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Tax rate cuts

The effects of state ownership and on accounting
tax rate cuts on accounting conservatism

conservatism: evidence
from Vietnam 197
Ben Le and Paula Hearn Moore Received 24 December 2020
Revised 3 July 2021
University of Tennessee at Martin, Martin, Tennessee, USA Accepted 10 November 2021

Abstract
Purpose – The purpose of this paper is to examine the joint effects of state ownership and tax rate cuts on
accounting conservatism, considering the different levels of foreign ownership in the context of Vietnam.
Design/methodology/approach – The paper uses ordinary least squares regressions and a data set of
405 firms covering the period 2007 to 2019. The manuscript uses three measures of accounting conservatism:
Basu’s 1997 timeliness of earnings, Basu’s 1997 earnings persistence and the book-to-market ratio.
Findings – State-owned enterprises (SOEs) adopt less accounting conservatism than non-SOEs; however,
the result is only robust in firms with foreign ownership being lower than the foreign ownership median.
Firms increase accounting conservatism in the year immediately prior to the year that the tax rate cuts
become effective. An SOE possesses an unusual conflict both as a taxpayer and in having its controlling
interest held by the government, which is both a tax creator and a tax collector. Interestingly, the increase
in accounting conservatism prior to the year of the tax rate cuts is more pronounced for non-SOEs
than SOEs.
Practical implications – This research is beneficial to investors and policymakers where the government
is both the taxpayer and tax collector and in emerging markets where foreign investment is local firms’
important financing.
Originality/value – To the best knowledge, this study is the first in examining the joint effects of state
control and tax rate cuts on accounting conservatism.

Keywords Accounting conservatism, State-owned enterprises, Tax rate cuts, Foreign ownership,
Vietnam
Paper type Research paper

1. Introduction
Accounting conservatism requires higher degrees of verification to recognise gains than
losses. This asymmetric recognition provides firm managers with the opportunity of
simultaneously shifting taxable income into a future tax year while also deferring tax
payments. Because of the time value of money, the delay in tax payment reduces the present
value of that tax payment. The benefit is magnified when a known tax rate cut looms in the
future. Knowing the tax rate cuts will occur in the short term, firms increase accounting
conservatism to shift taxable income to the next year, the first year of the tax rate cut. Prior
research documents that the level of accounting conservatism will increase the tax savings
from tax rate cuts (Guenther, 1994; Maydew, 1997; Watts, 2003; Lin et al., 2013; Andries Pacific Accounting Review
et al., 2016). Shackelford and Shevlin (2001) document that although economic and finance Vol. 34 No. 2, 2022
pp. 197-224
researchers have adequately addressed taxes in their research, there is a lack and slow © Emerald Publishing Limited
0114-0582
adoption of tax research in the accounting academe. DOI 10.1108/PAR-12-2020-0209
PAR This paper examines the joint effects of government ownership and tax changes on
34,2 accounting conservatism, considering the effect of foreign ownership. We use rich sample
data of listed companies during the period of 2007 through 2019 using both exchanges in
Vietnam: the Hochiminh Stock Exchange that was initiated in 2000 and the Hanoi Stock
Exchange which was launched in 2005. Our analysis uses three measures of accounting
conservatism: Basu’s (1997) timeliness of earnings, Basu’s (1997) earnings persistence and
198 the book-to-market ratio.
A government is a special shareholder. While the government is already the tax creator
and the tax collector, it assumes an unusual conflict when it is also a state-owned enterprise
(SOE) (i.e. owning 50% or more equity of a firm). Cullinan et al. (2012) discuss the two
complementary effects of state-control on accounting conservatism. Firstly, in an SOE, the
agent’s oversight may be less effective because of the lack of a clear principle (state
ownership is common ownership which is less evidence regarding who is the owner).
Secondly, the appointment of a manager in an SOE is based more on political connections
than on the manager’s talent (Sun et al., 2002; Blenman and Le, 2014). These managers may
seek higher politically appointed positions and may point to high tax payments of their
firms as an indicator of performance success. This effect may lead to less conservative
accounting in SOEs. Further, the benefit from increasing accounting conservatism
immediately prior to the year of tax rate cuts may be different for SOEs than for non-SOEs.
Hence, the motivation to reduce tax payments in general and to reduce the present value of
tax payment taking advantage of a tax rate cut in specific is weaker for SOEs than for non-
SOEs. Ha and Phan (2017) find that a higher level of government ownership is negatively
associated with tax avoidance in Vietnam. We investigate the difference in the effects of tax
rate cuts on conservative accounting in SOEs and in non-SOEs.
Le (2020a) argues that China and Vietnam are among the countries whose stock markets
include multiple SOEs. We choose Vietnam as our research subject because the institutional
environment and stock exchanges of Vietnam present a unique opportunity for this case
study. The institutional setting, corporate governance and investor protection of Vietnam
are different from these of developed and other developing markets. Campos and Kinoshita
(2003) declare former communist countries provide a precious but underused opportunity
for research. Different from the other countries, in both Vietnam and China, SOEs still play a
critical role in stock markets. However, the economic development and management vary
between China and Vietnam. The Chinese Government controls its SOEs using both the
central and local governmental agencies. On the contrary, the Vietnamese Government
managed its SOEs using central agencies (the Ministry of Finance) until 2018 when a
separation of central and local governmental agencies occurred (Le, 2020a). Further, Chinese
stock markets adopted the 2005 China Securities Regulatory Commission reforms to
eliminate preferential treatment for state-owned shares (Cullinan et al., 2012); no similar
action in Vietnam exists. Le and Moore (2021) document that the role of SOEs in stock
markets is more important in China than in Vietnam. They also note that the market share
of auditing services is higher for Big 4 auditors in Vietnam than for Big 4 auditors in China
with the market shares measured by the value of 80% for Vietnam and 35% for China.
Further, Vietnamese SOEs tend to hire Big 4 auditors more often than Chinese SOEs. Wang
et al. (2008) document that Chinese SOEs tend to hire small and local auditors who provide
relatively low audit quality.
China is the world’s second-largest economy. However, Vietnam is a relatively small
market. The market capitalisation of stock markets was equal to 44.21% of Vietnamese
GDP in 2007 (Blenman and Le, 2014). The market-capitalisation-weighted average of equity
held by foreigners in Vietnamese listed firms was 22.08% in 2007 (Blenman and Le, 2014)
and 29.40% during the period 2013–2016 after the government relaxed the restriction of Tax rate cuts
foreign holding, allowing foreigners to own up to 100% of the equity in non-SOEs (Le, on accounting
2020b). While foreigners own relatively high liquid (liquid is measured by a turnover rate
that is the ratio of shares traded during a year by total shares outstanding) stocks in other
conservatism
countries, they hold low liquid stocks in Vietnam, implying their long-term horizon targets
in Vietnam. Aggarwal et al. (2011) document that the long-term investment horizons of
foreign investors can prompt changes in corporate governance systems through their voting
rights. These investors also help the board to appoint appropriate independent directors. 199
These benefits demonstrate how foreign investors play a critical role in improving the
corporate governance of listed firms in Vietnam. We argue the effects of state ownership on
accounting conservatism are different in firms with high foreign ownership than in firms
with low foreign ownership.
Regulations on tax are also less developed for Vietnam than China. The Vietnamese
Government decreased the corporate income tax rates twice during our sample period. As a
transition economy, the government reduced the corporate income tax rate from 25% to
22% effective in 2014 and 20% effective since 2016. This paper examines the impact of tax
rate cuts effective in 2014 and 2016 on accounting conservatism.
The evidence shows that Vietnamese firms adopt accounting conservatism. As expected,
non-SOEs adopt more accounting conservatism than do SOEs; however, the evidence is only
robust in firm-year observations with foreign ownership being lower than the foreign
ownership median. During the year prior to each year of tax rate cuts (i.e. 2013 and 2015),
firms increase their adoption of conservative accounting to reduce the present value of tax
payments, increasing firm value. The effect is more pronounced for non-SOEs than for
SOEs.
The paper contributes to the literature from different perspectives. Firstly, to our
knowledge, ours is the first study to investigate the joint effects of state ownership and tax
rate cuts on accounting conservatism. Prior studies examine either the impact of
government ownership on accounting conservatism in non-Vietnamese firms (Bushman and
Piotroski, 2006; Chen et al., 2010; Cullinan et al., 2012) or the impact of tax rate cuts on
accounting conservatism (Maydew, 1997; Watts, 2003; Lin et al., 2013; Andries et al., 2016;
Liu, 2019). However, no existing research investigates the joint effects of state ownership
and tax rate cuts on accounting conservatism. Using a Vietnamese data set, Ha and Phan
(2017) document a negative relationship between government ownership levels and tax
avoidance but do not study the effect of accounting conservatism. Unlike these prior studies,
this manuscript examines the difference in the conservative accounting response to tax rate
cuts between SOEs and non-SOEs. We observe that during the year prior to an effective tax
rate cut, non-SOEs adopt higher levels of conservative accounting than SOEs, perhaps, due
to the social objectives of SOEs and different motivations in tax savings of managers in
SOEs than in non-SOEs. Secondly, we provide evidence on the effects of state ownership on
accounting conservatism, separately for firms with low and high foreign ownership. Other
studies (Zhu and Li, 2008; Chen et al., 2010; Cullinan et al., 2012; Liu, 2019) examine the
impact of state ownership on accounting conservatism using Chinese data but do not
include the effect of foreign ownership on the relationship between state ownership and
accounting conservatism. Limited research examines accounting conservatism in
Vietnamese firms. Le et al. (2017) document that foreign ownership is negatively associated
with accounting conservatism in Vietnam. They argue that foreign investors with low levels
of ownership do not have enough incentives to oversee managers of Vietnamese firms,
hence cannot influence the reporting quality. Our findings are different from these of Le et al.
(2017). State-controlled firms with low levels of foreign ownership adopt less accounting
PAR conservatism than non-SOEs also with a low level of foreign ownership. However, in firms
34,2 with a high level of foreign ownership, we do not see evidence that state-controlled firms
adopt less accounting conservatism. These combined findings are important because it
implies that foreigners help improve the corporate governance of local firms. Thirdly, this
paper adds evidence to the literature on tax rate cuts’ effects on accounting conservatism.
The evidence affirms that before the year of tax rate cuts, firms increase their adoption of
200 conservative accounting to reduce the present value of tax payments, increasing firm value.
This research is beneficial to policymakers and investors where the government is both the
taxpayer and tax collector and in emerging markets where foreign investment is an
important source of financing.
Our paper relates to prior studies of the relationship between state control and
accounting conservatism (Bushman and Piotroski, 2006; Zhu and Li, 2008; Chen et al., 2010;
Cullinan et al., 2012; Liu, 2019). Bushman and Piotroski, 2006 document that the association
level between state ownership and accounting conservatism is higher in common law
countries (such as the USA) and lower in code law countries; however, we document that
state ownership is associated with a lower level of accounting conservatism in Vietnam, a
code law country. Chen et al. (2010) and Cullinan et al. (2012) use a dummy variable equal to
one for SOEs and zero for non-SOEs to measure government control’s effects on accounting
conservatism. We use both the dummy variable (similar to Chen et al., 2010; and Cullinan
et al., 2012) and the percentage of government ownership in a firm to proxy for government
control. Our findings are consistent for the two measures: SOEs adopt less conservative
accounting than non-SOEs and a higher government percentage ownership is associated
with a lower level of adopting conservative accounting. Similar to prior studies using
Chinese stock market data (Zhu and Li, 2008; Chen et al., 2010; Cullinan et al., 2012), we
document that SOEs adopt less accounting conservatism than non-SOEs. However, while
Liu (2019) finds a U-shaped effect of government ownership on accounting conservatism in
China, we do not find the U-shaped effect in Vietnam.
We organise the paper’s remainder as follows: Section 2 provides a background of stock
markets, the corporate income tax system and SOEs in Vietnam. Section 3 includes the
development of hypotheses. Section 4 comprises the research design, sample selection and
data, Section 5 discusses the main results, Section 6 provides discussion on alternative
measures of accounting conservatism and Section 7 concludes.

