Enterprise risk management and earnings management under financial distress: evidence from an emerging market

This study examines how financial distress influences earnings management through accrual-based and real activity-based channels and investigates the moderating role of enterprise risk management (ERM) in an emerging market setting. Drawing on agency theory and Positive Accounting Theory, we argue that financial distress intensifies managers’ incentives to manipulate reported earnings, while ERM can constrain such opportunistic behavior. Using panel data from 2,845 firm-year observations in the Vietnam stock market, we find that financial distress is positively and significantly associated with accrual-based earnings management, whereas its effect on real earnings management is weak and unstable. More importantly, ERM significantly attenuates the positive impact of financial distress on accrual-based earnings management, but does not exert a comparable moderating effect on real activity manipulation. Employing a control function approach to address ERM endogeneity, the results further indicate that the constraining role of ERM depends on its effective implementation and systematic component. These findings highlight the channel-specific governance role of ERM and underscore its importance in safeguarding financial reporting quality during periods of financial pressure, with important implications for corporate governance and risk oversight in emerging economies.