Effects of financial characteristics on accounting conservatism of listed companies in Vietnam stock exchange

Hong, Nguyen Thi Phuong; My, Phan Thi Tra Article Effects of financial characteristics on accounting conservatism of listed companies in Vietnam stock exchange Cogent Business & Management Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Hong, Nguyen Thi Phuong; My, Phan Thi Tra (2024) : Effects of financial characteristics on accounting conservatism of listed companies in Vietnam stock exchange, Cogent Business & Management, ISSN 2331-1975, Taylor & Francis, Abingdon, Vol. 11, Iss. 1, pp. 1-24, https://doi.org/10.1080/23311975.2023.2289199 This Version is available at: https://hdl.handle.net/10419/325901 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Cogent Business & Management ISSN: 2331-1975 (Online) Journal homepage: www.tandfonline.com/journals/oabm20 Effects of financial characteristics on accounting conservatism of listed companies in Vietnam stock exchange Nguyen Thi Phuong Hong & Phan Thi Tra My To cite this article: Nguyen Thi Phuong Hong & Phan Thi Tra My (2024) Effects of financial characteristics on accounting conservatism of listed companies in Vietnam stock exchange, Cogent Business & Management, 11:1, 2289199, DOI: 10.1080/23311975.2023.2289199 To link to this article: https://doi.org/10.1080/23311975.2023.2289199 © 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group. Published online: 25 Jan 2024. Submit your article to this journal Article views: 4715 View related articles View Crossmark data Citing articles: 5 View citing articles Full Terms & Conditions of access and use can be found at https://www.tandfonline.com/action/journalInformation?journalCode=oabm20 Accounting, corporAte governAnce & Business ethics | reseArch Article Cogent Business & ManageMent 2024, VoL. 11, no. 1, 2289199 Effects of financial characteristics on accounting conservatism of listed companies in Vietnam stock exchange nguyen thi phuong hong and phan thi tra My school of accounting, university of economics Ho Chi Minh City, Vietnam ABSTRACT the research objectives is to analyze factors impacting on accounting conservatism such as growth opportunity, return on equity, sales growth, return on assets, capital intensity, investment opportunity, financial distress, financial leverage, global diversification and uncertainty environment. in this study, accounting conservatism is equal to non-operating accruals. the authors used balanced data collected from 379 listed companies in vietnam stock market in a 5-year period from 2017 to 2021. the authors compared 3 models including pooled ols, FeM and reM to choose the most appropriate one. the test results show that FeM is the most appropriate, but this model has the phenomenon of heteroscedasticity, so the authors used Fgls to test the hypotheses. the research results show that among the independent variables included in the model, there are five variables impacting on the accounting conservatism with statistical significance of 5%. the independent variable which is investment opportunity set has a positive impact on the accounting conservatism. in contrast, the independent variables including growth opportunities, return on assets, financial leverage, and uncertainty environment have a negative impact on the accounting conservatism. Besides, the other five variables of return on equity, sales growth, capital intensity, financial distress, global diversification have no impact on the accounting conservatism in terms of statistical significance. 1. Introduction Financial statements are a business manager’s explanation of the assets, capital, business situation, and cash flow of a business. information on financial reports is the basis for interested parties to make rational decisions. Financial characteristics include financial indicators such as growth opportunities, return on equity, sales growth, and return on assets, capital intensity, investment opportunity set, global diversification, and uncertainty environment. these indicators will show the financial health of the business, its development prospects and its future going concern. Financial characteristics, if problematic, will cause managers to consider the possibility of applying appropriate accounting policies to mitigate risks, hence investors will monitor more effectively the company’s performance, to keep the investment safe from possible future risks (saragih etal., 2022). According to ruch and taylor (2015), accounting conservatism is defined as ‘the tendency towards using policies and methods to understate the value of net assets with relation to their net economic value’. Besides, sreenu et al. (2022) argue that accounting conservatism is very important and essential. Additionally, hajawiyah etal. (2020) affirm that accounting conservatism is very important to be used to resolve uncertainties in the economic and business activities of enterprises. companies need to maintain sustainability with appropriate business strategies and policies to minimize the above difficulties and challenges. Applying accounting conservatism is a viable tool to overcome the above challenges and enhance the financial reporting quality. Because accounting conservatism © 2024 the author(s). Published by informa uK Limited, trading as taylor & Francis group. CONTACT nguyen thi Phuong Hong [email protected] school of accounting, university of economics Ho Chi Minh City, Vietnam. https://doi.org/10.1080/23311975.2023.2289199 this is an open access article distributed under the terms of the Creative Commons attribution License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. the terms on which this article has been published allow the posting of the accepted Manuscript in a repository by the author(s) or with their consent. ARTICLE HISTORY received 14 september 2023 revised 24 november 2023 Accepted 24 november 2023 KEYWORDS Accounting conservatism; financial characteristics; vietnam; financial statement; accruals; stock exchange SUBJECTS Financial Accounting; Accounting conservatism; Business; Management and Accounting REVIEWING EDITOR collins ntim, Accounting; southampton Business school, university of southampton, southampton, hampshire, united Kingdom of great Britain and northern ireland 2 n. t. phuong hong AnD p. t. trA MY plays an important role in minimizing asymmetric information, using accounting conservatism helps capital markets operate more efficiently. Accounting conservatism seems to be an important factor determining the financial reporting quality according to Watts (2003a, Alves, 2023), accounting conservatism reduces managers’ opportunistic behavior and compensates for discrepancies in financial reporting. hajawiyah etal. (2020) asserted that accounting conservatism is important to be used to resolve uncertainties in the economic and business activities of enterprises. Accountants should carefully handle and quickly