2. Background
Before 1986, almost all companies in Vietnam were SOEs. From the early 1990s, the
government implemented the privatisation (so-called equitisation in Vietnamese) by
gradually selling its ownership to the public and authorised private companies, the firms
where the government allows individuals and foreigners to hold equity. The government
holds the right to appoint chief executive officers of SOEs and expects SOEs to aid in social
stability. Therefore, an SOE has some social responsibility.
The government initiated its first stock exchange in 2000 in Hochiminh city and the
second stock exchange in 2005 in Hanoi. According to government regulations, at a certain
time, a firm can list on only one of these two exchanges. Almost 30% of listed firm-year
observations in our sample are SOEs.
Along with reforming the economy, to attract foreign investment, the government
started to switch its Russian-based accounting system to IFRS based accounting system in
the early 1990s. The fiscal year of listed firms ends on 31 December. The Ministry of Finance
is responsible for establishing the national accounting standard system (the Vietnamese
generally accepted accounting principles). By 2005, the government had issued the Tax rate cuts
accounting standard system comprising 26 accounting standards. on accounting
The corporate income tax system of Vietnam uses a flat tax rate, i.e. the tax rate is the
same for all firms during the same period, regardless of the firm’s income level. The
conservatism
corporate income tax rate system of Vietnam is different from that in most developed
markets. During the sample period, 2007–2019, the corporate income tax rate changed two
times. Initially, since 2007, the corporate income tax rate was a flat 25%. The first tax cut
became effective in 2014 when the corporate income tax rate was reduced to 22% for firms 201
with annual revenue of at least VND 20bn and 20% for firms with annual revenue less than
VND 20bn. The second tax cut became effective in 2016 when the corporate income tax rate
was reduced to 20% for all firms and this rate remains during the rest of the sample period
(2016–2019). Listed firms are typically large firms in Vietnam. Our sample shows that the
median revenue is VND 619bn for 2013. The tax rate cuts affect almost 99% of our sample
firm-year observations, which had revenue exceeding VND 20bn in 2013 and 2014.

3. Hypotheses development
3.1 The effect of government ownership on accounting conservatism
Accounting conservatism is an asymmetric recognition of gains and losses, i.e. losses are
more timely recognised but gains are deferred. Prior studies document that accounting
conservatism is a characteristic of high-quality accounting information (Basu, 1997; Watts,
2003). Serving as a governance mechanism, accounting conservatism can reduce
information asymmetry and the adverse effects of managerial risk-taking (Lara et al., 2009,
2014; LaFond and Roychowdhury, 2008).
Prior literature finds contradictory evidence of the relationship between state ownership
and accounting conservatism. On the one hand, Bushman and Piotroski (2006) examine the
data from different countries and find a significant effect of politics on conservative
reporting incentives. Specifically, they document that firms speed recognition of good news
and slow recognition of bad news in reported earnings in countries where the government
has higher involvement in the economy than where the government has lower involvement
in the economy. This observation implies accounting conservatism is lower in countries
where the government has a stronger influence on the economy. Further, Chen et al. (2010),
Cullinan et al. (2012) and Zhu and Li (2008) research Chinese firms and find a negative
relationship between government ownership and accounting conservatism, suggesting
SOEs adopt less accounting conservatism than non-SOEs. On the other hand, using the data
set of Malaysian firms, Mohammed et al. (2010) find company-level state ownership is
associated with higher levels of accounting conservatism due to the Malaysian
Government’s desire to build the credibility of its financial markets. Xia and Zhu (2009)
document a positive relationship between government ownership and accounting
conservatism because political concerns and pressures are higher in SOEs than in non-
SOEs. Liu (2019) observes an inverted U-shaped association between government
ownership and unconditional conservatism: the relationship between government
ownership and unconditional conservatism is positive if government ownership is less than
31%, but negative if government ownership is more than 31%. However, his result does not
support a U-shaped association between government ownership and conditional
conservatism.
Top managers in SOEs in Vietnam have promotion incentives. If they run the businesses
well within their terms of three to five years, they will be promoted to higher positions or as
politicians and government members. Due to these promotion incentives, the managers may
focus on short-term horizon performance and underweight long-term objectives. The focus
PAR on short-term performance may cause SOE managers to adopt more aggressive accounting
34,2 practices that reduce accounting conservatism. Therefore, in this paper, we hypothesize
that:

H1. The accounting conservatism is lower for SOEs than for non-SOEs.
Le (2020a) argues that before 1990, almost all Vietnamese firms were SOEs. Afterwards, the
202 government allows the existence of firms owned by individuals or entities who are not
governmental agencies called private firms. Further, the government then sells its
ownership to individuals and private firms. Listed firms that have government ownership
were initially SOEs. These initial SOEs remain SOEs if the government still owns 50% or
more of equity. If the government owns less than 50% of these firms’ equity, those firms are
non-SOEs. We argue that SOEs are associated with less accounting conservatism than non-
SOEs. We further test how the change in the government ownership percentage of equity
affects accounting conservatism.

3.2 Tax avoidance, government control and accounting conservatism

Accounting conservatism requires higher standards in recognizing book income of gains
than book income of losses, resulting in recognizing losses earlier than recognizing gains.
The adoption of conservative accounting shifts taxable income into the future periods and
defers tax payments, hence reducing the present value of taxes. Watts (2003a) notes that a
deferral of tax payments during a period of steady tax rates decreases this present value.
This dynamic is magnified when a tax rate cut is announced. Firms can increase their tax-
saving benefits by adopting more conservative accounting. An increase in conservative
accounting will also increase the deferral of taxable income to the next period with lower tax
rates. Prior studies document that firm managers increase the tax-saving benefits from
government tax cuts (Guenther, 1994; Maydew, 1997; Lin et al., 2013; Andries et al., 2016).
Using data from 18 countries, Bornemann (2018) finds a positive relationship between
conditional conservatism and future tax rate cuts when book-tax conformity is high. We,
therefore, hypothesize that:

H2. Accounting conservatism increases in the year immediately prior to the effective
year of the tax rate cut.
As discussed in the earlier sections, on the one hand, the government is the tax collector; on
the other hand, in SOEs, like businesses, the government is the controlling shareholder of a
taxpayer. Due to this conflict, compared with a tax payment of corresponding non-SOEs, the
tax payment of SOEs may be considered more of a movement of money from one pocket to
another pocket. Further, managers in SOEs are politically appointed by the government
based more on political connections than on management talents. Therefore, these managers
may focus more on improving their political and social connections than building their
business acumen. Further, the government also expects SOEs to have social functions and
paying higher taxes is sometimes a measure of good performance for managers of SOEs.
Hence, the motivation to reduce tax payment in general and the motivation of increasing
accounting conservatism to reduce the present value of tax payment in specific may be
weaker for SOEs than for non-SOEs. We argue that compared with managers of non-SOEs,
managers of SOEs have fewer incentives to reduce the present value of tax payments when
corporate tax rate cuts occur. We hypothesize that:
 H3. The effects of the tax rate cuts on accounting conservatism are less pronounced in Tax rate cuts
SOEs than in non-SOEs. on accounting
conservatism
3.3 The effects of foreign ownership
As discussed in earlier sections, financing from foreigners is critical for Vietnamese stock
exchanges. Foreign ownership is the percentage of firm shares owned by non-Vietnamese 203
citizens or parties outside Vietnam. We argue that foreign ownership has an impact on the
relationship among government control, tax rate cuts and accounting conservatism.
Unlike foreigners in other markets, foreigners in Vietnamese stock exchanges target
a long-term horizon by investing in relatively low liquid stocks. Aggarwal et al.
(2011) note long-term investment horizon foreign investors can prompt a change in
corporate governance systems through their voting rights. These investors also vote for
appropriate independent directors which are particularly important in SOEs. Hence, we
hypothesize that:

H4. The relationship among government ownership, tax rate cuts and accounting
conservatism is different among firms with different levels of foreign
ownership.

