INTRODUCTION
Accounting principles  allow  managers  to  exercise  considerable  discretion  over  accruals,  which  creates  flexibility  in  terms  of  exercising  certain  amount  of judgement in preparing financial statements through choices of accounting and reporting  methods,  especially  in  new  issuance  events,  which  is  known  as  a  rich  information  asymmetry  context.  This  behaviour  is  consistent  with  the  earnings  management  definition  suggested  by  Healy  and  Wahlen  (1999,  p.  368)  as “managers use judgment in the financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about the underlying economic performance of the company, or to influence contractual outcomes that depend  on  reported  accounting  numbers.”  Some  studies  have  determined  three  events in which firms have incentives and possibilities to manipulate earnings before issuing shares via initial public offerings (IPOs), seasoned equity offerings (SEOs),  or  new  listings.  Several  international  studies  have  documented  the existence  of  earnings  management  surrounding  new  issuance.  Results  of  these  studies  illustrate  the  contrast  among  levels  of  accruals  earnings  management  ranging from very aggressive (such as Aharony et al., 1993; DuCharme et al., 2004; Friedlan, 1994; Kao et al., 2009; Nuryaman, 2013; Rangan, 1998; Shivakumar, 2000; Teoh et al., 1998a, 1998b) to no earnings management (such as Armstrong et al., 2008; Ball & Shivakumar, 2008; DuCharme et al., 2001; Premti, 2013) to no earnings management (such as DuCharme et al., 2001; Ball & Shivakumar, 2008; Armstrong et al., 2008; Premti, 2013). Review of the earnings management around issuance of  equity  and  new  listings  indicates  that  while  earnings  management  during  issuance  of  equity  is  fully  documented,  the  study  on  accruals  earnings  management and new listings is not strong enough. While IPOs and SEOs are the types of equity issuance in which the shares of a firm are sold to investors with the main objective to raise capital, listing refers to an entrance of firms into a stock exchange and the transformation to publicly owned entities. Listing offers advantages to firms such as raising further capital, improving their reflectivity and reputation, having higher collateral value of the securities, and achieving better corporate practice and better liquidity of marketable securities. Firms must meet all the listing requirementsset out by the governing bodies to be listed on the stock
in (year +1) and DA(CFO) in (year –1). Therefore, there is limited evidence to conclude that firms listed on HOSE present positive earnings management in the year before listing event, when models based on total accruals are adopted.Table 2 shows the results used to test the first hypothesis, H1. H1 is supported as firms listed on HOSE exhibit a high magnitude of positive earnings management in  pre-listing  year  when  using  current  accruals  models.  However,  models  based  on  total  accruals  provide  mixed  results.  Hence,  greater  reliance  depends  on  the  results of the current accruals models, which support H1.
Table 2
Descriptive statistics for the DA and DCA
MeanMedianMinMaxSDPanel A: Modified Jones model DA year –10.0146 0.0233 (0.9179)1.1010 0.2443 DA year 0(0.0166)(0.0025)(1.3507)0.9412 0.2389 DA year +10.00240.0234**(1.54)1.170.2445DA year +2(0.0053)(0.0020)(0.81)0.320.1331Panel B: Currents accruals model DCA year –10.0726***0.0452***(0.5189)1.0788 0.2349 DCA year 00.0146 0.0049 (0.5196)0.8820 0.1936 DCA year +10.01060.020(1.29)0.800.2314DCA year +2(0.0067)0.0011(0.56)0.360.1437Panel C: Cash flow model based on total accruals DA(CF0) year –10.01710.0303***(0.9744)0.5075 0.1884 DA(CF0) year 0 0.0002 0.0223 (1.3498)0.4915 0.1911 DA(CFO) year +1(0.0029)0.0129(1.95)1.30  0.2591DA(CFO) year +20.00430.0028(0.78)1.32 0.1680Panel D: Cash flow model based on current accruals DCA(CF0) year –1 0.0815***0.0631***(0.9532)1.0987 0.2409 DCA(CF0) year 00.0245 0.0169**(0.9363)0.6103 0.2063 DCA(CF0) year +10.01130.006(1.54)1.140.2437DCA(CF0) year +20.00450.011(0.69)1.430.1887Notes: ***, **, and * represent significance levels at 1%, 5%, and 10%Year –1 is considered as a year-end before the listing date. Year 0 refers as fiscal year ending after listing. Year +1 and Year +2 refer to the first and second post-listing financial statements issued after listing.
