Does real earnings management weaken commitment credibility? Evidence from ESG embedment in China

Real earnings management (REM) imposes short-run costs, but does it also weaken the credibility investors assign to firms' longer-horizon commitments? Using Chinese A-share-listed firms from 2018 to 2022, we examine this question through ESG embedment, defined as external evaluators' recognition of a firm's sustainability commitments rather than its underlying ESG quality. REM is negatively associated with firm value, and the association attenuates modestly when ESG embedment enters the valuation model, consistent with partial transmission through weaker commitment credibility. The REM-related valuation discount is concentrated in mature firms, where short-run distortions are less readily justified as growth investment. The discount is larger among firms with stronger AI capability, whereas AI-related disclosure does not have a comparable moderating effect. Carbon-transition exposure affects the valuation setting without intensifying the REM penalty. These findings link REM to sustainable finance through the credibility of externally recognized corporate commitments.