4. Research design, sample selection and data

4.1 Measures of accounting conservatism and models
Our main discussion uses Basu’s (1997) timeliness of earnings measure, one of the most
common methods of measuring accounting conservatism. The Basu (1997) timeliness of
earnings approach implies accounting conservatism as the firms capture bad news quicker
than good news in their financial statements. Among alternative conservatism measures,
Roychowdhury and Watts (2007) provide preferences for the Basu (1997) conservatism
measure. Cullinan et al. (2012) also use this measure to study the Chinese stock market. We
measure accounting conservatism following Basu (1997) model:

Et
¼ a0 þ a1 * Dt þ a2* Rt þ a3 * Dt * Rt (1)
Pt
1

We use two-year cumulative returns and earnings to mitigate potential bias as suggested by
Roychowdhury and Watts (2007). E is the two-year cumulative returns per share and P is
the price per share at the end of the year. R is the buy-and-hold stock return for one year
accumulated from 9 months before the end of the previous fiscal year to 3 months after the
end of the fiscal year. D is a dummy variable equal to one if R is negative, zero otherwise.
The coefficient of the interactive variable, a3 ; therefore, measures the incremental
timeliness of earnings reflecting bad news versus good news or the conditional accounting
conservatism.
The conservatism suggests financial statements capture bad news quicker than good
news. Concurrent negative and positive unexpected returns proxy for bad news and good
news, respectively. Stock returns proxy for economic gains and losses. To test the
accounting conservatism differences in SOEs and non-SOEs, we estimate the following
ordinary least squares regression model:
PAR Et
¼ b 0 þ b 1 * Dt þ b 2* Rt þ b 3 * Dt * Rt þ b 4 * POLt þ b 5 * Dt * POLt
34,2 Pt
1
þ b 6 * Rt * POLt þ b 7 * Dt * Rt * POLt þ b 8 * SIZEt þ b 9 * Dt * SIZEt
þ b 10 * Rt * SIZEt þ b 11 * Dt * Rt * SIZEt þ b 12 * LEVt þ b 13 * Dt * LEVt
þ b 14 * Rt * LEVt þ b 15 * Dt * Rt * LEVt þ b 16 * MTBt þ b 17 * Dt * MTBt
204
þ b 18 * Rt * MTBt þ b 19 * Dt * Rt * MTBt ð2Þ

POL stands for two measures of state involvement in listed firms. The first measure of state
involvement is SOE, a dummy equal to one if the government owns 50% or more of the
firm’s equity. The second measure of state involvement is GOV, the percentage of
government ownership in the firm at the end of the year. We use SOE in equation (2) to
estimate the difference in the adoption of conservative accounting between SOEs and non-
SOEs (H1). In the same equation, we use GOV to estimate the difference in adopting
conservative accounting when the government ownership percentage of equity in a firm
varies. The accounting conservatism, the firm recognises bad news quicker than good news,
predicts that the sign of the coefficient b 3 is positive. Our interest variable coefficient is b 7 .
We expect the sign of b 7 to be negative, indicating that SOEs have less accounting
conservatism than non-SOEs.
Watts (2003) concludes the determinants of accounting conservatism involve contractual
and other factors. Prior studies point out that firm size, leverage and market-to-book ratio
impact accounting conservatism (Ahmed and Duellman, 2007; LaFond and Roychowdhury,
2008; Khan and Watts, 2009). We include SIZE to control for firm size, proxied by the market
value of equity at year-end; LEV to control for firm risk, proxied by total debt scaled by the
market value of equity at year-end; and MTB, the market-to-book ratio at year-end.
We examine the effects of tax rate cuts on accounting conservatism using the following
regression equation:
Et
¼ l 0 þ l 1 * Dt þ l 2* Rt þ l 3 * Dt * Rt þ l 4 * TAXt þ l 5 * Dt * TAXt
Pt
1
þ l 6 * Rt * TAXt þ l 7 * Dt * Rt * TAXt þ l 8 * SIZEt þ l 9 * Dt * SIZEt
þ l 10 * Rt * SIZEt þ l 11 * Dt * Rt * SIZEt þ l 12 * LEVt þ l 13 * Dt * LEVt
þ l 14 * Rt * LEVt þ l 15 * Dt * Rt * LEVt þ l 16 * MTBt þ l 17 * Dt * MTBt
þ l 18 * Rt * MTBt þ l 19 * Dt * Rt * MTBt ð3Þ

where TAX is a dummy equal to one for the years 2013 and 2015. The tax rate cuts occurred
in 2014 and 2016 and we use TAX to examine the effects of tax rate cuts on accounting
conservatism. H2 predicts the coefficient estimate of l 7 to be positive, indicating firms
adopt more conservative accounting in 2013 and 2015, the years before the tax rate cuts
become effective. The denotations of the other variables such as D, R SIZE, LEV and MTB
are similar to these in the previous equation.
To examine the difference in the accounting conservatism response of managers in SOEs
and non-SOEs, we run equation (3) separately for the SOE subsample and the non-SOE
subsample. H3 predicts that the coefficient of l 7 is more pronounced for the latter than for
the former.
4.2 Sample selection and data Tax rate cuts
We collect the initial data from Compustat Global with 4,941 firm-year observations of all on accounting
available non-financial listed firms of Vietnam in both stock exchanges: the Hochiminh and
the Hanoi stock exchanges for the period 2007–2019. We start our sample in 2007 because
conservatism
Vietnam’s Law of Securities became effective in 2007. This law provides more transparency
for market participants. We merge the data set with the Compustat Global daily securities
data, which provides the stock price information to construct the Basu (1997) conservatism
measure. The final sample comprises 2,038 firm-year observations of 405 unique firms after 205
excluding observations with missing data to calculate Basu (1997) conservatism measure.
Table 1 summarises the sample selection criteria and industry distribution. The evidence in
panel B of the table shows that roughly 52% of firm-year observations are manufacturers.
Table 2 reports the firm characteristics of the full sample and the separation for SOEs
and non-SOEs. To avoid the effects of outliers, we winsorize the dependent variable EPS/
Pt
1 at the 1% level. SOEs comprise 29.83% of the sample firm-year. The mean value of
government ownership in the equity of listed firms in the sample is 25.38%. SOEs have
significantly higher EPS/Pt
1 than the counterpart non-SOEs.

5. Main results
5.1 Government equity ownership and accounting conservatism
Table 3 reports the regression results using Basu’s, 1997 differential timeliness measure of
accounting conservatism. Model 1 includes regression results for estimating equation (1).
The coefficient on the conservatism variable, in model 1 which measures the difference in
sensitivity of earnings to bad and good news, is significant and positive ( b 3 = 0.359, t =
5.39), implying that earnings are more sensitive to negative returns than to positive returns.
The results indicate that Vietnamese listed firms use conservative financial reporting.
Models 2 and 3 include our interest variable, the interactive coefficient b 7. Controlling for
firm size, leverage and market-to-book ratio, b 7 is negative in both models using SOE and
GOV ( b 7 =
0.2574 and t =
1.83 in model 2; b 7 =
0.0084 and t =
3.38 in model 3). The
results suggest that as the government holds a higher percentage of a firm’s equity, the
accounting conservatism of the firm decreases (model 3). The coefficient of b 7 is negative in
model 2, implying that SOEs adopt less conservative accounting than non-SOEs. However,
this coefficient is only significant at the 10% level. We analyse the effects of foreign
ownership on the relationship between state control and accounting conservatism in
Section 6.
The results of Table 3 and are consistent with the hypothesis of SOEs being less
accounting conservative than non-SOEs. Further, a firm reduces its accounting
conservatism adoption as the government ownership percentage of its equity increases. The
results are supportive of H1.

5.2 Tax rate cuts, government control and accounting conservatism

Table 4 reports regression results for the effects of tax rate cuts on accounting conservatism.
The sign of the interest variable coefficient, l 7 is what we expected (l 7 = 0.8183 and t =
5.77 in the model controlling for firm size, leverage and market-to-book ratio). The sign and
significance of l 7 are the same in the models controlling for firm size and the model not
controlling for firm size. The result is supportive of H2: firms adopt more conservative
accounting in the year immediately before the corporate tax rate cuts become effective.
We replicate the regression equation (3) separately for non-SOEs and SOEs and Table 5
reports the results. The first two columns include the regression results for non-SOEs and
the last two columns show the regression results for SOEs.
PAR
Panel A: selection criteria
34,2 Total non-financial firm-year observations 2007–2019 4,941
Less observations with missing data to calculate Basu (1997) conservatism measure (2,404)
Less observations missing data to compute two-year cumulative return and earnings (499)
Final sample 2,038
Panel B: Sample composition by industry
206 2-digit SIC code Industries Frequency (%)
AGRICULTURE 21 1.03
1 Agriculture production-crops 21 1.03
MINING 102 5.00
10 Metal mining 13 0.64
12 Coal mining 22 1.08
13 Oil and gas extraction 36 1.77
14 Quarry minerals 31 1.52
CONSTRUCTION 209 10.26
15 Building construction 41 2.01
16 Heavy construction 146 7.16
17 Construction and special trade 22 1.08
MANUFACTURING 1,065 52.26
20 Food and kindred products 234 11.48
21 Tobacco product 15 0.74
22 Textile mill products 4 0.20
23 Apparel and other finished products 26 1.28
24 Lumber and wood products 11 0.54
25 Furniture and fixtures 15 0.74
26 Paper and applied products 51 2.50
27 Printing, publishing and allied 48 2.36
28 Chemicals and allied products 150 7.36
29 Pete refining and related industries 8 0.39
30 Rubber and misc. plastics products 120 5.89
32 Stone, clay, glass and concrete products 135 6.62
33 Primary metal industries 102 5.00
34 Fabricated metal products 17 0.83
35 Industrial and commercial machinery computer equipment 34 1.67
36 Electrical equipment and components 71 3.48
37 Transportation equipment 5 0.25
38 Measurement analysing and control instr. related products 2 0.10
39 Misc. manufacturing industry 17 0.83
TRANSPORTATION 324 15.90
41 Transit and passenger trans 16 0.79
42 Motor freight transportation and warehouse 2 0.10
44 Water transportation 109 5.35
45 Transportation by air 6 0.29
47 Transportation services 48 2.36
49 Electric, gas and sanitary services 143 7.02
WHOLESALE TRADE 108 5.30
50 Durable goods – wholesales 53 2.60
51 Non-durable goods – wholesales 55 2.70
RETAIL TRADE 38 1.86
55 Auto dealers and gas station 10 0.49
Table 1. 57 Home furniture and equipment store 3 0.15
Descriptive 59 Miscellaneous retail 25 1.23
information on SERVICES 122 5.99
sample selection and 70 Hotels, other lodging places 16 0.79
industry distribution (continued)
73 Business services 53 2.60
Tax rate cuts
79 Amusement and recreation services 26 1.28 on accounting
87 Engineering, architect and survey services 27 1.32 conservatism
PUBLIC ADMINISTRATION 49 2.40
99 Non-classifiable establishments 49 2.40
Total 2,038 100

Notes: This table summarises selection criteria and the sample composition by industry. We collect data of 207
Vietnamese listed firms from COMPUSTAT Global for the period 2007–2019. We manually collected the
information of government ownership percentage of equity from financial statements of listed firms
available on the stock exchange websites of Vietnam Table 1.

