European Journal of Business Science and Technology 2025, 11(1):67-84 | DOI: 10.11118/ejobsat.2025.006

Substitution between Accrual and Real Earnings Management: Impact of Firm Characteristics, Audit Quality, and Institutions

Pham Duc Cuong¹, Duong Thi Chi¹

¹ National Economics University, Hanoi, Vietnam

We study the trade-off between real earnings management activities (REM) and accrual-based earnings management (AEM) among newly listed Vietnamese firms from 2009 to 2019. First, we found that firms exhibit REM as well as AEM around listing events to beat earnings targets. We further explore whether managers use REM and AEM as substitutes, considering both internal factors- firms’ characteristics and external factors like audit quality and institutional environments. Our results indicate that companies employ a greater amount of AEM and less REM when they have a higher firm size, measured by total assets, experience higher levels of liquidity. Nevertheless, firms experiencing higher levels of cash flow from operating activities, net operating assets are more likely to engage in REM and but less likely to use AEM. However, when considering external factors including audit quality and institutional environments, there is limited evidence of a trade-off between the two methods. While audit quality appears to constrain only AEM, the corruption index has a negative impact on REM. Interestingly, consistent with previous studies, we also provide evidence that managers make adjustments to the level of accruals after the fiscal year-end based on the actual level of real earnings realized during the year.

Keywords: real earnings management, accrual-based earnings management, trade-off, audit quality, institutional environments, firms’ characteristics

JEL classification: M41

Received: February 12, 2025; Revised: May 28, 2025; Accepted: June 24, 2025; Published: June 30, 2025  Show citation