ESG Performance and Earnings Management : The Moderating Role of CEO Compensation

Purpose This study empirically examines the impact of Environmental, Social, and Governance (ESG) performance on two types of earnings management －accrual－based (AEM) and real activities－based (REM) －in Korean listed firms, and investigates how CEO compensation moderates these relationships. Methodology The analysis uses a panel dataset of 7,811 firm－year observations for non －financial listed companies from 2013 to 2022. ESG scores are derived from Korea Corporate Governance Service (KCGS) ratings, which are converted to a 7－point scale. CEO compensation (COMP) is measured as the natural logarithm of the average compensation per executive. AEM is estimated using the modified Jones model, and REM is estimated using Roychowdhury’s (2006) model. Panel regressions are employed to test both the main effects of ESG and the interaction effects between ESG and COMP. Findings First, higher ESG performance is significantly associated with lower levels of both AEM and REM, suggesting that ESG contributes to enhanced financial reporting transparency. Second, the moderating analysis reveals that high levels of CEO compensation significantly strengthen the negative association between ESG and both AEM and REM. This implies that high compensation and strong ESG performance can act as complementary governance mechanisms to enhance financial reporting integrity. Implications ESG performance should not be evaluated in isolation. Instead, a multi－ dimensional assessment that recognizes the synergistic potential between high compensation and strong ESG performance is essential. The findings suggest that aligning managerial incentives through high compensation with a firm’s ESG goals can be a powerful tool for fostering genuine accounting transparency. Nevertheless, given the inherent difficulty in detecting REM, continuous efforts by policymakers and auditors to improve REM－specific auditing protocols remain crucial for strengthening reporting integrity.