record situations that lead to losses. cases that have the potential to generate profits will be delayed in recording until that situation occurs significantly. According to novari etal. (2021), it has been observed that the disclosure of financial report information must be based on the principle of accounting conservatism. Managers should be cautious of errors and fraud and should highlight all significant factors for investors and other users in the company’s reports. Accounting conservatism is an accounting principle requiring a high degree of verification before a company can recognize any profits. Mrad, (2022), companies complying with accounting conservatism will help investors trust the information disclosed, make the company reliable and have a good reputation in the financial markets, and enhance the possibility that companies will be listed in multiple stock markets such as the us stock market. According to pujiono et al. (2023), businesses can implement applying accounting conservatism into financial statement as a reaction to uncertain conditions which companies are facing. According to Basu (1997), from a theoretical perspective, positive accounting theory holds that companies can apply accounting skills, knowledge and understanding to apply appropriate accounting policies to address future events to minimize information asymmetry in recording ‘good news’ and ‘bad news’. conservatism does not define in an absolute manner but should be determined in a context through a certain factor. studies emphasize the impact of accounting conservatism on the balance sheet (consistently valuing assets at lower values) or its influence on the income statement (using stock returns as a measure of news). that the factors of financial characteristics affecting accounting conservatism is considered as an interesting researching topic. Accounting conservatism has received numerous researchers’ attention worldwide. several typical studies include Basu (1997), givoly and hayn (2000), Beaver and ryan (2000), Qiang (2007), Zhang (2008), Beatty et al. (2008), Xie (2015), ruch and taylor (2015), Banker et al. (2016), Dutta and patatoukas (2017), lin et al. (2018), ge et al. (2019), hajawiyah et al. (2020), Dai and ngo, (2021), Khalifa et al. (2023), etc. in vietnam, there are also studies related to accounting conservatism such as nguyen thi Bich thuy (2019), tang tri hung et al (2021), Doan thuy Duong (2022), le tuan Bach et al. (2022), vo thi thuc (2023), and so on. however, to the best of the authors’ knowledge so far, vietnam has only a small number of research on accounting conservatism, particularly, no any research on the influence of financial characteristics on accounting conservatism. therefore, this study objective is to analyze the impact of financial characteristics on accounting conservatism in the vietnamese context. to achieve this research objective, the research questions are posed as follows: What is the impact of financial characteristics on the accounting conservatism of companies listed on the vietnam stock market? some functions need to be proposed. First, adding a theoretical model on financial characteristics affecting accounting conservatism in the vietnamese context. second, the research results are a reference for future researchers related to this topic. third, the research results are a useful scientific basis for relevant subjects to make appropriate decisions such as business managers, investors, shareholders, state management agencies, and so on. 2. Background this research is driven with the covid-19 pandemic which has truly become the biggest concern ever for the economy, as most countries around the world have shut down, and the goods trade has been enhanced, leading to a wave of business bankruptcies that seriously impact the economies worldwide. Moreover, a series of global events such as the conflict between russia and ukraine, climate change, fluctuating natural gas energy sources have caused price instability, and have heightened uncertainty about future events. investors interested in accounting information have become more cautious, prudent, and risk-averse in investment matters. the aforementioned events further exacerbate the unpredictability of business trends and changing economic policies. they rely more on fundamental information where cogent Business & MAnAgeMent 3 the accounting information quality and related accounting disclosures in financial reports become more crucial for users of accounting information during a time when the global economy is facing significant challenges. Financial statements serve as an explanatory dashboard for corporate management and governance regarding the state of assets, capital sources, business conditions, and the cash flow, but these figures must be prepared based on accepted standards and principles. in addition, Zahro (2021) believes that managers presenting financial statements in an exaggerated way can cause confusion for users, affecting the decision making of relevant agencies. With such difficulties, companies must be careful and meticulous in preparing financial statements to attract investors and creditors as users of financial statements. Accounting conservatism has been applied for more than a hundred years and there have been a series of fierce controversies over the application and elimination of accounting conservatism in preparing and presenting financial statements. the iAsB (2018) has brought accounting conservatism back into the conceptual framework after its removal in 2010, showing the importance of applying accounting conservatism in preparing and presenting financial statements. vietnam is a developing country receiving attention from partners and major investors worldwide. therefore, businesses in vietnam need to create a transparent business environment to attract investment from countries and corporations and promote their own potential strength. in addition, the vietnamese economy needs to create an effective capital flow so that the stock market can support and promote the development of businesses. in addition, vietnam is on the path to mandatory iFrs application by 2025. therefore, information presented on financial reports needs to be more transparent and of higher quality to provide users with rational decision-making purposes, while accounting conservatism has an image of quality information on the financial statements. Financial characteristics are important indicators of a business to evaluate its ability to continuously operate and develop sustainably. Factors of good financial characteristics will increase expectations for the business about development opportunities and future cash flow. therefore, research on the relationship between factors of financial characteristics and accounting conservatism in the context of businesses listed on the stock market in vietnam is truly necessary. 