Earnings management and new listings41
In  summary,  the  research  provides  some  empirical  evidence  for  existence  of earning  management  before  listing  on  HOSE.  Firms  listed  on  HOSE  show significantly  greater  positive  earnings  management  in  current  accrual  models than in total accrual ones. The first interpretation is that in order to be listed on HOSE, firms use current discretionary accruals to inflate their earnings in pre-listing  year  to  meet  profit  requirements.  Moreover,  managers  prefer  to  use discretion  over  current  accruals,  because  it  is  known  as  “the  component  most  easily  subjected  to  successful  managerial  manipulation”  (Teoh  et  al.,  1998b, p. 64). In addition, current accruals are likely to be more flexible and important than  non-current  accruals  in  improving  earnings  since  current  accruals  have  higher degree of judgment with regard to its estimation (Dechow, 1994). Non-current  accruals  such  as  depreciation  and  change  in  deferred  taxes  are  more  visible  than  current  accruals  and  need  more  time  to  change  before  listing.  Therefore,  consistent  with  previous  studies,  managers  of  HOSE  firms  favour adjusting  current  accruals  in  an  attempt  to  improve  earnings  in  the  year  before  listing, which cannot be sustained in post-listing years.Testing the Earnings Management in the Pre-Listing Year and Post-Listing YearsThe  result  above  indicates  that  earnings  management  in  year  –1  is  greater  than  year  0  and  two  consecutive  years  after  listing.  In  order  to  investigate  the significance  of  the  differences,  the  research  uses  t-statistics  from  t-tests  and Wilcoxon tests to determine if earnings management in year –1 is statistically higher  than  in  year  0  and  subsequent  years  in  which  the  former  tests  the  differences in means of earnings management and the latter tests the differences in medians of earnings management. The result of matched-paired t-test in Table 3 shows that the means of DCA [DCA(CFO)] are statistically significantly higher in year –1 than in year 0 and subsequent years at 5% and 1% level, respectively. In  contrast,  the  means  of  DA  (measured  by  two  total  accruals  models)  are lower  in  year  0  and  two  subsequent  years  after  listing  than  in  year  –1,  but  the  difference is not significant for both models. Hence, listing firms in HOSE exhibit significantly higher positive discretionary current accruals in year –1 than in year 0  and  two  consecutive  years  immediately  after  listing  for  two  current  accruals  models, which support H2. Current accruals model can detect a significant and positive level of earnings management in the year preceding the listing.
Table 3
Comparison between year –1 and year 0, year +1, year +2 in earnings management based on matched pairs t-testModel testTesting periodt-valuep-value A. Models based on total accruals1.   Modified Jones model (DA)Year –1 and Year 01.29400.1973Year –1 and Year +10.53120.5959Year –1 and Year +20.98760.32462.   Cashflow [DA(CFO)]Year –1 and Year 01.0690.2864Year –1 and Year +10.89450.3722Year –1 and Year +20.76660.4443B.   Model based on current accruals 1. Current accruals (DCA)Year –1 and Year 02.44290.0155Year –1 and Year +12.54010.0119Year –1 and Year +23.79860.00022.   Cashflow [DCA(CFO)]Year –1 and Year 02.42540.0162Year –1 and Year +12.55520.0114Year –1 and Year +23.42430.0008In  Table  4,  positive  signed  ranks  mean  that  the  medians  of  DA  [DA(CFO)] and  DCA  [DCA(CFO)]  variables  are  greater  in  year  –1  than  those  in  year  0, year    +1, and year +2. The opposite is true in negative ranks. In general, there are fewer negative ranks than positive ranks in all models. It can be observed from  Panel  B  that  the  significant  differences  between  the  medians  are  at conventional  levels  in  both  current  accruals  models  with  greater  positive  DCA  in the year –1 than that in the year 0 and two subsequent years after listing. By comparison, models based on total accruals show that median DA in year –1 are significantly greater than median in year 0 for the Jones model at 10% level, as shown in Panel A. However, the reduction in the median DA from the year –1 to the year +1 and year +2 is not significant. Contrary to results found in modified Jones  model,  DA(CFO)  from  the  cashflow  model  indicates  a  statistically significant  difference  among  year  –1  and  two  consecutive  years  immediately after listing at 10% level, but the difference is not significant between year –1 and year 0.On the other hand, medians of DA derived from models based on total accruals show a significant difference in some years as compared to the pre-listing year, but the opposite result is found from the means of discretionary accruals. Hence, there was insufficient evidence to prove that earnings management (measured by total
Earnings management and new listings43accruals) are significantly higher in the pre-listing year as compared to that in the listing year and two consecutive years immediately after listing.
