvestment and underinvestment..
- Size of company reflects quantitative factors about production and business of the company through total asset ratio.
- In the enlarging process, enterprises can get around to projects to increase company value through investing on effective which have positive NPV..
- The purpose of this research is to study the impact of earnings quality on investment efficiency of listed companies on Vietnam stock market.
- We analyzed the correlation between the independent variables in the model and conduct descriptive statistics the variables of the model through some typical quantities such as average, variance, standard deviation, maximum value, minimum value.
- The residual error is negative value, which is under-investment and in contrast, the positive value of the residual error represents for over- investment.
- Independent variable: Earnings quality.
- For measuring earnings quality, we focus on 2 proxies: persistence and predictability of earnings quality..
- Estimating this model, predictability of earnings quality is calculated via R2 from the model..
- (2003), we calculate the persistence of earnings via the ratio between the standard deviation of earnings and the standard deviation of cash flow from operation activities:.
- Persistence: Stability of earnings..
- Firm’s size is the natural logarithm of total assets, the ratio of leverage is measured by dividing total debts to total assets and the growth rate of revenue is measured in the following way:.
- Based on prior research related to the impact of financial reporting quality on investment efficiency of companies, this study measures the influence of earnings quality on investment efficiency of firms as well as the impact of factors which are firm's size , financial leverage, ownership structure and the growth rate of revenue on investment efficiency as control variables in this model.
- Table 1: Research variables in the model.
- Source: Summed up by research team The chart shows the relationship between factors in the model..
- Therefore, the next goal of this paper is examining the effect of control variables on earnings quality in companies.
- Table 2: Descriptive statistics of variables in the model Variable Mean Standard deviation Min Max.
- Regarding investment value, the total investment of listed companies on HOSE and HNX in the period of 2009-2017 had the mean value of 93.4 billion VND, the lowest of -20500 billion VND and the highest of 28700 billion VND.
- Regarding company size, industries in the economy, on average, were quite large in terms of total assets.
- Based on the results of descriptive statistics stated above, Ln (total assets) had the mean value of 27.15, the lowest of 24.47.
- Thus, it can be seen that the average total assets of companies is about VND 537.4 billion, which is ranked in the category of large scale.
- This has shown that the total assets size of the whole economy is leisurely expanding..
- With such value of coefficient of variation, it can be seen that the distance between the highest and lowest LV values is short, reflecting the narrow dispersion of the leverage target..
- Table 3: The matrix of correlation coefficients among independent variables in the model.
- The correlation coefficient among the independent variables in the model does not have any pairs greater than 0.8.
- In particular, the correlation coefficient of -0.2637 is a practical demonstration of the inverse relationship between predictability and persistence of earning quality (according to Mohammady, A.
- The research team compared and selected which model would be suitable for the regression of INEFF dependent variable according to PERSIS in the three models: OLS (ordinary least squares), REM (Random effects model), FEM (Fixed impact model).
- However, before analyzing in details the factors affecting INEFF, the research team conducted the following tests: Heteroscedasticity, autocorrelation and necessary corrections to overcome the limitations of the model..
- Thus, with the significance level of 5%, the model had the phenomenon of Heteroscedasticity..
- Table 4: Regression results of investment efficiency with the variable of persistence Coef.
- The estimation results show that state ownership (STATE) and leverage ratio (LV) have the negative impact on the investment inefficiency.
- The LV variable has the negative impact on the investment inefficiency, consistently with the views of Weill (2008), Berger and Bonaccorsi di Patti (2006).
- The results of the negative relationship between the growth rate and the investment inefficiency are consistent with the previous hypotheses and studies of Anthony and Ramesh (1992), Feng Chen (2010), Sajjadi et al.
- The increase in the revenue growth rate of the company makes investors believe in it and contribute capital to implement projects that have positive NPV without which the company could ignore such projects, leading to underinvestment.
- The ownership structure has the negative impact on the investment inefficiency, which is contrary to the hypothesis proposed.
- (Watts and Zimmerman, 1990) argued that large companies were more likely to prefer disruptive and downward activities because of the higher possibility to increase the government control when they become bigger and more profitable..
- The research findings also revealed that there were three factors that negatively affect the investment inefficiency of the company, including state ownership, leverage and earnings predictability, while size have positive impact..
- The earnings predictability has a negative impact on the investment inefficiency, which is consistent with the hypothesis stated.
- The paper examined the impact of earnings quality along with the corporate characteristic factors on the investment inefficiency of the non-financial companies listed on Vietnam's stock market in ten years from 2008 to 2017.
- Based on the research findings, all of the four factors proposed for analysis are related to the investment efficiency of the company.
- The research results show that only the earnings predictability has an impact on the investment inefficiency of enterprises in the sample.
- Profit information may be reflected in the business results of the enterprise..
- Based on the research findings, the research team would like to propose a number of solutions and recommendations for businesses to minimize under and overinvestment as follows:.
- Firstly, the factor of business size, measured by the total amount of assets, reflecting the business performance of an enterprise has a positive impact on the investment inefficiency, i.e.
- Secondly, leverage in business represented by the debt to total assets ratio has also been demonstrated to have a negative effect on the investment inefficiency.
- When this ratio increases, it is likely that businesses have made use of the debt advantages to increase earnings, thereby helping to enhance the investment efficiency as well as reduce the inefficiency of companies.
- Thirdly, the ownership structure factor represented by the state ownership ratio of the company has a negative relationship with the investment inefficiency.
- as having a negative impact on the investment inefficiency.
- Therefore, it is necessary to strengthen the management and supervision of the state in the investment implementation of companies, in addition to providing policy incentives that will help state enterprises to make full use of their own advantages..
- (2005) Earnings Quality in UK Private Firms: Comparative Loss Recognition Timeliness.
- (2003) Auditor Industry Specialization and Earnings Quality.
- (2013), Earnings Quality in the Microfinance Industry, In Gueyie J.P., Manos R.
- Earnings quality in the microfinance industry.
- How does financial reporting quality relate to investment efficiency? Journal of accounting and economics .
- Financial reporting quality and investment efficiency of private firms in emerging markets.
- The impact of product market competition on earnings quality.
- Understanding earnings quality: A review of the proxies, their determinants and their consequences.
- A returns-based representation of earnings quality.
- The relationship between financial reporting quality and investment efficiency in Tehran stock exchange.
- Earnings quality.
- Founding family ownership and earnings quality

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