3.Theoretical literature review the relationship between financial characteristics and accounting conservatism is explained by a number of fundamental theories such as agency theory, positive accounting theory, signal theory, contractual theory. 3.1. Agency Theory Agency theory is one of the fundamental theories in economic research. this theory is used to explain the issue of asymmetric information between managers and relevant parties. the groundwork for this theory was laid by ross (1973), and it was further developed by Jensen and Meckling in 1976. this theory evolves in the context of differing cooperative agreement relationships among managers, shareholders, and profits, and is viewed as a relationship between managers and shareholders. here, there is a divergence of interests among company owners, investors, and managers. owners or investors, who do not want to incur high taxes, would lose out on the profits they have earned. on the other hand, managers are concerned about highlighting profits to maintain their current positions. Due to these differing interests, the principle of conservatism needs to be applied to achieve the interests of all parties. Managers apply the principle of accounting conservatism in providing financial reporting information for the company. therefore, administrators need to establish mechanisms to monitor managerial behavior in recording assets, capital sources, revenue, costs, and profits in order to enhance the quality of financial reporting. Additionally, when a company has numerous investment opportunities, it may face high agency costs. thus, applying accounting conservatism can help mitigate information asymmetry and adjust the manipulation of managerial interests in line with shareholder interests. 4 n. t. phuong hong AnD p. t. trA MY Furthermore, in the event of financial crises such as the risk of bankruptcy, the agency costs also increase as the reliability of financial statements might be questioned. Accounting conservatism will help reduce agency costs by mitigating information asymmetry and enhancing the financial reporting quality. 3.2. Positive accounting theory the empirical accounting theory was studied by Watts and Zimmerman (1986). this theory aims to explain and predict various phenomena by applying accounting skills, knowledge, and understanding to use appropriate accounting policies to address future situations. this theory consists of three identified hypotheses: (1) the bonus plan hypothesis, (2) the debt covenant hypothesis, and (3) the political cost hypothesis. Zhang (2008) pointed out that accounting conservatism benefits accounting information users by providing timely signals of default risk and uncertainty. this theory helps explain companies’ investment opportunities with accounting conservatism to reduce earnings volatility. Additionally, companies using more operating assets generate higher sales. According to pujiono et al. (2023), when uncertainty conditions exist in a business, managers need to apply suitable accounting policies to meet the assumption of continuous operations in the future. saragih et al. (2022) assert that higher capital intensity leads to more efficient utilization of all assets for revenue generation. this theory is also explained by the fact that higher capital usage results in higher political costs and a greater likelihood of reduced profits and more cautious financial reporting. 3.3. Signal theory signal theory explains about the assymetric information between buyers and sales. Wolk et al. (2001) assumes that managers’ report positive signals to stakeholders through financial statement with a view to reducing asymmetric information circumstances. When applying accounting conservatism, high-quality profit is achieved. companies with significant investment opportunities often have many opportunities to invest in high-profit projects but with elevated risks as well (herma et al., 2023). therefore, conservative accounting is applied in order to mitigate the potential risks, ensure financial stability, and provide timely information. 3.4. Contractual theory contracts have governed economic activities since ancient times, Jensen and Meckling (1976) first introduced the theory of contracts. this theory studies how agreements and constraints within contracts are designed to minimize issues of asymmetric information between parties. A contract cannot predict all future situations. Accounting-related factors are indispensable in contracts. According to Dang and tran (2020), accounting figures in contracts are often adjusted to meet the conditions of the contract. According to this theory, as a company’s financial leverage increases, the application of accounting conservatism also increases. 4. Empirical literature review and hypotheses development 4.1. Growth opportunities and accounting conservatism growth opportunities are an opportunity that companies will invest in profit-making field. Based on Agency theory, proxy conflict between shareholders and managers will happen when the company has high growth rate. Businesses with hidden reserves using for investment will have a tendency to apply accounting conservatism. the trade advantage is when the market value is higher than the book value of equity. According to holiawati and Julianty (2017), when companies have growth opportunities, it tends to invest in possibly profit-making category in the future instead of distributing profits by receiving dividends. the relationship between growth opportunities and accounting conservatism has also been conducted by a number of studies, but the research results are also different. According to sari cogent Business & MAnAgeMent 5 (2020), holiawati and Julianty (2017), development opportunities positively affect accounting conservatism, while nuraeni and tama (2019), penman and Zhang (2002) has the opposite effect. Besides, the studies of nafi’lnayati Zahro (2021) were not influential. it is such strong evidence that it is the basis for the author to propose the first hypothesis as follows: h1: growth opportunity has a positive effect on the accounting conservatism. 4.2. Return on equity and accounting conservatism return on equity is the company’s ability to generate profits from its capital. A higher profitability indicates a larger company value. the company must present profit information that is not excessively volatile as profitability increases. Accounting conservatism is a principle that needs to be applied as part of earnings management to present stable profit figures. the signaling theory explains that managers will provide a signal of high profitability in the form of the company’s future growth. high profits result in retained earnings, and this positively affects the return on equity, leading to an accounting conservatism approach according to Martani and Dini (2010) and el-habashy (2019). this demonstrates that profitability has a positive impact on accounting conservatism. the relationship between return on equity and accounting conservatism has also been conducted by a number of studies, but the research results are also different. According to research by Mohammand Fawzi (2021), return on equity positively affects accounting conservatism, while Abu nassar and Mohammad Al twerqi (2021), pandey (2004), Artiach and clarkson (2013), and lara etal. (2011) found that return on equity negatively affects accounting conservatism. Mohammadi etal. (2013) and Martani and Dini (2010) stated return on equity was not influential. Based on the above results, and based on the signal theory explanation, the author proposes the next hypothesis as follows: h2: return on equity has a positive effect on the accounting conservatism. 