Table 4Comparison between year –1 and year 0, year +1, year +2 in earnings management based on Wilcoxon signed-rank testModel testTesting periodPositive rankNegative rankp-valuez-scoreA. Model based on total accruals  1. Modified Jones model (DA)Year –1 and Year 0108810.05851.8920Year –1 and Year +194950.62080.495Year –1 and Year +2107820.10711.61102. Cashflow DA (CFO)Year –1 and Year 0105840.1929 1.3020Year –1 and Year +1107820.06181.868Year –1 and Year +2103860.09871.651B.   Model based on current accruals1. Current accruals (DCA)Year –1 and Year 0106830.03292.1330Year –1 and Year +1101880.0981.658Year –1 and Year +2107820.00522.7972. Cashflow DCA (CFO)Year –1 and Year 0105840.02062.3150Year –1 and Year +1106830.02322.27 Year –1 and Year +2107820.00143.193
In summary, the results from t-test  reported  in  Table  3  are  consistent  with  the  results  from  Wilcoxon  signed-rank  test  presented  in  Table  4  for  all  current accruals  models.  When  models  based  on  current  accruals  are  considered,  the findings  suggest  that  HOSE-listed  firms  show  significantly  greater  positive earnings management in the year before listing than in post-listing years, including two  consecutive  years  immediately  after  listing,  which  validates  H2.  However,  the evidence related to H2 is mixed when using models based on total accruals.Overall, consistent with previous studies and agency theory, the results obtained from testing H1 and H2 suggest that in an attempt to meet the pre-listing profit requirement, the firms listed on HOSE may have incentives to inflate their earnings in the listing year through the current accruals. However, the high level of current accruals cannot be sustained in post-listing years.As  discussed  in  previous  sections,  there  was  no  pre-listing  profit  requirement (ROE) before 15 September 2012. Then, a new requirement for ROE in the latest  year to be at least 5% has been added in the new decree. H3 states that firms listed on HOSE after 15 September 2012 might have stronger incentives to manipulate their earnings upward in year –1 than firms listed before 15 September 2012.Testing the Pre-Listing Earnings Management and the Change  in Profit RequirementThe  sample  of  189  firms  is  separated  into  two  groups.  Group  1  consists  of 115    firms listed before the new profit requirement (before 15 September 2012), the rest of 74 firms listed after the new profit requirement (after 15 September 2012) is in Group 2.Three  tests  are  undertaken  to  test  H3.  First,  two-sample  t-test  is  performed  to  investigate  whether  the  differences  in  the  means  of  discretionary  accruals and  discretionary  current  accruals  of  two  groups  are  significant.  Second,  the statistical significance of the difference in medians of the two groups is tested with median test. In addition, in order to investigate whether Group 2 presents more significantly the level of discretionary accruals and the level of discretionary current accruals in the year preceding the listing than Group 1, the Mann-Whitney U-test is undertaken. Table 5 indicates that the means of accruals based on all models are greater in Group 2 than those in Group 1. However, the differences are not significant. Similarly, there is no statistically significant difference between two groups. Therefore, the test results do not support H3, which implies that the change  in  profit  requirement  (ROE  at  least  5%)  is  not  related  to  a  significant increase in earnings management.
Table 5
Comparisons of earnings management between Group 1 and Group 2 in year t−1 Model testTwo-sample t-test Median test Mann-Whitney U-testGroup 1DA(DCA) mean Group 2DA(DCA) meanp-value Group 1 DA(DCA) median Group 2DA(DCA) median p-value p-valueModels based on total accruals1. Modified Jones model0.0117 0.01900.8420 0.03150.0130 0.325 0.86592. Cashflow0.0089 0.02970.4597 0.03190.0211 0.697 0.8232Models based on current accruals 1. Current accruals0.0682 0.07950.7468 0.04820.0449 0.928 0.51322. Cashflow0.0785 0.08620.8302  0.06500.0570 0.928 0.6085
Earnings management and new listings
In  an  effort  to  enhance  the  quality  of  listed  firms,  regulators  have  imposed stricter  listing  requirement  by  increasing  capital  requirement  and  introduced  new profit requirement (ROE) after 15 September 2012. As opposed to tighter regulations,  the  institutional  setting  of  the  Vietnam  market  provides  evidence  that both groups have the same incentives to manipulate their earnings upward in pre-listing  year  to  its  maximum  level.  Newly  listed  companies  use  current  accruals to inflate earnings of pre-listing year in order to be eligible for listing on the HOSE without the impact of new regulations.