Our interest variable coefficient is l 7. As expected, the coefficient estimate l 7 is positive in

all models but only significant for non-SOEs. The coefficient l 7 = 1.0349 with t = 7.08 for
the non-SOEs subsample and l 7 = 0.4401 with t = 1.36 for the SOEs subsample. In
untabulated results, we exclude firm size, leverage and market-to-book ratio-related
variables. The sign and significance of l 7 remain the same (positive and significant at the
1% level for the non-SOE subsample: l 7 = 1.1377 and t = 7.09, positive and insignificant for
the SOE subsample: l 7 = 0.1526 and t = 0.39), indicating an equivalently qualitative result.
The evidence suggests that in response to the future tax rate cuts, non-SOEs adopt more
conservative accounting which reduces the present value of tax payment than SOEs. The
results support hypothesis H3.

Obs. Mean Q1 Median Q3 SD

Panel A: Firm characteristics of the full sample

EPS/Pt
1 2,038 0.1081 0.0604 0.1130 0.1717 0.1417
D 2,038 0.4637 0 0 1 0.4988
R 2,038 0.0808
0.1729 0.0332 0.2737 0.3814
GOV 2,038 25.384 0 20 51 25.1156
LEV 2,038 1.3732 0.0948 0.5088 1.4392 3.3724
MTB 2,038 1.2116 0.5776 0.9104 1.5057 1.0308
Log(SIZE) 2,038 13.08 11.87 13.09 14.20 1.72
SOE 2,038 0.2983 0 0 1 0.4576
TAX 2,038 0.2522 0 0 1 0.4344
Panel B: Firm characteristics by ownership type: SOE versus non-SOE
Non-SOE (n = 1,430) SOE (n = 608) t-stat
Mean Std. Dev. Mean Std. Dev.
EPS/Pt
1 0.0999 0.1435 0.1274 0.1358
4.026***
D 0.4503 0.4977 0.4951 0.5004
1.8527*
R 0.0915 0.4029 0.0558 0.3241 1.9339*
LEV 1.2682 2.3537 1.6201 5.0036
2.1574**
MTB 1.2201 1.0304 1.1915 1.0323 0.5714
Log(SIZE) 13.0653 1.7597 13.1064 1.6237
0.4929
TAX 0.2426 0.4288 0.2746 0.4467
1.5227

Notes: This table summarises the statistics of variables used in the manuscript. Panel A reports the firm
characteristics of the full sample. Panel B compares the statistics of SOEs and non-SOEs. GOV is the
government ownership percentage of equity at the year-end. SOE is a dummy equal to one if GOV >= 50% Table 2.
and zero otherwise. The last column of Panel B presents the t-stat of the hypothesis if the corresponding
mean measures are equal for SOEs and non-SOEs. The superscripts, ***, ** and * denote the 1%, 5% and Firm characteristics
10% levels of significance, respectively, in a two-tailed test. Refer to the Appendix for the definitions of of SOEs and non-
variables SOEs
PAR Model 2: Model 3:
34,2 Dependent variable: Predicted Model 1 POL = SOE POL = GOV
Et/Pt
1 sign Coef. t-stat Coef. t-stat Coef. t-stat

Constant b0 ? 0.109*** 8.96 0.0553 0.56 0.0448 0.45

D b1 ? 0.037* 1.83 0.4213*** 2.69 0.4435*** 2.82
R b2 þ 0.081*** 3.16 0.2339 1.05 0.2246 1.02
208 D*R b3 þ 0.359*** 5.39 2.2693*** 4.37 2.4448*** 4.73
POL b4 ? 0.0067 0.26 0.0003 0.65
D*POL b5 ?
0.0147
0.36
0.0010
1.36
R*POL b6 ? 0.0249 0.39 0.0004 0.34
D*R*POL b7

0.2574*
1.83
0.0084***
3.38
SIZE b8 ? 0.0073 0.91 0.0077 0.96
D*SIZE b9 ?
0.0257**
2.03
0.0264**
2.09
R*SIZE b 10 ?
0.0134
0.73
0.0128
0.7
D*R*SIZE b 11

0.160***
3.71
0.1675***
3.91
LEV b 12 ?
0.0106*
1.86
0.0105*
1.85
D*LEV b 13 ?
0.059***
7.54
0.0595***
7.59
R*LEV b 14 ?
0.0077
0.5
0.0076
0.5
D*R*LEV b 15 þ
0.064***
3.27
0.0634***
3.23
MTB b 16 ?
0.026**
2.19
0.0268**
2.26
D*MTB b 17 ?
0.0099
0.49
0.0065
0.32
R*MTB b 18 ? 0.0217 0.91 0.0221 0.94
D*R*MTB b 19 þ
0.0035
0.05 0.0151 0.2
R2 0.05 0.2615 0.2668
No. of Obs. 2,038 2,038 2,038

Notes: This table reports the regression results of accounting conservatism with different types of
ownership using Basu’s, 1997 differential timeliness measure of accounting conservatism. The dependent
variable is Et/Pt
1 where E is earnings per share and P is the price per share at year-end. GOV is the
Table 3. government ownership percentage of a firm’s equity. SOE is equal to one if GOV >= 50% and zero
State ownership and otherwise. All models include the robust option to obtain robust standard errors. Numbers in parentheses
accounting represent the t-statistics. The superscripts, ***, ** and * denote the 1%, 5% and 10% levels of significance,
conservatism respectively, in a two-tailed test. Refer to the Appendix for the definitions of variables

5.3 Effects of only state ownership on accounting conservatism in firms with different
foreign ownership levels
This section provides a discussion on the effect of foreign ownership which is the percentage
of firm shares owned by foreigners to Vietnam. By the Vietnamese regulations, equity is
held by non-Vietnamese citizens or parties outside Vietnam. In each year, we compute the
median foreign ownership for each two-digit industry SIC code. We then separate the
sample into two subsamples: the firm-year observations with low (i.e. foreign ownership of
the firm is lower than the foreign ownership median) and high foreign ownership (i.e. foreign
ownership of the firm is higher than the foreign ownership median).
In the previous section, we observe in Table 3 that state-controlled firms exercise less
accounting conservatism than the others; however, coefficient b 7 in the model of SOE is
only significant at the 10% level ( b 7 =
2574, t-stat =
1.83).
Table 6 is similar to Table 3, except we separately present regression results for the low
foreign ownership subsample in panel A and the high foreign ownership subsample in panel
B. The results of panel A support and complement the results of Table 3. The results show
that the coefficient b 7 is negative in both panels but only significant in panel A ( b 7 =

0.5945 and t =
3.12 for the model of SOE and b 7 =
0.0135 and t =
4.11 for the model
 Expected Model 1 Model 2
Tax rate cuts
Dependent variable: Et/Pt
1 sign Coef. t-stat Coef. t-stat on accounting
conservatism
Constant l0 ? 0.0978*** 6.85 0.0391 0.39
D l1 ? 0.0163 0.7 0.3765** 2.39
R l2 þ 0.0948*** 3.03 0.2747 1.19
D*R l3 þ 0.1797** 2.38 1.9180*** 3.67
TAX l4 ? 0.0420 1.55 0.0421* 1.74 209
D*TAX l5 ? 0.1098** 2.34 0.1070** 2.56
R*TAX l6 ?
0.0445
0.82
0.0535
1.07
D*R*TAX l7 þ 0.8308*** 5.22 0.8183*** 5.77
SIZE l8 ? 0.0078 0.98
D*SIZE l9 ?
0.0238*
1.89
R*SIZE l 10 ?
0.0148
0.81
D*R*SIZE l 11

0.1502***
3.5
LEV l 12 ?
0.0101*
1.79
D*LEV l 13 ?
0.0586***
7.5
R*LEV l 14 ?
0.0091
0.6
D*R*LEV l 15 þ
0.0610***
3.11
MTB l 16 ?
0.0257**
2.18
D*MTB l 17 ?
0.0130
0.64
R*MTB l 18 ? 0.0206 0.88
D*R*MTB l 19 þ
0.0171
0.23
R2 0.0642 0.2715
No. of Obs. 2,038 2,038

Notes: This table reports the regression results of accounting conservatism using estimating equation (3). Table 4.
The dependent variable is Et/Pt
1 where E is earnings per share and P is the price per share at year-end. The effect of a tax
TAX is equal to one for 2013 and 2015, the years immediately prior to tax rate decreases and zero rate cut on
otherwise. The tax rate decreases from 25% to 22% in 2014 and from 22% to 20% in 2016 for all firms. All
models include the robust option to obtain robust standard errors. Numbers in parentheses represent the t- accounting
statistics. The superscripts, ***, ** and * denote the 1%, 5% and 10% levels of significance, respectively, in conservatism of
a two-tailed test. Refer to the Appendix for the definitions of variables listed firms

of SOE in panel A). The absolute value of coefficient b 7 is almost double in panel A of
Table 6 than in Table 3 for the model of SOE. The significance of this variable also highly
increases in panel A of Table 6 relative to Table 3. On the contrary, coefficient b 7 is
insignificant in panel B. Interestingly, the evidence suggests that a separate examination is
important and more accurate regarding the effects of state ownership on accounting
conservatism for different groups of firms with the unique impact of foreign holdings.
The results support hypothesis H4.