4.3. Sales growth and accounting conservatism sales growth is the current change of revenue of one company in comparison to the previous period, which can be seen in the income statement. According to Barton etal. (1989), sales growth reflects the success of investment in the past and can be used to estimate thriving factors in the future. if the annual sales growth is positive, the lucrative potential can be higher. if the revenue increases significantly, the future value of money (Fv) of receivables from customers or immediately in cash will go up. therefore, companies with positive sales growth get investors’ attention. According to rahayu and indra gunawan, (2018), based on positive accounting theory, the increased revenue results in the increased political cost. in order to reduce profits, accounting will apply conservatism when the revenue soars. Ahmed and Duellman (2011) also found a positive relationship between sales growth and accounting conservatism. the relationship between sales growth and accounting conservatism has also been conducted by a number of studies, but the research results are also different. rahayu and indra gunawan (2018) found that sales growth positively affects accounting conservatism, while goffar and Muhyarsyah, (2022) stated that sales growth negatively affects accounting conservatism. Besides, Achyani and lovita (2021) concluded sales growth had no effect. the agency theory together with previous studies serves as the basis for the author to put forward the next hypothesis about the sales growth and accounting conservatism. h3: sales growth has a positive effect on the accounting conservatism. 4.4. Return on assets and accounting conservatism return on assets is the measure of how many profits that one unit of assets generates. return on assets represents a company’s ability to earn profits from its assets (e.g. by selling assets to generate earnings). this ratio serves as a tool to analyze a company’s management efficiency, as the return on assets 6 n. t. phuong hong AnD p. t. trA MY indicates the potential to generate profits. According to Ahmed et al. (2002), a profitable company can be rewarded with lower debt costs. A higher return on assets reflects better financial efficiency and demonstrates the ability to manage existing assets to generate profits. therefore, applying accounting conservatism is necessary to recognize the return on assets in order to reduce political costs. the relationship between return on assets and accounting conservatism has also been conducted by a number of studies, but the research results are also different. Mohammand Fawzi (2021), octavia (2022) found that return on assets positively affects accounting conservatism, while Martani and Dini (2010) claimed that return on assets negatively affects accounting conservatism. Besides, goffar and Muhyarsyah (2022), nur solichah and Fachrurrozie (2019) claimed return on assets do not affect accounting conservatism. the next hypothesis is given as follows: h4: return on assets has a positive effect on the accounting conservatism. 4.5. Capital intensity and accounting conservatism capital intensity is the total amount of company’s capital known as assets and shows the effective level when using company’s assets for making profits. companies with high-using capital intensity efficiently use their assets to increase profits. Zmijewski and hagerman (1981) said that enterprises with high-using capital intensity would have high profits, leading to suffer from a number of political costs (taxation) and cutting down the ability to earn an income by applying accounting principles. By contrast, Watts and Zimmerman (1990) convinced that it was because of managers who urged to reduce profits so as to reduce the hidden political costs, financial statements were expected to be conservative. the relationship between capital intensity and accounting conservatism has also been conducted by a number of studies, but the research results are also different. According to research of nafi’lnayati Zahro (2021), Achyani and lovita (2021), putri et al. (2020), capital intensity positively affects accounting conservatism. Besides, sholikhah and Baroroh (2021) stated that capital intensity does not affect accounting conservatism. thus, the h5 hypothesis in this study is: h5: capital intensity has a positive effect on the accounting conservatism. 4.6. Investment opportunity set and accounting conservatism the investment opportunity set refers to decisions regarding investment in assets impacting asset growth and also represents options for future investments. According to agency theory, conflicts between managers and shareholders can be reduced through investment opportunities achieved by managerial decisions. on the other hand, signaling theory indicates that managers can attract investors through investment opportunity set; investors desire more investment opportunity set signals and have more specific evaluations about the company’s investment needs. increasing investment opportunity set will attract investors willing to invest in the company. Managerial investment decisions directly affect the company’s value, thereby influencing stock prices. in fact, high stock prices impact the book value-to-market value ratio, which is a representation of accounting conservatism. researchers such as Murwaningsari and rachmawati (2017), herma etal. (2023), have found a positive relationship between investment opportunity set and accounting conservatism. the relationship between investment opportunity set and accounting conservatism has also been conducted by a number of studies, but the research results are also different. According to research sholikhah and Baroroh, (2021), Murwaningsari and rachmawati (2017), investment opportunity set positively affects accounting conservatism. Besides, goffar and Muhyarsyah (2022) concluded that investment opportunity set does not affect accounting conservatism. thus, the h6 hypothesis in this study is: h6: investment opportunity set has a positive effect on the accounting conservatism. 