Free cash flow, financial performance, and disclosure violations the moderating role of the audit committee

Abstract

This study was conducted to examine the relationship between free cash flow (FCF), financial performance (FP), and disclosure violations, while simultaneously assessing the moderating role of the audit committee (AC) in non-financial firms listed in Vietnam during the period 2019–2023. Drawing on agency theory and stewardship theory, the analysis was performed using Partial Least Squares Structural Equation Modeling (PLS-SEM) to accommodate the complex and non-normally distributed nature of the data. The findings indicate that FCF positively affects FP but concurrently increases the risk of disclosure violations. In contrast, FP was not found to have a statistically significant impact on disclosure behavior, implying that transparency is not solely determined by financial outcomes but also influenced by internal control quality. Importantly, the AC was shown to exert a significant moderating effect by enhancing the positive impact of FCF on FP and attenuating the adverse effect of poor FP on disclosure violations. This study contributes to the literature by integrating FCF, FP, and disclosure violations into a single empirical model and by highlighting the underexplored regulatory role of ACs in emerging markets. Practically, the results provide meaningful implications for firms and regulators in strengthening transparency, mitigating disclosure risks, and improving governance mechanisms in the context of Vietnam’s capital market reform and upgrade trajectory. Research Purpose This study investigates how free cash flow influences financial performance and disclosure violations in Vietnamese listed firms, and examines the moderating role of audit committees, aiming to enhance understanding of governance mechanisms and provide implications for improving transparency in emerging markets. Research Motivation This study is motivated by the limited evidence on how free cash flow and financial performance affect disclosure violations in Vietnam, and by the underexplored moderating role of audit committees in strengthening governance and transparency in emerging markets. Research Design, Approach, and Method The study employs a quantitative design using panel data from non-financial listed firms in Vietnam (2019–2023) and applies Partial Least Squares Structural Equation Modeling (PLS-SEM) to test direct, indirect, and moderating relationships among free cash flow, financial performance, and disclosure violations. Main Findings Free cash flow positively impacts financial performance and reduces disclosure violations. Financial performance shows no significant effect on disclosure behavior. Audit committees enhance the positive effect of free cash flow on performance and mitigate disclosure violations when performance declines. Practical/Managerial Implications The findings highlight the need for firms to strengthen audit committee effectiveness, improve free cash flow utilization, and enhance disclosure governance, providing managers and regulators with actionable insights to mitigate disclosure risks and foster transparency in Vietnam’s capital market.