5.4 Effects of both state ownership and tax rate cuts on accounting conservatism in firms
with different foreign ownership levels
We rerun regressions of models in Table 4 separately for low and high foreign ownership
subsamples. The untabulated results show that coefficient l 7 is positive and significant at
the 1% level for both low and high foreign ownership subsamples.
We also rerun regressions for models in Table 5 separately for low and high foreign
ownership subsamples. The untabulated estimate of coefficient l 7 is positive and
significant at the 1% level for all four subsamples of SOEs and low foreign ownership
subsample, non-SOEs and low foreign ownership subsample, SOEs and high foreign
ownership subsample and non-SOEs and high foreign ownership subsample. The results on
PAR Expected Non-SOEs SOEs
34,2 Dependent variable: Et/Pt
1 sign Coef. t-stat Coef. t-stat

Constant l0 ? 0.0571 0.58 0.0111 0.04

D l1 ? 0.1038 0.65 0.8341** 2.25
R l2 þ 0.1711 0.76 0.6077 0.98
D*R l3 þ 0.9870* 1.9 2.5118* 1.89
210 TAX l4 ? 0.0400* 1.66 0.0371 0.63
D*TAX l5 ? 0.1476*** 3.35 0.0806 0.9
R*TAX l6 ?
0.0506
1.08
0.0321
0.22
D*R*TAX l7 þ 1.0349*** 7.08 0.4401 1.36
SIZE l8 ? 0.0049 0.61 0.0150 0.78
D*SIZE l9 ?
0.0111
0.86
0.0581**
2.03
R*SIZE l 10 ?
0.0045
0.25
0.0508
1.08
D*R*SIZE l 11

0.1041**
2.42
0.1801*
1.72
LEV l 12 ?
0.0066
0.75
0.0126
1.52
D*LEV l 13 ? 0.0076 0.66
0.1084***
9.09
R*LEV l 14 ?
0.0171
0.91 0.0063 0.2
D*R*LEV l 15 þ 0.1294*** 5.16
0.2023***
5.39
MTB l 16 ?
0.0152
1.29
0.0763**
2.21
D*MTB l 17 ? 0.0052 0.22 0.0358 0.8
R*MTB l 18 ? 0.0026 0.12 0.1419 1.61
D*R*MTB l 19 þ 0.0405 0.47
0.1033
0.66
R2 0.2852 0.3831
No. of Obs. 1,430 608

Notes: This table reports the regression results of accounting conservatism separately for non-SOEs (1,430
firm-year observations) and SOEs (608 firm-year observations) using estimating equation (3). The
Table 5. dependent variable is Et/Pt
1 where E is earnings per share and P is the price per share at year-end. TAX is
The effect of tax rate equal to one for 2013 and 2015, the years immediately prior to the tax rate decreases and zero otherwise.
The tax rate decreases from 25% to 22% in 2014 and from 22% to 20% in 2016 for all firms. All models
cut on accounting include the robust option to obtain robust standard errors. Numbers in parentheses represent the t-
conservatism in non- statistics. The superscripts, ***, ** and * denote the 1%, 5% and 10% levels of significance, respectively, in
SOEs and SOEs a two-tailed test. Refer to the Appendix for the definitions of variables

the coefficient of l 7 for SOEs turn to significant (this coefficient is insignificant in Table 5
for the model of SOEs) because the total number of firm-year observations with sufficient
data in this section is 1,986 which is lower than the total number of firm-year observations
(2,038) in Table 5. The evidence shows no difference in the effect of foreign ownership on the
relationship among state ownership, tax rate cuts and accounting conservatism.

5.5 Test on the U-shaped hypothesis

Liu (2019) documents a U-shaped relationship between government ownership and
unconditional accounting conservatism, but the result is not clear for conditional accounting
conservatism in Chinese stock exchanges. We conduct a similar test but do not find evidence
of a U-shaped relationship for conditional accounting conservatism using Vietnamese firms.
The untabulated results show a negative estimate for the interaction variable of GOV and a
positive estimate for the interaction variable of GOV2, but the coefficients are insignificant.

6. Additional tests
This section provides additional tests using alternative measures of accounting
conservatism. We use two additional measures of accounting conservatism. The first
 Tax rate cuts
Dependent variable Predicted POL = SOE POL = GOV
Et/Pt
1 sign Coef. t-stat Coef. t-stat
on accounting
conservatism
Panel A: Low foreign ownership firms – foreign ownership is lower than the median of foreign ownership by
industry and year
Constant b0 ? 0.0125 0.08 0.0089 0.06
D b1 ? 0.4888* 1.98 0.5081** 2.06
R b2 þ 0.1674 0.47 0.1592 0.45 211
D*R b3 þ 2.4603*** 3.21 2.6214*** 3.43
POL b4 ?
0.0258
0.67
0.0002
0.24
D*POL b5 ?
0.0229
0.4
0.0014
1.39
R*POL b6 ? 0.0932 0.92 0.0009 0.57
D*R*POL b7

0.5945***
3.12
0.0135***
4.11
SIZE b8 ? 0.0144 1.06 0.0144 1.06
D*SIZE b9 ?
0.0442**
2.15
0.0440**
2.15
R*SIZE b 10 ?
0.0116
0.38
0.0109
0.36
D*R*SIZE b 11

0.1761
2.68
0.1795***
2.74
LEV b 12 ?
0.0106
1.6
0.0110*
1.66
D*LEV b 13 ? 0.0182 1.63 0.0189* 1.7
R*LEV b 14 ?
0.0029
0.15
0.0019
0.1
D*R*LEV b 15 þ 0.0691*** 2.58 0.0695*** 2.61
MTB b 16 ?
0.0567***
2.81
0.0563***
2.8
D*MTB b 17 ? 0.0611* 1.92 0.0634 2
R*MTB b 18 ? 0.0448 1.35 0.0438 1.33
D*R*MTB b 19 þ 0.0000 0 0.0185 0.17
R2 0.2353 0.2438
No. of Obs. 984 984
Panel B: High foreign ownership firms – foreign ownership is higher than the median of foreign ownership by
industry and year
Constant b0 ? 0.1034 1.57 0.0824 1.22
D b1 ? 0.3406*** 3.12 0.3721*** 3.32
R b2 þ 0.4943*** 3.07 0.5317*** 3.2
D*R b3 þ 0.8583** 2.19 1.0554*** 2.66
POL b4 ? 0.0428*** 2.63 0.0007** 2.15
D*POL b5 ?
0.0262
0.97
0.0004
0.81
R*POL b6 ?
0.0654*
1.74
0.0010
1.5
D*R*POL b7

0.1291
1.27
0.0017
0.9
SIZE b8 ?
0.0017
0.33 0.0000
0.01
D*SIZE b9 ?
0.0205**
2.43
0.0233***
2.74
R*SIZE b 10 ?
0.0218*
1.77
0.0247**
1.99
D*R*SIZE b 11

0.0698**
2.27
0.0848***
2.77
LEV b 12 ? 0.0099 1.46 0.0098 1.44
D*LEV b 13 ?
0.0148
1.64
0.0136
1.5
R*LEV b 14 ?
0.0482***
3.54
0.0478***
3.47
D*R*LEV b 15 þ 0.0578** 2.41 0.0606** 2.51
MTB b 16 ? 0.0075 0.9 0.0032 0.39
D*MTB b 17 ?
0.0079
0.59
0.0035
0.26
R*MTB b 18 ?
0.0281
1.3
0.0213
0.99
D*R*MTB b 19 þ 0.0963* 1.84 0.0890* 1.68
2
R 0.1402 0.1299
No. of Obs. 1,002 1,002
(continued) Table 6.
The effects of foreign
ownership
PAR
34,2 Notes: This table reports the regression results of accounting conservatism with different types of
ownership using Basu’s, 1997 differential timeliness measure of accounting conservatism, separately for
firms with low foreign ownership (Panel A) and firms with high foreign ownership (Panel B). Low (high)
foreign ownership firm-year observations are the observations that have foreign ownership lower (higher)
than the year and industry median foreign ownership. The dependent variable is Et/Pt
1 where E is
earnings per share and P is the price per share at year-end. GOV is the government ownership percentage of
212 a firm’s equity. SOE is equal to one if GOV >= 50% and zero otherwise. All models include the robust
option to obtain robust standard errors. Numbers in parentheses represent the t-statistics. The superscripts,
***, ** and * denote the 1%, 5% and 10% levels of significance, respectively, in a two-tailed test. Refer to
Table 6. the Appendix for the definitions of variables

alternative measure follows the earnings persistence approach suggested by Basu (1997) to
examine the effect of accounting conservatism on earnings time series. This approach
implies that good news persists longer than bad news which may not be fully included in
stock price. The second alternative measure of accounting conservatism is the book-to-
market ratio. Beaver and Ryan (2000) suggest firms that report low book-to-market ratios
represent high conservatism.

6.1 Earnings persistence model – Basu (1997)

Following Basu (1997), we use the first alternative measure of accounting conservatism that
investigates the time-series properties of earnings change. Specifically, we use the following
model to estimate the effects of state ownership on accounting conservatism:

DNIt = g 0 þ g 1*DDNIt
1 þ g 2*DNIt
1 þ g 3*DDNIt
1*DNIt
1 þ g 4*POL

þ g 5*DDNIt
1*POL þ g 6*DNIt
1*POL þ g 7*DDNIt
1*DNIt
1*POL
þ g 8*SIZE þ g 9*DDNIt
1*SIZE þ g 10*DNIt
1*SIZE
þ g 11*DDNIt
1*DNIt
1*SIZE þ g 12*LEV þ g 13*DDNIt
1*LEV
þ g 14*DNIt
1*LEV þ g 15*DDNIt
1*DNIt
1*LEV þ g 16*MTB
þ g 17*DDNIt
1*MTB þ g 18*DNIt
1*MTB þ g 19*DDNIt

1*DNIt
1*MTB

where DNI is the change in earnings scaled by beginning total assets. DDNI is a dummy
equal to one if DNI is negative, zero otherwise.
Conservatism implies bad news is recognised more quickly than good news. This
method assumes that good news persists longer than bad news which may not be fully
incorporated in share price. Bad news creates a transition shock while good news creates a
persistent shock in the earnings process. Conservatism implies bad news (as measured by
an earnings decrease) is recognised more quickly than good news for non-SOEs; hence, we
expect g 3 to be negative. Our interest variable is g 7 which measures the difference in
accounting conservatism effects for time-series properties of earnings between SOEs and
non-SOEs. Hypothesis H1 predicts that SOEs adopt less accounting conservatism than non-
SOEs, hence, we expect g 7 to be positive.
As expected, the evidence in Table 7 shows non-SOEs adopt accounting conservatism
( g 3 =
2.303 with the t-stat =
7.19 in the model for SOE and g 3 =
2.651 with the t-stat =

8.04 in the model for GOV). The estimate of coefficient g 7 is positive and significant in
both models ( g 7 = 0.379 with the t-stat = 2.81 in the model for SOE and g 7 = 0.0054 with the
t-stat = 2.4 in the model for GOV). The results show that non-SOEs recognise bad news in a
timelier manner than SOEs. The evidence in Table 7 confirms H1.
 To test the effects of foreign ownership on the relationship between government Tax rate cuts
ownership and accounting conservatism, we run model (4) separately for sub-samples of low on accounting
foreign owned firms. Low (high) foreign ownership firm-year observations are the
conservatism
observations that have foreign ownership lower (higher) than the year and industry median
foreign ownership. We report the results in Table 8, panel A for the low and panel B for the
high foreign ownership sub-samples.
The signs of interest variables in Table 8 are what we expected. In panel A where foreign
213
ownership is low, the adoption of accounting conservatism is significantly lower for SOEs
than for non-SOEs ( g 7 = 0.676 with the t-stat = 2.73 in the model for SOE and g 7 = 0.0126
with the t-stat = 3.35 in the model for GOV). However, in panel B, the sub-sample for firms
with high foreign ownership levels, the difference in accounting conservatism adoption
between SOEs and non-SOEs is low ( g 7 = 0.314 with the t-stat = 1.83 in the model for SOE
and g 7 =
0.0005 with the t-stat =
0.16 in the model for GOV). Interestingly, the
coefficient estimate of g 7 becomes insignificant in the model for GOV in panel B and only
significant at the 10% level in the model for SOE. The absolute values of the coefficient g 7
magnitudes are significantly lower in panel B than in corresponding values in panel A. The
evidence confirms the important impact of foreigners in the corporate governance of
Vietnamese firms.

