[Research Contribution] The Impact of the Board of Management’s Characteristics on Earnings Quality of Vietnamese Listed Companies

15 May, 2025

Keywords: Earnings quality (EQ), Board of Management, Corporate governance characteristics, EQ properties, Multi-dimensional measurements, Listed companies, Effective business management, Sustainable profits

In the context of the financial market increasingly requiring transparency and sustainability, earnings quality (EQ) has become an important criterion to evaluate the efficiency and the reliability of Vietnamese listed companies. The Board of Management plays a key role in strategic planning and control of management activities, which can significantly impact EQ. Therefore, in this research, the UEH Mekong author, University of Economics Ho Chi Minh City (UEH) aims to clarify the impact of the Board of Management on EQ of Vietnamese listed companies in the 2016-2020 period, approaching this as a multi-dimensional measure that has not been mentioned in previous studies in Vietnam.

Earnings Quality (EQ)

EQ is determined from two views, one is from the view of the usefulness of decision making and one is based on economic platforms. Accordingly, profits are considered to be of high quality when reflecting the current efficiency of the enterprise’s current performance, capable of predicting the efficiency of future operations, and is a reliable measure for sustainable value, in accordance with the expectations of financial analysts and investors. On the other hand, from the perspective of creditors, EQ can be defined as an easy income to convert into cash flow and reflect the actual effectiveness of the manager.

Meanwhile, the user accurately defines the quality of profit in the sense of “no profit management”. The fact that managers actively adjust the profit number within the permissible scope of the accounting standards may falsify the usefulness of financial information, affecting the decision of investors and stakeholders. A continuous income level and high prediction ability is not necessarily a manifestation of high profit quality if it is the result of profit management behavior.

Managers may tend to manage income for various reasons, including pressure from the capital market, compensation and bonuses based on performance, as well as binding from the loan contract. These behaviors can significantly reduce the quality of profitability of the business.

The quality of profits is not merely accounting profits but also reflects the reliability, the stability and the sustainability of the financial figures announced. Different from previous studies using only one single measure, this research approaches the quality of profit from the multi -dimensional perspective from four separate attributes.

Persistence: the ability to maintain a stable profit over time, not affected by mutations from non -economic factors.

Predictability: the extent to which future profits can be forecasted based on current data.

Variability: the level of oscillation of profits over the periods, reflecting the stability of business activities.

Smoothing: the level of cohesion between current and future profits, showing the level of honesty in profit recognition.

The synthesis of all four attributes helps assess the quality of profits in a more comprehensive and objective way, as a basis for examining the impact of corporate governance factors.

Impacts of the characteristics of the Board of Management on EQ

The Board of Management in joint stock companies plays a key role in supervising the operating activities, ensuring effective allocation of investment capital, preventing power centrifuges and establishing a control mechanism and balance between interest groups. Each company will have a Board of Management, depending on the structural and composition characteristics, which will affect the ability to monitor and operate efficiency of the business including EQ.

The diversity in the Board of Management is considered a factor to improve the effectiveness of corporate governance, expressed in the aspects of professional skills, experience, scale, the percentage of independent members, the share between the CEO and the Chairman, and the proportion of females. In addition, intrinsic factors like business scale, financial leverage, etc. can also affect the quality of profit, according to results from empirical studies.

In Vietnam’s stock market, the number of listed companies must adjust the after-auditing financial statements is quite common, of which mainly adjust the profit criteria. This creates a significant concern for investors because the adjustment issue has a great influence on shareholder benefits and reduces the value of financial statements.

Regarding how to measure profit quality, most of the previous studies mainly use accruals quality or focus only on some of the single attributes of quality like sustainability, stability, prediction for measurement of profit quality. Studies on the relationship between the Board of Directors and the quality of profits in Vietnam remain limited, and have not fully exploited the multi-dimensional perspective in measurement.

In this study, the quality of profit is measured based on four attributes: Persistence, predictability, variability and smoothing, with a measure of synthetic profit quality to bring a multi -dimensional, deeper view of profit quality through empirical results.

Policy implications for Vietnamese listed companies and stakeholders

*For listed companies

The research results conclude that the profit quality of companies listed over the years from 2016 to 2020 was relatively low; it is necessary to have appropriate solutions to improve and improve quality more effectively. In addition, on the basis of the results of the impact of the Board of Management on profit quality, listed companies, especially the General Meeting of Shareholders, should pay more attention to the female structure, the scale, and the professional qualifications of members of the Board of Management. The construction of a Board of Management with a reasonable and diverse structure will contribute to improving the supervision capacity and quality of financial information, improving the quality of profitability of the business.

*For investors

This study has shown the scale of the Board of Management and the size of the business are two of the factors that have a positive impact on EQ, which serves as a useful indicator for investors in evaluating and selecting businesses. In the context of the increasingly focused financial markets for transparency and sustainable efficiency, investors should overcome the traditional approach based on pure profits, to switch to more deeply analysis of the true quality of profits, measured through multiple attributes. The update of knowledge and multi-dimensional analysis will be a key factor to help investors make strategic decisions more effectively.

*For the credit institutions

In the process of lending credit appraisal, banks need to combine multidimensional information in addition to profit targets and financial indicators. The greater the debt pressure is, the greater the increase in the profit adjustment motives are to make a good signal for the credit institutions. On the opposite side, when the credit institutions no longer see the profit target as an important basis to evaluate the ability to repay the debt, businesses will reduce the pressure to interfere in profits, contribute to improving the quality of profit of the business itself and reducing bad debts for the bank. Concurrently, credit institutions need to consider the characteristics of the Board of Management that affect EQ as a complementary information for capital issuance decisions.

*For authorities

In fact, some listed companies in Vietnam tend to adjust the financial statements after auditing, especially profit targets. In order to ensure the transparency and the stability of the financial market, the State Securities Commission also needs measures and sanctions to avoid information disturbance causing difficulties for investors. In addition, in order to support enterprises in the process of listing, management policies should aim to accompany, support and minimize pressure through flexible regulations and encourage transparency. Along with that, promoting deeper studies on corporate governance characteristics and the quality of financial statements will be an important basis for building a sustainable development stock market in Vietnam.

This research has provided empirical evidence of the influence of the Board of Management on EQ at listed companies in Vietnam. The profound insights from the research not only contributes to clarifying the role of the structure and the Board attributes for financial efficiency but also brings a useful reference basis for shareholders and management agencies in assessing and monitoring corporate governance activities. In particular, the study has contributed to the development of the concept of profit quality as a multi-dimensional measure including: sustainability, prediction, fluctuations and stability, which have not been mentioned comprehensively in previous studies in Vietnam.

The full-text research article on The Impacts of the Board of Management’s Characteristics on the Earnings Quality of Vietnamese Listed Companies can be accessed here.

Author group: Nguyen Hong Nga, Lam Thi Truc Linh, Nguyen Ngoc Tho, Tran Ngoc Hoa – University of Economics Ho Chi Minh City

This article is part of the series of research and application knowledge with the message “For A More Sustainable Mekong”, under the program “Research Contribution for All – Research for the Community” by UEH. UEH cordially to invite readers to the next UEH Research Insights.

News, photos: The authors, UEH Mekong Department of Admissions and Communications, UEH Department of Communications and Partnerships