4.7. Financial distress and accounting conservatism Financial distress of a company is a major concern in academia and practice, not only internally (for managers and shareholders) but also externally (for investors, creditors, etc.). Financial distress or cogent Business & MAnAgeMent 7 financial crisis refers to a situation where a company faces financial difficulties leading to bankruptcy, evidenced by periods of reduced net income (pujiono etal., 2023). currently, there is not a universally agreed-upon definition of financial distress, resulting in various viewpoints. According to Dinh Khanh nam (2022), states of financial distress include failure, illiquidity, default, bankruptcy, and dissolution. however, hashi (1997) noted that these states could be challenging to observe in reality. According to ohlson (1980), strong corporate resources were more pronounced as a company’s scale increases. in empirical accounting theory, managers focus on reducing the level of accounting conservatism when addressing high levels of financial distress. poor financial reporting could threaten managers as it might risk contract violations. Financial difficulties could lead to managerial dismissals due to ineffective management. Financial distress was a scenario where financial problems were evident, leading managers to reduce the level of accounting conservatism. When facing with uncertain conditions, companies need to exercise caution in reducing economic events, potentially benefiting stakeholders interested in financial statements. Altman (1968) developed an early warning model for financial distress using the Z-score. poor governance mechanisms could contribute to financial distress. Financial distress could erode investor confidence, decrease company value, and reduce the market-to-book ratio. Accounting conservatism enhanced income quality and decreased the likelihood of financial distress. chen’s study (2009) found an inverse relationship between accounting conservatism and financial distress. the relationship between financial distress and accounting conservatism has also been conducted by a number of studies, but the research results are also different. According to research of Kao and sie (2016), sari (2020), pujiono et al. (2023), financial distress positively affects accounting conservatism, while herma et al. (2023), chen etal. (2009), sholikhah and suryani (2020) found that financial distress negatively affects accounting conservatism. Besides, Meilinda etal. (2022) stated that financial distress does not affect accounting conservatism. Along with the argument from the agency theory, the author proposes the next hypothesis as follows: h7: Financial distress has a negative effect on the accounting conservatism. 4.8. Financial leverage and accounting conservatism Financial leverage is a financing tool involving debt. When a company borrows debt, creditors always anticipate earnings returns from the borrowed funds. Agency theory explains the conflict between managers, shareholders, and investors, and managers are also monitored by creditors. For creditors and shareholders, a company with high financial risk tends to have high financial leverage. in positive accounting theory, a company with high leverage tends to shift future profits to the present, limiting the impact of debt covenants on the company’s value. if a company has high financial leverage, it can reduce its appeal to investors due to concerns about repayment risk, unless attractive and convincing business plans are presented to investors. sajid etal. (2016) noted that high-growth companies can utilize leverage for investment as they have sufficient cash flows to mitigate risks associated with leverage. A decrease in a company’s attractiveness would lead to reduced company and stock values, accordingly decreasing the market-to-book ratio. A lower ratio indicates less conservatism. According to Ahmed and Duellman (2007), higher leverage leads to higher potential conflicts between shareholders and equity holders, impacting the need for conservatism. When funded through debt, managers concentrated to present ‘favorable’ financial reports when asset values and profits increased to reassure creditors. researchers like Ahmed and Duellman (2007), gigler et al. (2009), geimechi and Khodabakhshi (2015) found an inverse relationship between financial leverage and accounting conservatism. the relationship between financial leverage and accounting conservatism has also been conducted by a number of studies, but the research results are also different. According to the study ge et al. (2019), Dang and tran (2020), octavia, (2022), pujiono etal. (2023), financial leverage positively affects accounting conservatism, while Khalifa et al. (2022) claimed that financial leverage negatively affects accounting conservatism. Besides, Meilinda et al. (2022) and nur solichah and Fachrurrozie (2019) stated that financial leverage does not affect accounting conservatism. thus, the h8 hypothesis in this study is: h8: Financial leverage has a negative effect on the accounting conservatism. 14 n. t. phuong hong AnD p. t. trA MY Breusch and pagan lagrangian multiplier test for random effects ACC MB FIRM t Xb u FIRM e FIRM t_, , [] = + [] + [] estimated results: Var sd = sqrt(Var) ACC_NAC 0.1949373 0.4415171 e0.151283 0.3889512 u8.57e-06 0.0029279 test: var(u) = 0 chibar2(01) = 0.99 prob > chibar2 = 0.1597 consequently, from the combined results of the tests comparing the three models pooled ols, FeM and reM, it is shown that the estimation of FeM is the most suitable. table 8 below summarizes the model selection tests: pooled ols, FeM and reM. After determining that FeM model is the most appropriate among pooled ols, FeM and reM models, the authors test the model assumptions such as no multicollinearity phenomenon, distributed residuals, normal distribution, constant variance and no auto-correlation. the test results are shown in the appendix, specifically: All the viF values of each independent variable of the model are less than 4, showing that there is no multicollinearity. the shape of the distribution chart of the residuals shows that the residuals have a normal distribution. Additionally, the result shows prob > chi2 = 0.0000 (with statistical significance of 1%), so this model has heteroscedasticity phenomenon. At the same time, the results show that F(1, 373) = 0.523 and prob > F = 0.4701 (no persistently significant at 5% level) showing that there is no the auto-correlation. thus, one assumption has been violated: constant variance. to solve the violation of this assumption, the authors perform Fgls in order to test the proposed hypotheses. 