Predicted POL = SOE POL = GOV

Dependent variable: DNIt sign Coef. t-stat Coef. t-stat

Constant g0 ?
0.0398**
2.45
0.0390**
2.37

DDNIt
1 g1 ?
0.0290
1.17
0.0378
1.5
DNIt
1 g2 ?
0.0344
0.21
0.0935
0.58
DDNIt
1*DNIt
1 g3

2.303***
7.19
2.651***
8.04
POL g4 ?
0.0010
0.23 0.0000
0.4
DDNIt
1*POL g5 ? 0.0061 0.91 0.0002 1.45
DNIt
1*POL g6 ? 0.0913 1.22 0.00277** 2.16
DDNIt
1*DNIt
1*POL g7 þ 0.379*** 2.81 0.00540** 2.4
SIZE g8 ? 0.00336*** 2.59 0.00333** 2.56
DDNIt
1*SIZE g9 ? 0.0015 0.76 0.0021 1.03
DNIt
1*SIZE g 10 ?
0.0139
1.01
0.0122
0.9
DDNIt
1*DNIt
1*SIZE g 11 þ 0.163*** 6.52 0.190*** 7.48
LEV g 12 ?
0.0004
0.38
0.0004
0.45
DDNIt
1*LEV g 13 ? 0.000005 0.1 0.0001 0.1
DNIt
1*LEV g 14 ?
0.0202
1.02
0.0187
0.95
DDNIt
1*DNIt
1*LEV g 15
0.0363 1.23 0.0412 1.4
MTB g 16 ? 0.00540*** 2.7 0.00548*** 2.81
DDNIt
1*MTB g 17 ?
0.0054
1.37
0.00649*
1.66
DNIt
1*MTB g 18 ? 0.0259* 1.7 0.0233* 1.74
DDNIt
1*DNIt
1*MTB g 19

0.0984*
1.72
0.129**
2.24
R2 0.1290 2038 0.1310 2038
No. of Obs. 2,038 2,038

Notes: This table reports the regression results of the model in equation (4). The dependent variable is Table 7.
DNIt, the change in earnings of the year scaled by beginning total assets. DDNIt
1 is a dummy equal to one Accounting
if the change in income is negative, zero otherwise. GOV is the government ownership percentage of a conservatism and
firm’s equity. SOE is equal to one if GOV >= 50% and zero otherwise. All models include the robust option
to obtain robust standard errors. Numbers in parentheses represent the t-statistics. The superscripts, ***, state ownership –
** and * denote the 1%, 5% and 10% levels of significance, respectively, in a two-tailed test. Refer to the Basu (1997) earnings
Appendix for the definitions of variables persistence
PAR
Predicted POL = SOE POL = GOV
34,2 Dependent variable: DNIt sign Coef. t-stat Coef. t-stat

Panel A: Low foreign ownership firms – foreign ownership is lower than the median of foreign ownership by
industry and year
Constant g0 ?
0.0287
1.09
0.0281
1.07
DDNIt
1 g1 ?
0.0125
0.31
0.0341
0.84
214 DNIt
1 g2 ? 0.0218 0.08
0.0279
0.11
DDNIt
1*DNIt
1 g3

0.6982
1.2
1.4171**
2.37
POL g4 ?
0.0038
0.57
0.0001
0.45
DDNIt
1*POL g5 ? 0.0139 1.41 0.0003* 1.73
DNIt
1*POL g6 ? 0.1345 0.79 0.0012 0.5
DDNIt
1*DNIt
1*POL g7 þ 0.6763*** 2.73 0.0126*** 3.35
SIZE g8 ? 0.0022 1.01 0.0022 1.00
DDNIt
1*SIZE g9 ? 0.00004 0.01 0.0016 0.46
DNIt
1*SIZE g 10 ?
0.0089
0.37
0.0051
0.22
DDNIt
1*DNIt
1*SIZE g 11 þ
0.0039
0.08 0.0477 0.95
LEV g 12 ?
0.0001
0.08
0.0001
0.09
DDNIt
1*LEV g 13 ?
0.0008
0.42
0.0004
0.23
DNIt
1*LEV g 14 ?
0.0183
0.77
0.0174
0.73
DDNIt
1*DNIt
1*LEV g 15
0.0099 0.26 0.0225 0.59
MTB g 16 ? 0.0077** 2.25 0.0076** 2.22
DDNIt
1*MTB g 17 ?
0.0047
0.68
0.007
1.02
DNIt
1*MTB g 18 ?
0.0207
0.67
0.0214
0.69
DDNIt
1*DNIt
1*MTB g 19
0.1083 1.07 0.0322 0.32
R2 0.1288 0.1298
No. of Obs. 984 984
Panel B: High foreign ownership firms – foreign ownership is higher than the median of foreign ownership by
industry and year
Constant g0 ?
0.031
1.37
0.0277
1.17
DDNIt
1 g1 ?
0.0696**
1.98
0.0749**
2.07
DNIt
1 g2 ?
0.3125
1.15
0.5918**
1.96
DDNIt
1*DNIt
1 g3

2.8327***
6.44
2.7212***
5.8
POL g4 ? 0.0051 0.83
0.00001
0.07
DDNIt
1*POL g5 ?
0.001
0.1 0.0001 0.52
DNIt
1*POL g6 ?
0.0526
0.55 0.004** 2.12
DDNIt
1*DNIt
1*POL g7 þ 0.3144* 1.83
0.0005
0.16
SIZE g8 ? 0.0031* 1.81 0.0029 1.62
DDNIt
1*SIZE g9 ? 0.0039 1.42 0.0042 1.53
DNIt
1*SIZE g 10 ? 0.0049 0.23 0.021 0.94
DDNIt
1*DNIt
1*SIZE g 11 þ 0.1995*** 6.11 0.1953*** 5.72
LEV g 12 ?
0.0037**
1.97
0.0037**
1.98
DDNIt
1*LEV g 13 ? 0.0073*** 2.93 0.0073*** 2.94
DNIt
1*LEV g 14 ?
0.0743
1.18
0.0416
0.66
DDNIt
1*DNIt
1*LEV g 15
0.3323*** 3.74 0.300*** 3.37
MTB g 16 ? 0.0034 1.25 0.0045* 1.66
DDNIt
1*MTB g 17 ?
0.0048
0.95
0.006
1.17
DNIt
1*MTB g 18 ? 0.0417** 2.03 0.0059 0.29
DDNIt
1*DNIt
1*MTB g 19

0.0827
1.09
0.0491
0.64
2
R 0.167 0.1703
Table 8. No. of Obs. 1,002 1,002
Foreign ownership (continued)
effects – Basu (1997)
earnings persistence
 Tax rate cuts
Notes: This table reports the regression results of the model in equation (4). The result is presented on accounting
separately for the sub-samples of firms with low foreign ownership and firms with high foreign ownership. conservatism
Low (high) foreign ownership firm-year observations are the observations that have foreign ownership
lower (higher) than the year and industry median foreign ownership. The dependent variable is DNIt, the
change in earnings of the year scaled by beginning total assets. DDNIt
1 is a dummy equal to one if the
change in income is negative, zero otherwise. GOV is the government ownership percentage of a firm’s
equity. SOE is equal to one if GOV >= 50% and zero otherwise. All models include the robust option to 215
obtain robust standard errors. Numbers in parentheses represent the t-statistics. The superscripts, ***, **
and * denote the 1%, 5% and 10% levels of significance, respectively, in a two-tailed test. Refer to the
Appendix for the definitions of variables Table 8.

We use the following model to test the effect of tax rate cut on accounting conservatism
using the time series tests of timeliness of loss recognition:
DNIt = c 0 þ c 1*DDNIt
1 þ c 2*DNIt
1 þ c 3*DDNIt
1*DNIt
1 þ c 4*TAX
þ c 5*DDNIt
1*TAX þ c 6*DNIt
1*TAX þ c 7*DDNIt
1*DNIt

1*TAX þ c 8*SIZE þ c 9*DDNIt
1*SIZE þ c 10*DNIt
1*SIZE
þ c 11*DDNIt
1*DNIt
1*SIZE þ c 12*LEV þ c 13*DDNIt
1*LEV
þ c 14*DNIt
1*LEV þ c 15*DDNIt
1*DNIt
1*LEV þ c 16*MTB
þ c 17*DDNIt
1*MTB þ c 18*DNIt
1*MTB þ c 19*DDNIt

1* DNIt
1*MTB
We report regression results for model (5) for the whole sample and separately for SOEs and
non-SOEs in Table 9 and Table 10, respectively. Similar to model (4), we expect c 7 to be
negative to show that firms increase the adoption of accounting conservatism during the
year immediately before the tax rate cut year. The coefficient estimate of c 7 is negative (as
expected) but insignificant in Table 9.
Panel A of Table 10 shows the coefficient estimate of c 7 is negative and significant at the
5% level in the model without controlling for firm size, leverage and market-to-book ratio
( c 7 =
0.307 with the t-stat =
2.08). Interestingly, this coefficient turns positive and
significant at the 10% level in panel B ( c 7 = 0.429 with the t-stat = 1.85) for SOEs.
Controlling for firm size, leverage and market-to-book ratio, this coefficient is insignificant.

6.2 Market-based approach

Following Ahmed and Duellman (2007) and Haider et al. (2021) among others, we use the
book-to-market ratio as the second alternative measure of accounting conservatism [1].
We compute the book-to-market ratio of a firm as the total book value of equity scaled by the
total market value of equity at year-end, then multiply the result by
1, resulting in CON-
MKT as the dependent variable in models (6) and (7). Because we multiple the book-to-
market ratio by
1, positive values imply larger accounting conservatism. Compared with
the previous section, there are more firm-year observations in the regression results of this
section because the data in this section does not have to fulfil the requirements of the Basu
(1997) measure.