CONCLUSION
Literature   review   presents   several   motivations   for   earnings   management   practices around the event of share issuance and new listings. Attention is given to issuers on
 HOSE due to their inflation of earnings around new listing events. The   empirical   approach   uses   discretionary   accruals   to   measure   earnings   management.  Four cross-sectional  models,  including  two  total  accruals  models  and  two  current  accruals  models,  are  necessary  for  computing  the  discretionary  accruals proxies. The initial results provide empirical evidence for three hypotheses that firms tend to increase their earnings before listing. Based on estimates from four models  using  both  total  accruals  and  current  accruals,  parametric  and  non-parametric tests are used to examine the validity of three hypotheses. The research provides evidence to support the existence of earnings management in pre-listing year with significantly greater positive earnings management in current accrual models. However, when using models based on total accruals, there is insufficient evidence for the existence of the earnings management before listing. Besides, the empirical findings suggest that the accruals means and accruals medians are significantly higher in pre-listing year than those in post-listing years only when two models of current accruals are considered. Overall,  given  the  conflicting  results  in  previous  studies,  the  study  provides further  evidence  for  ongoing  debate  on  the  existence  of  earnings  management  phenomenon.  The  findings  are  in  line  with  literature  review  which  suggest that  HOSE-listed  firms  can  use  current  discretionary  accruals  to  deliberately manipulate earnings in an attempt to meet profit requirements for listing. These firms  then  show  a  falling  trend  of  earnings  management  in  post-listing  years. The  findings  agree  with  the  views  expressed  by  Teoh  et  al.  (1998a,  1998b), Dechow  and  Dichev  (2002),  and  Eiman  (2013)  in  explaining  the  use  of  current  discretionary accruals. According to Teoh et al. (1998b), current accruals are most easily subjected to manipulation by managers. In addition, current accruals are likely to be more flexible and important than long-term accruals in improving
earnings. Current accruals which occur frequently have higher degree of subjective judgment with regard to its estimation (Dechow & Dichev, 2002; Teoh et al., 1998b).Since 15 September 2012, HOSE has imposed new profit requirements for all new listings. By dividing sample firms into two groups, in which Group 1 consisting of firms listed before 15 September 2012 and Group 2 consisting of firms listed after that time, the results indicate that Group 1 and Group 2 are inflating their profits  in  pre-listing  year  similarly.  The  difference  between  the  earnings management of two groups is not significant in pre-listing year. In other words, the institutional setting of HOSE also demonstrates that two groups have the same incentives  to  manipulate  their  earnings  upward  in  listing  year  to  meet  the  pre-listing profit requirement.Finally, the study suggests that managers of newly listed firms in Vietnam attempt to  boost  their  earnings  in  the  year  preceding  the  listing  by  taking  advantage  of  current accruals. However, positive level of earnings management is not sustained in  post-listing  years.  Evidence  from  this  study  can  help  managers,  auditors,  market’s policy, and investors better understand the quality of financial reporting of newly listed firms.Despite the overall contribution, there are limitations in this study. First, this study is limited to the sample of listed firms in HOSE. Second, this study could only be generalised to similar market. In addition, the small sample is subjected to bias which stems from size limitation. Third, due to the lack of data in the years before  listing,  the  period  of  research  was  limited  to  only  one  year  prior  to  the  listing. This may be an inadequate length of time for data analysis. Finally, there are  some  problems  related  to  the  technique  of  measuring  earnings  management.  According to Fields et al. (2001), using only accrual-based earnings management method  may  not  capture  the  entire  level  of  earnings  management  behaviour.  In order to address the limitation, a more comprehensive approach to investigating earnings  management  around  listing  by  using  varied  earnings  management  techniques,  such  as  real  earnings  management,  would  be  a  potential  topic  for  future research.
ACKNOWLEDGEMENTS
This research is funded by the National Economics University, Hanoi, Vietnam.