6.2.5. Beta coefficient results and statistical significance the results from table 9 below show among the independent variables included in the model, there are five variables impacting on the accounting conservatism with statistical significance of 5%. the independent variable which is investment opportunity set has a positive impact on the accounting conservatism. the independent variables have a negative impact on the accounting conservatism including growth opportunities, return on assets, financial leverage, uncertainty environment. the other five variables of return on equity, sales growth, capital intensity, financial distress, global diversification have no impact on the accounting conservatism in terms of statistical significance. After conducting the Fgls model, the results show that 5 out of the 10 variables have an impact on accounting conservatism. Among these variables, growth opportunities, return on assets, financial leverage and uncertainty environment have a significant inverse effect at the 1% and 5% levels. the investment opportunity set variable has a positive impact with a significance level of 1%. however, the variables return on equity, sales growth, capital intensity, financial distress and global diversification do not have an impact on accounting conservatism. Based on the above analysis results, the authors summarize the results of hypothesis testing as follows: From the results of tables 9 and 10, it can be seen that the influence of financial characteristics on accounting conservatism is as follows: 6.2.6. Growth opportunities and accounting conservatism the growth opportunity (gro) has a significant inverse impact on accounting conservatism at a significance level of less than 5%, with a coefficient of -0.006. this implies that companies with greater growth Table 8. summary of Pooled oLs, FeM and ReM model tests. test Pooled oLs and ReM Pooled oLs and FeM FeM and ReM F-test F (378,1506)=1.42 Prob > F = 0.0000 Breusch-Pagan test Chibar2(01)=0.99 Prob > F = 0.1597 Hausman test not done Conclusion select Pooled oLs select FeM cogent Business & MAnAgeMent 15 opportunities tend to exhibit less conservative reporting. According to the explanation of proxy theory, the higher the growth opportunity, the higher the accounting conservatism. however, this result shows the opposite direction. this study aligns with the research conducted by nuraeni and tama (2019), penman and Zhang (2002). however, it contradicts the findings of sari (2020), holiawati and Julianty (2017). Additionally, the study by nafi’lnayati Zahro (2021) found no significant impact on accounting conservatism. 6.2.7. Return on equity and accounting conservatism the return on equity (roe) does not have an influence on accounting conservatism. this implies that even companies with greater growth opportunities do not influence the application of accounting conservatism. the study by Mohammadi etal. (2013), Martani and Dini (2010) aligns with the results of this research, indicating no impact on accounting conservatism. this is not consistent with signaling theory, proxy theory and the results of some previous studies. Managers need to exercise prudence so as not to reduce profits and harm shareholders’ interests. Besides, the study by Mohammand Fawzi (2021) found a positive impact, whereas the research by Abu nassar & Mohammad Al twerqi, pandey (2004), Artiach and clarkson (2013) reported a negative impact. 6.2.8. Sales growth and accounting conservatism the revenue growth (grs) does not have an impact on accounting conservatism, with coefficients of 0.002, respectively. this implies that revenue growth does not significantly influence the application of conservative reporting by businesses. companies always promote sales to achieve the expected profits Table 9. Regression results FgLs estimate of model. aCC_naC Coef st.err t-value p-value [95% Conf interval] sig gRo −0.006 0.003 −2.23 0.026 −0.012 −0.001 ** Roe −0.04 0.024 −1.64 0.1 −0.088 0.008 gRs 0.002 0.002 1.20 0.232 −0.001 0.005 Roa −0.738 0.057 −12.92 0 −0.85 −0.626 *** Cin 0 0 0.44 0.657 0 0 ios 0.047 0.011 4.18 0 0.025 0.069 *** ZCo 0 0.006 0.08 0.936 −0.011 0.012 LeV −0.046 0.013 −3.65 0 −0.07 −0.021 *** gDi 0.01 0.007 1.45 0.147 −0.003 0.023 uou −0.103 0.016 −6.46 0 −0.134 −0.072 *** Const. 0.066 0.012 5.71 0 0.043 0.089 *** Mean dependent var −0.053 sD dependent var 0.442 number of obs 1895 Chi-square 381.190 ***p < 0.01, **p < 0.05, *p < 0.1. Table 10. summary of hypothesis testing results. Hypothesis Hypothetical content Related theories expected Results H1 growth opportunities has a positive effect on the accounting conservatism Positive accounting theory + – H2 Return on equity has a positive effect on the accounting conservatism signal theory + 0 H3 sales growth has a positive effect on the accounting conservatism agency theory + 0 H4 Return on assets has a positive effect on the accounting conservatism agency theory + – H5 Capital intensity has a positive effect on the accounting conservatism Positive accounting theory + 0 H6 investment opportunity set has a positive effect on the accounting conservatism signal theory agency theory Positive accounting theory + + H7 Financial distress has a negative effect on the accounting conservatism agency theory – 0 H8 Financial leverage has a negative effect on the accounting conservatism signal theory agency theory Contractual theory – – H9 global diversification has a positive effect on the accounting conservatism signal theory + 0 H10 uncertainty environment has a positive effect on the accounting conservatism agency theory + – Notes: (+) Positive effect, (-) negative effect, (0) no effect. 16 n. t. phuong hong AnD p. t. trA MY of shareholders and investors. however, there is no link between higher sales and managers must apply accounting conservatism, which proves that managers are only interested in achieving goals to satisfy shareholders and investors ignore caution. this study is consistent with the research by Achyani and lovita (2021), but contradicts the findings of rahayu and indra gunawan (2018) which found a positive impact, and the research by goffar and Muhyarsyah (2022) which reported a negative impact on accounting conservatism. 6.2.9. Return on assets and accounting conservatism the return on assets (roA) has a significant inverse impact on accounting conservatism at a significance level of less than 1%, with a coefficient of –0.738. this implies that as the return on assets increases, companies tend to report less conservatively. According to positive accounting theory, when businesses are in the process of profit growth, increased profits will encourage companies to apply accounting conservatism to reduce income to avoid rising costs. this study aligns with the research conducted by Mohammand Fawzi (2021), octavia (2022). however, it contradicts the findings of Martani and Dini (2010). Additionally, the research by goffar and Muhyarsyah (2022), nur solichah and Fachrurrozie (2019) found no significant impact on accounting conservatism. 