CON
MKTi;t ¼ z 0þ z 1 POLi;tþ z 2  SIZEi;tþ z 3  LEVi;t þ z 4  CFOi;t þ z 5

 GROWTHi;t þ «
(6)
PAR Predicted Model 1 Model 2
34,2 Dependent variable: DNIt sign Coef. t-stat Coef. t-stat

Constant c0 ? 0.00426** 2.16 0.00349*** 2.67

DDNIt
1 c1 ?
0.0112***
3.37
0.0253
1.00
DNIt
1 c2 ?
0.0000449
1.60
0.0674
0.42
DDNIt
1*DNIt
1 c3

0.401***
9.15
2.295***
7.11
216 TAX c4 ? 0.00670 1.44 0.00203 0.43
DDNIt
1*TAX c5 ?
0.00926
1.29
0.00116
0.16
DNIt
1*TAX c6 ?
0.0910
1.35 0.0641 0.89
DDNIt
1*DNIt
1*TAX c7

0.00436
0.04
0.0804
0.65
SIZE c8 ? 0.00112 0.55
DDNIt
1*SIZE c9 ?
0.0126
0.92
DNIt
1*SIZE c 10 ? 0.166*** 6.62
DDNIt
1*DNIt
1*SIZE c 11 þ
0.000356
0.36
LEV c 12 ? 0.000125 0.09
DDNIt
1*LEV c 13 ?
0.0200
1.01
DNIt
1*LEV c 14 ? 0.0440 1.48
DDNIt
1*DNIt
1*LEV c 15
0.00448** 2.32
MTB c 16 ?
0.00453
1.16
DDNIt
1*MTB c 17 ? 0.0412*** 3.36
DNIt
1*MTB c 18 ?
0.0986*
1.73
DDNIt
1*DNIt
1*MTB c 19

0.0412**
2.52
R2 0.0553 0.120
No. of Obs. 2,038 2,038

Notes: This table reports the regression results of the model in equation (5). The dependent variable is
DNIt, the change in earnings of the year scaled by beginning total assets. DDNIt
1 is a dummy equal to one
if the change in income is negative, zero otherwise. TAX is equal to one for 2013 and 2015, the years
Table 9. immediately prior to the tax rate decreases and zero otherwise. The tax rate decreases from 25% to 22% in
2014 and from 22% to 20% in 2016 for all firms. All models include the robust option to obtain robust
The effect of a tax standard errors. Numbers in parentheses represent the t-statistics. The superscripts, ***, ** and * denote
rate cut – Basu (1997) the 1%, 5% and 10% levels of significance, respectively, in a two-tailed test. Refer to the Appendix for the
earnings persistence definitions of variables

In model (6), the definitions of POL, SIZE and LEV are the same as those in the previous
section. POL stands for 2 measures of state involvement in listed firms. CFO is the cash flow
from operations scaled by year-end assets. GROWTH is the annual growth rate of firm sales
revenue. In the regressions of the model (6), we also control for two-sic industry and firm-
year fixed effects.

CON
MKTi;t ¼ h 0þ h 1 tAXi;tþ h 2  SIZEi;t þ h 3  LEVi;t þ h 4  CFOi;tþ h 5

 GROWTHi;t þ «
(7)

We use model (7) to investigate the effect of tax rate cut on accounting conservatism. The
definitions of the variables in this model are the same as those in the previous sections.
We expect a positive relationship between SIZE and conservatism because prior studies
document that large firms have larger public scrutiny and political cost (Watts and
Zimmerman, 1978; Basu, 2005). We include LEV in the model because Watts and Zimmerman
(1978) contend that firms with higher levels of debt are likely to adopt aggressive accounting
policies. Watts (2003) and Ball et al. (2008) document that highly levered firms adopt more
 Predicted Model 1 Model 2
Tax rate cuts
Dependent variable: DNIt sign Coef. t-stat Coef. t-stat on accounting
conservatism
Panel A: Non-SOEs
Constant c0 ? 0.0106*** 3.77
0.0367*
1.78
DDNIt
1 c1 ?
0.0163***
3.69
0.0355
1.12
DNIt
1 c2 ?
0.185***
5.40 0.0529 0.29
DDNIt
1*DNIt
1 c3

0.256***
4.23
2.508***
6.85 217
TAX c4 ? 0.00268 0.44 0.00271 0.46
DDNIt
1*TAX c5 ?
0.00778
0.84
0.00369
0.40
DNIt
1*TAX c6 ? 0.0958 1.12 0.0949 1.12
DDNIt
1*DNIt
1*TAX c7

0.307**
2.08
0.220
1.52
SIZE c8 ? 0.00319* 1.93
DDNIt
1*SIZE c9 ? 0.00175 0.68
DNIt
1*SIZE c 10 ?
0.0170
1.10
DDNIt
1*DNIt
1*SIZE c 11 þ 0.176*** 6.23
LEV c 12 ?
0.000917
0.76
DDNIt
1*LEV c 13 ? 0.000467 0.26
DNIt
1*LEV c 14 ?
0.116***
3.54
DDNIt
1*DNIt
1*LEV c 15
0.155*** 3.59
MTB c 16 ? 0.00544* 1.85
DDNIt
1*MTB c 17 ?
0.00233
0.44
DNIt
1*MTB c 18 ? 0.0135 0.47
DDNIt
1*DNIt
1*MTB c 19

0.0924
1.24
R2 0.0953 0.163
No. of Obs. 1,430 1,430
Panel B: SOEs
Constant c0 ? 0.00746** 2.53
0.0186
0.65
DDNIt
1 c1 ?
0.0109**
2.16
0.00559
0.13
DNIt
1 c2 ?
0.0000463**
2.14
0.667
0.92
DDNIt
1*DNIt
1 c3

0.0691
0.71 0.0188 0.02
TAX c4 ?
0.000165
0.02
0.00138
0.19
DDNIt
1*TAX c5 ? 0.00668 0.64 0.00851 0.79
DNIt
1*TAX c6 ?
0.146
1.09
0.0658
0.41
DDNIt
1*DNIt
1*TAX c7
0.429* 1.85 0.369 1.49
SIZE c8 ? 0.00196 0.89
DDNIt
1*SIZE c9 ? 0.000114 0.03
DNIt
1*SIZE c 10 ? 0.0391 0.73
DDNIt
1*DNIt
1*SIZE c 11 þ 0.0112 0.14
LEV c 12 ?
0.00175
0.99
DDNIt
1*LEV c 13 ? 0.000172 0.08
DNIt
1*LEV c 14 ? 0.0220 0.66
DDNIt
1*DNIt
1*LEV c 15

0.0561
1.20
MTB c 16 ? 0.00434 1.39
DDNIt
1*MTB c 17 ?
0.00815
1.38
DNIt
1*MTB c 18 ? 0.00165 0.05
DDNIt
1*DNIt
1*MTB c 19

0.0476
0.50
R2 0.0219 0.0506
No. of Obs. 608 608

Notes: This table reports the regression results of the model in equation (5). The result is presented
separately for the sub-samples of non-SOEs and SOEs. The dependent variable is DNIt, the change in Table 10.
earnings of the year scaled by beginning total assets. DDNIt
1 is a dummy equal to one if the change in
The effect of a tax
income is negative, zero otherwise. TAX is equal to one for 2013 and 2015, the years immediately prior to
the tax rate decreases and zero otherwise. The tax rate decreases from 25% to 22% in 2014 and from 22% rate cut for non-SOEs
to 20% in 2016 for all firms. All models include the robust option to obtain robust standard errors. Numbers and SOEs – Basu
in parentheses represent the t-statistics. The superscripts, ***, ** and * denote the 1%, 5% and 10% levels (1997) earnings
of significance, respectively, in a two-tailed test. Refer to the Appendix for the definitions of variables persistence
PAR cautious reporting methods. The empirical findings on leverage effects are mixed. Ahmed et al.
34,2 (2002) find a positive relationship between leverage and accounting conservatism. Using
Australian data, Haider et al. (2021) document a positive relationship while Ahmed and Henry
(2012) find a negative relationship between accounting conservatism proxied by book-to-
market ratio. Ahmed et al. (2002) note that profitable firms are likely to follow more
conservatism, hence, we expect a positive relationship between CFO and CON-MKT.
218 The results in Table 11 show that for the whole sample, coefficient POL is negative and
significant at the 10% level for the model of SOE but is insignificant for the model of GOV.
The evidence also shows that three types of firms exercise greater conservatism: large firms,
firms with lower debt and firms with lower growth rates.
Table 12 documents regression results of accounting conservatism separately for firms
with low foreign ownership and firms with high foreign ownership. The evidence in the first
two columns of panel A indicates that in firms with low foreign ownership, conservatism is
lower for SOEs than for non-SOEs. Although this result supports H1, the evidence in panel
B does not support H1. The evidence in panel B confirms the results of the previous sections:
high levels of foreign ownership can reduce the negative effect of government control on
accounting conservatism.
Table 13 reports the effects of tax rate cut on accounting conservatism. As expected,
firms adopt more accounting conservatism in the year immediately before the tax rate cut
year to take advantage of lowering total tax payment. The coefficient of TAX is 0.151 and
significant at the 1% level (t-stat = 6.12).
Table 14 presents separate regression results of the tax rate cut effects on accounting
conservatism for SOE and non-SOEs. The results show that non-SOEs more often take
advantage of tax rate cuts than do SOEs. The coefficient on TAX is both larger in
magnitude and higher significant for non-SOEs than for SOEs ( h = 0.162 with the t-stat =
5.11 for non-SOEs; h = 0.0617 with the t-stat = 1.95 for SOEs).

