The Impact of Corporate Governance on Financial Performance: The Mediating Role of Real Earnings Management

This study examines the association between corporate governance and financial performance and investigates whether real earnings management (REM) mediates this relationship in an emerging-market context. Using a balanced panel of 434 nonfinancial listed firms in Vietnam from 2020 to 2024, yielding 2170 firm-year observations, the study employs feasible generalized least squares (FGLS) after diagnostic tests indicate heteroskedasticity and autocorrelation. The Durbin–Wu–Hausman test does not indicate significant endogeneity in the current model specification. REM is measured using the Roychowdhury-based approach, and mediation effects are examined through sequential regressions. Tobin’s Q is used for robustness testing, and a two-step System GMM is used as an additional robustness test. The results show that board size, institutional ownership, and state ownership are positively associated with financial performance, while board independence is negatively associated with performance. Board financial expertise has no significant direct relationship with performance. REM is negatively associated with financial performance and serves as a mediating channel in the governance–performance relationship. The study contributes to the corporate governance literature by showing that REM can transmit governance effects to firm performance in an emerging market characterized by evolving enforcement, state ownership, and potential gaps between formal and substantive governance mechanisms.