6.2.10. Capital intensity and accounting conservatism the capital intensity (cin) does not have an impact on accounting conservatism, with a coefficient of 0.000. this implies that the capital intensity does not significantly influence the application of conservative reporting by businesses. this result is not consistent with positive accounting theory because according to this theory, assets will generate revenue, and high capital intensity will cause large political costs. in fact, the more accounting conservatism companies apply, the study results were not influential. this study aligns with the research by sholikhah and Baroroh (2021). however, it contradicts the findings of nafi’lnayati Zahro (2021), Achyani and lovita (2021), putri et al. (2020) which found a positive impact on accounting conservatism. 6.2.11. Investment opportunity set and accounting conservatism investment opportunity set (ios) has a positive impact on accounting conservatism at a significance level of less than 1%, with a coefficient of 0.047. this implies that companies with more investment opportunities can choose to report more conservatively. this study is consistent with signaling theory. companies with high profitability prospects in the future will increase investment opportunities, making stock value go up, which will lead to the fact that the ratio of market value divided by book value will increase significantly. Accounting conservatism is also more applied, enabling managers to grasp the business situation, make predictions about the company’s performance and future investment decisions in the hope of bringing high profits. this result is corresponded to the research of sholikhah and Baroroh (2021), Murwaningsari and rachmawati (2017), but the research of goffar and Muhyarsyah (2022) does not there is an impact of investment opportunity set on accounting conservatism. 6.2.12. Financial distress and accounting conservatism Financial distress (Zco) does not have an impact on accounting conservatism, with a coefficient of 0.000. this implies that financial distress does not significantly influence the application of conservative reporting by businesses. this study is contrary to positive accounting theory and because according to positive accounting theory, companies will reduce their application of accounting conservatism when financial stress increases. signaling theory suggests that companies will apply high caution when the company faces financial difficulties to reduce information asymmetry and generate quality profits to build trust with creditors and investors. this study aligns with the research by Meilinda et al. (2022). however, it contradicts the findings of Kao and sie (2016), sari (2020), which found a positive impact, and the research by herma etal. (2023), chen etal. (2009), sholikhah and suryani (2020), which reported a negative impact on accounting conservatism. cogent Business & MAnAgeMent 17 6.2.13. Financial leverage and accounting conservatism Financial leverage (lev) has a significant inverse impact on accounting conservatism at a significance level of less than 1%, with a coefficient of -0.046. therefore hypothesis h8 is accepted. external capital financing in the form of debt will create a relationship between managers and creditors according to delegation theory. According to the research result, the higher the leverage value, the less cautious the manager is. the manager tries to increase information asymmetry to hide the ability to manipulate profits or over-presenting assets to demonstrate the ability to pay all debts. this implies that lower financial leverage corresponds to more conservative reporting by companies. this study aligns with the research by ge et al. (2019), Dang and tran (2020), octavia (2022), which found a positive impact. however, the research by Khalifa et al. (2022) reported a negative impact. Besides, the research by Meilinda et al. (2022), nur solichah and Fachrurrozie (2019), Aburisheh et al. (2022), Mrad (2022) found no significant impact on accounting conservatism. 6.2.14. Global diversification and accounting conservatism global diversification (gDi) has no impact on accounting conservatism, with a coefficient of 0.01. this means that whether companies have revenue from international source or not does not affect the choice of applying accounting conservatism reporting. When doing business in different geographical environments, we will face risks that we do not face domestically, but these risks do not affect the application of accounting conservatism. 6.2.15. Uncertainty environment and accounting conservatism the uncertainty operating environment (uou) has an inverse impact on accounting conservatism at a significance level of less than 1%, with a coefficient of -0.103. this is contrary to expectations. this implies that as the level of uncertainty in the operating environment increases, companies tend to report less conservatively. When the environment is uncertain with high risk, conversely, information asymmetry and the need for careful accounting practices are reduced, and the benefits of debt transactions will become more apparent (habib & hossain, 2013). the findings of this study are linked to the research conducted by cui etal. (2023) and Marziyeh hejranijamil etal. (2020), which found a positive impact on accounting conservatism. 6.3. Additional test the authors further test the above model with the measurement of the accounting conservatism variable according to another measurement method based on the ratio of market value to book value (Acc_MB) of Beaver and ryan (2000) and then extended by Beatty etal. (2008), based on market value divided by book value. the accounting conservative measure (Acc_BM) model captures the difference between the book value and the market value of a firm’s total net assets. the authors perform data analysis techniques to select the most appropriate estimation model, and then test the model assumptions such as no multicollinearity phenomenon, distributed residuals, normal distribution, constant variance, and no autocorrelation. the results show that the FeM model is the most suitable, and at the same time, has the phenomenon of heteroscedasticity and autocorrelation. therefore, the authors use Fgls in order to test the proposed hypotheses. the research results (table 11) show that out of 10 tested factors, 5 factors have results similar to those of testing the model with conservative accounting measurement based on non-operating accrual of givoly and hayn (2000). specifically, financial leverage and uncertainty environment have a negative impact on accounting conservatism. in contrast, sales growth, financial distress, and global diversification have no impact on accounting conservatism.the remaining factors have results dissimilar to those of testing the model with accounting conservatism measures based on non-operating accrual of givoly and hayn (2000), which are growth opportunities, return on assets and capital intensity which have a positive impact. in the same direction, return on equity has a negative impact and investment opportunity set has no impact on accounting conservatism. 