Earnings management and tax avoidance in the context of sustainability: Evidence from manufacturing firms

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Abstract

This study investigates the impact of earnings management, focusing on discretionary accruals, on corporate tax avoidance among manufacturing firms listed on the Ho Chi Minh Stock Exchange (HOSE) during the period 2018–2022. This study is contextualized within the Vietnamese government’s 30 percent corporate income tax (CIT) reduction policy implemented to support businesses during the COVID-19 pandemic. We employ feasible generalized least squares (FGLS) regression models to analyze the relationship between earnings management and tax avoidance, using two proxies: the cash effective tax rate (CASH_ETR) and book-tax differences (BTD) (Chen et al., 2019; Delgado et al., 2023). Our findings show that firms that engage in higher levels of earnings management are more likely to avoid taxes. Furthermore, we observe that firm size and profitability moderate this relationship, reducing the extent to which earnings management influences tax avoidance. By contrast, the economic downturn during the pandemic period appears to intensify the effect, suggesting that firms may exploit financial downturns as a justification for more aggressive tax strategies. These results highlight the complex interaction between financial reporting behavior and tax compliance, particularly under economic and policy-driven pressures. The findings offer insights for policymakers and regulators aiming to strengthen tax enforcement and improve transparency in corporate financial reporting in developing markets, such as Vietnam.

Keywords: Earnings Management, Tax Avoidance, Manufacturing Firms, Vietnam

Authors’ individual contribution: Conceptualization — T.L.A.N. and T.N.A.P.; Methodology — T.N.A.P. and H.M.N.; Investigation — T.N.A.P. and V.H.T.N.; Writing — Original Draft — T.N.A.P., V.H.T.N., and H.M.N.; Writing — Review & Editing — T.N.A.P., V.H.T.N., and H.M.N.; Supervision — T.L.A.N.; Funding Acquisition — T.L.A.N.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: H25, L60, M41

Received: 31.12.2024
Revised: 24.03.2025; 03.06.2025
Accepted: 30.06.2025
Published online: 03.07.2025

How to cite this paper: Nguyen, T. L. A., Phan, T. N. A., Nguyen, V. H. T., & Nguyen, H. M. (2025). Earnings management and tax avoidance in the context of sustainability: Evidence from manufacturing firms. Corporate Governance and Sustainability Review, 9(3), 55–65. https://doi.org/10.22495/cgsrv9i3p4