Audit Quality, Institutional Environments, and Earnings Management: An Empirical Analysis of New Listings

Abstract

The purpose of this article is to investigate the relationship between audit quality, the role of institutional environments at the provincial level, and earnings management around listing events by using data from 189 newly-listed companies on the Hochiminh Stock Exchange. Audit quality was proxied by Big4, auditor tenure, and auditor industry specialization, while earnings management was quantified as current discretionary accruals. The findings indicated that there was no role for Big 4, auditor tenure, and auditor industry specialization in curbing earnings management, as indicated by the regression result of the full sample. Interestingly, the effect differed substantially across signs of earnings management. The regression results of different forms of earnings management showed a contrast and indicated that the auditor tenure can mitigate the activities of income-increasing activities in the positive model, the auditor tenure and auditor industry specialization can explain the incentives for managing earnings in the negative model. Moreover, this study found no evidence of the impact of provincial governance on earnings management in the full regression model. However, a negative effect of provincial governance on earnings management was found in the case of a motive for upward earnings management, while good governance tends to provide greater benefits to reduce the occurrence of negative earnings management. After controlling for dummy listing and interaction variables that may be related to audit quality and institutional environment, this relationship remains unchanged. Finally, The study’s findings make several contributions to the earnings management literature and are relevant for investors, policymakers, and firms.