18 n. t. phuong hong AnD p. t. trA MY thus, the additional test results show that 5 out of 10 factors included in the test have similar results for two methods of measuring accounting conservatism which are measurements based on the ratio of market value to book value by Beaver and ryan (2000) and measurement based on nonoperating accrual by givoly and hayn (2000). 7. Summary and conclusions the main objective of the study is to analyze the effect of financial characteristics on accounting conservatism. the research results show that out of the 10 factors tested, there are 5 factors affecting accounting conservatism, specifically, growth opportunities, return on assets, financial leverage, and environment. there is certainly a negative influence and investment opportunities have a positive influence on accounting conservatism. the remaining factors including return on equity, sales growth, capital intensity, financial distress and global diversification have no influence on accounting conservatism. thus, based on these results, the authors propose some implications as follows: the careful application of accounting conservatism by businesses in preparing and presenting financial statements will increase the usefulness of their financial statements. however, the above empirical research results show that there are 5 influencing factors that affect accounting conservatism. therefore, state management agencies need to strengthen the promulgation of relevant regulations so that businesses strictly comply and are not influenced by any motive. independent auditors refer to these research results in performing financial statement audits, especially in risk assessment procedures. in addition, investors, suppliers, banks, etc. refer to these research results, specifically the factors affecting accounting conservatism, and the factors not affecting the accounting conservatism of companies to evaluate the usefulness of information in financial statements, and then make rational decisions. in addition, under uncertain conditions, business managers must be cautious in making decisions, ensuring the usefulness of information on financial statements provided by the business without being affected by a number of factors of financial characteristics, otherwise the business can create losses that must be borne by shareholders, creditors, investors, etc. this requires managers to have knowledge and understanding of accounting to apply appropriate policies to minimize risks in the business process. this study collects a sample of 379 companies listed on the vietnamese stock market in the 5-year period 2017–2021. Future studies can increase the sample size and extend the sample period. in addition, this study only focuses on factors that belong to the main characteristics of the company. Future studies can examine other groups of factors such as corporate governance characteristics and ownership structure and characteristics of the company, etc. Author contributions Both authors were involved in the conception and design, analysis and interpretation of the data; the drafting of the paper, revising it critically for intellectual content; and the final approval of the version to be published; and both authors agree to be accountable for all aspects of the work. Table 11. Regression results FgLs estimate of model (aCC_MB). aCC_MB Coef st.err t-value p-value [95% Conf interval] sig gRo 0.415 0.005 84.05 0 0.405 0.424 *** Roe −0.138 0.051 −2.72 0.007 −0.237 −0.039 *** gRs −0.002 0.002 −1.37 0.17 −0.005 0.001 Roa 1.453 0.13 11.15 0 1.198 1.709 *** Cin 0 0 2.00 0.045 0 0 ** ios −0.033 0.034 −0.98 0.327 −0.1 0.033 ZCo −0.005 0.006 −0.77 0.442 −0.016 0.007 LeV −0.493 0.024 −20.69 0 −0.54 −0.446 *** gDi 0.013 0.01 1.30 0.192 −0.007 0.033 uou −0.064 0.022 −2.89 0.004 −0.107 −0.02 *** Constant 1.028 0.017 59.04 0 0.994 1.062 *** Mean dependent var 1.545 sD dependent var 0.898 number of obs 1895 Chi-square 10335.583 ***p < .01, **p < .05, *p < .1. cogent Business & MAnAgeMent 19 Disclosure statement All authors declare that they have no conflict of interest. Informed consent informed consent was obtained from all individual participants included in the study. We have used the stata 16 software to analyze the data of our research and we have obtained a copyright license of this stata 16 software. Funding this research is funded by university of economics ho chi Minh city, vietnam (ueh). About the author Nguyen Thi Phuong Hong is a phD and main lecturer of school of Accounting, university of economics ho chi Minh city. her main research areas include issues related to Accounting, Auditing, and tax. ORCID nguyen thi phuong hong http://orcid.org/0000-0003-0304-5549 phan thi tra My http://orcid.org/0009-0002-5317-9203 Data availability statement Data will be made available on reasonable request. References Abu nassar, M., & Mohammad Al twerqi, h. (2021). Accounting conservatism and company’s profitability: the moderating effect of ownership concentration. Jordan Journal of Business Administration, 17(4), 1–24. Aburisheh, K. e., Dahiyat, A. A., owais, W. o., Al shanti, A. M., & AlQudah, l. A. 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Journal of Accounting and Economics, 3(2), 129–149. https://doi.org/10.1016/0165-4101(81)90010-0 cogent Business & MAnAgeMent 23 Appendix Testing the defects of the model due to the violation of the assumptions (1) The independent variables are not correlated with each other (no multicollinearity) the author uses a method to determine the common multicollinearity using the variance exaggeration factor viF. if an independent variable has a viF greater than or equal to 10, then that variable is said to have multicollinearity with the remaining independent variables. the viF results are as follows: According to the results in table A1 above, all the viF values of each independent variable of the model are less than 4, which show that there is no multicollinearity. (2) Assumption of a normal distribution of residuals through the shape of the distribution chart of the residuals (Figure A1), it shows that the residuals in this research model have a normal distribution. (3) Assumptions that the variance of the error is constant to detect whether there is a phenomenon of variance in the model, the author has performed a constant variance test using the Modified Wald test using stAtA 16 software, the results are as follows (table A2). Table A1. ViF value of independent variables. ViF 1/ViF Roa 1.864 0.536 Roe 1.385 0.722 gRo 1.257 0.796 uou 1.253 0.798 LeV 1.14 0.877 gRs 1.139 0.878 gDi 1.035 0.966 ZCo 1.029 0.972 Cin 1.025 0.976 ios 1.006 0.995 Mean VIF 1.213 source: own elaboration. Figure A1. Regression standardized residual. source: own elaboration Table A2. Heteroskedasticity test result. Modified Wald test for groupwise heteroskedasticity in fixed effect regression model H0: sigma(i)^2 = sigma^2 for all i chi2 (374) = 2.0e + 06 Prob > chi2 = 0.0000 source: own elaboration.