Earning management and cost of debt financing: Evidence from Vietnamese listed companies

Abstract

While earnings management has been employed to conceal corporations' true performance, concerns have risen regarding its adverse impact on financing costs, particularly the cost of debt. This study, therefore, aims to examine the impact of earnings management on the cost of debt in Vietnam. Using data on 197 companies during 2016-2020 in a wide variety of industries and a quantile regression approach, which allows different magnitudes in the impact of earnings management on the cost of debt, the study indicates the negative impact of earnings management on the cost of debt. Earnings management leads to a higher cost of debt. The result supports the garbling theory that Vietnamese firms engage in earnings management exhibit a higher cost of debt as a form of punishment for gaming earnings. In Vietnam, the impact of earnings management is more severe at high levels of debt.