7. Conclusion
We investigate the effects of government control, the tax rate cuts and the combination of these
two factors on accounting conservatism using the data of listed Vietnamese firms for the period
2007–2019. We use three methods of measuring accounting conservatism: Basu’s (1997)
differential timeliness, Basu’s (1997) earnings persistence measure and the book-to-market ratio
approach. The results of the first two methods consistently affirm that SOEs adopt less
conservative accounting than non-SOEs. Using the book-to-market ratio (the third method) also
shows similar results; however, the coefficient is only significant at the 10% level for the model of
SOEs while the coefficient is negative but insignificant for the model of GOV. More interestingly,
the results using all three measures of accounting conservatism show the increase of foreign
ownership reduces the negative impact of government control on firms’ adopting conservatism.
During the year prior to an effective tax rate cut, managers increase the adoption of
accounting conservatism to save the present value of tax payment. Interestingly, the
accounting conservatism response to the tax rate cuts is more pronounced for non-SOEs than
for SOEs. The results are consistent using all three measures of accounting conservatism.
Literature documents contradictory effects of government control on firm performance and
investors (including global investors) benefit from understanding these effects. On the one
hand, the government guarantees the existence of SOEs, so the default risk is virtually zero for
investors of SOEs. Further, Le (2020a) documents that SOEs in Vietnam enjoy a lower cost of
borrowing than non-SOEs because SOEs can lower transaction fees and have more access to
commercial banks which are also SOEs. On the other hand, Blenman and Le (2014) note that
the appointment of management in SOEs is based more on political connections than on the
Dependent variable: Predicted POL = SOE POL = GOV
Tax rate cuts
CON-MKTi,t sign Coef. t-stat Coef. t-stat on accounting
conservatism
POL z1

0.101*
1.79
0.00137
1.26
SIZE z2 þ 0.485*** 28.02 0.484*** 27.98
LEV z3 þ
0.0121**
2.24
0.0123**
2.26
CFO z4 þ 0.0902 1.11 0.0942 1.15
GROWTH z5

0.00370*
1.91
0.00371*
1.91 219
Year and Industry FF Yes Yes
R2 0.496 0.495
No. of Obs. 2,499 2,499

Notes: This table reports the regression results of the model in equation (6). The dependent variable is
CON-MKTi,t, the book-to-market ratio, measured as the ratio between total book value of equity and total Table 11.
market value of equity at year end. GOV is the government ownership percentage of a firm’s equity. SOE is
Results for the effects
equal to one if GOV >= 50% and zero otherwise. CFO is the operating cash flow scaled by total assets.
GROWTH is the annual growth rate of sales. All models include the robust option to obtain robust standard of government
errors. All models include the robust option to obtain robust standard errors. Numbers in parentheses control – book-to-
represent the t-statistics. The superscripts, ***, ** and * denote the 1%, 5% and 10% levels of significance, market ratio
respectively, in a two-tailed test approach

Dependent variable: Predicted POL = SOE POL = GOV

CON-MKTi,t sign Coef. t-stat Coef. t-stat

Panel A: Low foreign ownership firms – foreign ownership is lower than the median of foreign ownership by
industry and year
POL z1

0.154**
2.06
0.00159
1.09
SIZE z2 þ 0.531*** 20.3 0.529*** 20.24
LEV z3 þ 0.00159 0.26 0.00138 0.22
CFO z4 þ 0.0358 0.34 0.0404 0.39
GROWTH z5
0.0625** 2.13 0.0631** 2.14
Year and Industry FF Yes Yes
R2 0.496 0.495
No. of Obs. 1,269 1,269
Panel B: High foreign ownership firms– foreign ownership is higher than the median of foreign ownership by
industry and year
POL z1

0.0353
0.5 0.00126 0.91
SIZE z2 þ 0.423*** 20.84 0.422*** 20.82
LEV z3 þ
0.162***
14.21
0.162***
14.21
CFO/AT z4 þ 0.104 1.02 0.102 1
GROWTH z5

0.00319**
2.27
0.00319**
2.26
Year and Industry FF Yes Yes
R2 0.496 0.495
No. of Obs. 1,179 1,179

Notes: This table reports the regression results of the model in equation (6). The result is presented
separately for the sub-samples of firms with low foreign ownership and firms with high foreign ownership.
Low (high) foreign ownership firm-year observations are the observations that have foreign Table 12.
ownership lower (higher) than the year and industry median foreign ownership. The dependent variable is Results for the effects
CON-MKTi,t, the book-to-market ratio, measured as the ratio between the total book value of equity and the of foreign
total market value of equity at year-end. All models include the robust option to obtain robust standard
errors. Numbers in parentheses represent the t-statistics. The superscripts, ***, ** and * denote the 1%, 5% ownership – book-to-
and 10% levels of significance, respectively, in a two-tailed test. Refer to the Appendix for the definitions of market ratio
variables approach
PAR
Dependent variable: Predicted All
34,2 CON-MKTi,t sign Coef. t-stat

TAX h1 þ 0.151*** 6.12

SIZE h2 þ 0.667*** 30.76
LEV h3 þ
0.0349***
4.39
CFO h4 þ 0.0340 0.38
220 GROWTH h5

0.0044**
2.32
Industry FE Yes
R2 0.435
No. of Obs. 2,026

Notes This table reports the regression results of the model in equation (7). The dependent variable is CON-
MKTi,t, the book-to-market ratio, measured as the ratio between the total book value of equity and the total
market value of equity at year-end. TAX is equal to one for 2013 and 2015, the years immediately prior to
Table 13.
the tax rate decreases and zero otherwise. The tax rate decreases from 25% to 22% in 2014 and from 22%
Results for the effects to 20% in 2016 for all firms. CFO is the operating cash flow scaled by total assets. GROWTH is the annual
of a tax rate cut – growth rate of sales. All models include the robust option to obtain robust standard errors. Numbers in
book-to-market ratio parentheses represent the t-statistics. The superscripts, ***, ** and * denote the 1%, 5% and 10% levels of
approach significance, respectively, in a two-tailed test

talents of the managers which may reduce the corporate governance efficiency in SOEs.
Further, SOEs have social duties which may harm the profitability of SOEs. This paper
contributes to this area of research. SOEs adopt less accounting conservatism than non-SOEs.
Further, during the year immediately before a tax rate cut year, firms can increase accounting
conservatism to reduce total tax payments. We find non-SOEs take greater advantage of the
tax rate cuts than SOEs, which can reduce total tax payments, consequently, increasing
shareholders’ wealth. More interestingly, the finding that the increase of foreign ownership can
improve corporate governance which increases tax savings in SOEs is directly relevant to
foreign investors. Prior studies document that accounting conservatism can serve as a
governance mechanism and can increase a firm’s value. The findings of this paper are

Dependent variable: Predicted Non-SOEs SOEs

CON-MKTi,t sign Coef. t-stat Coef. t-stat

TAX h1 þ 0.162*** 5.11 0.0617* 1.95

SIZE h2 þ 0.548*** 20.19 0.879*** 24.66
LEV h3 þ
0.148***
9.29 0.0207*** 3.02
CFO h4 þ
0.0104
0.09 0.0719 0.56
GROWTH h5
0.00883 0.39
0.00475***
3.49
Industry FE Yes Yes
R2 0.437 0.58
No. of Obs. 1,421 605

Table 14. Notes: This table reports the regression results of the model in equation (7), separately for the sub-samples
Results for the effects of non-SOEs and SOEs. The dependent variable is CON-MKTi,t, the book-to-market ratio, measured as the
ratio between the total book value of equity and the total market value of equity at year-end. TAX is equal
of a tax rate cut for
to one for 2013 and 2015, the years immediately prior to the tax rate decreases and zero otherwise. The tax
non-SOEs and rate decreases from 25% to 22% in 2014 and from 22% to 20% in 2016 for all firms. CFO is the operating
SOEs – book-to- cash flow scaled by total assets. GROWTH is the annual growth rate of sales. All models include the robust
market ratio option to obtain robust standard errors. Numbers in parentheses represent the t-statistics. The superscripts,
approach ***, ** and * denote the 1%, 5% and 10% levels of significance, respectively, in a two-tailed test
essential. Investors are better prepared by understanding the difference between SOEs and Tax rate cuts
non-SOEs in adopting accounting conservatism and in response to the tax rate cuts. Because on accounting
SOEs are also responsible for social stability, their reaction to increasing accounting
conservatism in the year immediately prior to and the effective tax cut is lower for SOEs than
conservatism
for non-SOEs that may cause lower tax savings in SOEs than in non-SOEs. Investors of SOEs
must make a trade-off which is a virtually zero default risk and lower cost of debt versus higher
taxes paid due to lower accounting conservatism.
Global investors may be interested in understanding how financial reporting practices
221
vary among countries and how the unique institutional structures of each country affect the
financial reporting quality. Further, emerging market regulators may have incentives to
improve the transparency of financial reporting. This research is beneficial to policymakers
and investors where the government is both the taxpayer and tax collector and in emerging
markets where foreign investment is an important source of financing. SOEs are taxpayers;
however, their controlling interest, the government, is also a tax collector. Hence, SOEs have
internal competing interests that may be reluctant to increase firm value from tax savings
by increasing accounting conservatism. Alternatively, the default risk is virtually zero in
SOEs due to the government’s implicit guarantee for SOEs’ existence. Further, managers of
SOEs may have better access to new regulations (Le, 2020a).

Note
1. Due to the limited market size of Vietnamese stock markets, most firms started listing in or after
2007, the Hanoi stock exchange was launched in 2005. We do not include 6-year-lagged security
returns in the regression model. We use the simple book-to-market ratio as the second alternative
conservatism measure. Prior studies (Ahmed and Duellman, 2007; Haider et al., 2021) find
consistent results between the model of simple book-to-market and the model including the
6-year-lagged security return.

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PAR Appendix
34,2

Variables Definitions

224 EPS/Pt
1 Two-year cumulative earnings per share of the year divided by market price per share at
the beginning of the year
D Dummy variable that equal to one if R is negative and zero otherwise
R Two-year cumulative buy and hold stock return from 9 months before the fiscal year-end to
3 months after the fiscal year-end
GOV Percentage of equity owned by the government
LEV (Long-term debt þ short-term debt)/market value of equity
MTB Market value of equity/book value of equity
SIZE The natural logarithm of the market value of equity at the end of the year
SOE Dummy variable that is equal to 1 if the firm is a state-owned enterprise (the government
owns 50% of voting shares), equal to zero otherwise
Table A1. TAX Dummy equal to one for the year immediately prior to the year that the tax rate decrease
Variable definitions becomes effective and zero otherwise

About the authors

Ben Le is an Assistant Professor of Accounting at the University of Tennessee at Martin. His
research was presented at the AAA Annual Meeting, FMA Annual Meeting, AAA International
Accounting Section Midyear Meeting, AAA Financial Accounting and Reporting Section Midyear
Meeting, American Real Estate Society Annual Meeting where he won the best real estate finance
paper award, and the American Economic Association Annual Meeting, among others. His 2019
article entitled “Working capital management and firm’s valuation, profitability and risk: Evidence
from a developing market” won the outstanding paper of International Journal of Managerial Finance
and Emerald 2020 Literati Award. He has published articles in Pacific Accounting Review, Journal of
Real Estate Research, among others. Ben Le is the corresponding author and can be contacted at:
ble4@utm.edu
Paula Hearn Moore is a Professor of Accounting and Business Law at the University of Tennessee
at Martin. Her research interests are in business law, taxes, and financial accounting. Her research
was presented at the AAA Annual Meeting, International Accounting Section Midyear Meeting,
among others. She has published articles in Brigham Young University Law Review, and Journal of
Learning in Higher Education, among others.

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