Nature's Toll on the Books: Biodiversity Exposure and Earnings Management

This study investigates the relationship between firm-level biodiversity risk exposure and earnings management practices, using a large dataset of 25,509 firm-year observations for U.S. non-financial firms from 2001 to 2020. We find that biodiversity risk is associated with higher earnings management, primarily driven by income-decreasing accruals. This indicates conservative reporting when firms face biodiversity-related uncertainty. Cross-sectional analyses reveal stronger effects among firms with greater debt maturity mismatch and lower operational efficiency. These results remain robust when using an alternative biodiversity risk proxy, controlling for firm fixed effects, and applying multiple approaches to address endogeneity. Overall, biodiversity risk emerges as a significant driver of financial reporting behavior, with important implications for regulators and stakeholders focused on sustainability and transparency.