Beyond Earnings Management and ESG Performance. The Effects of Corporate Governance Mechanisms

Abstract Drawing on agency, legitimacy, and resource dependence theories, this research delves into the nexus between earnings management and environmental, social, and governance (ESG) performance within an international sample of non-financial companies. The proxy for earnings management is discretionary accruals, while ESG performance is measured both by ESG score, overall, and by the three pillars (environmental, social, and governance). Furthermore, this investigation includes several company-level characteristics as control variables. Research hypotheses are tested using a panel dataset collected from Thomson Reuters Eikon, for the time frame between 2018 and 2023. Prior to econometric modelling, data analysis is based on descriptive statistics and correlation matrix. Then, through a multilevel regression estimation, performed in STATA18, a noteworthy pattern is demonstrated, namely that earnings management techniques are associated with lower ESG performance. Notably, this relationship is positively moderated by corporate governance mechanisms, such as board independence, board diversity, and audit committee independence, which may diminish the negative link between discretionary accruals and ESG performance. From this perspective, it is found support for the agency theory, which holds that corporate governance mechanisms lessen managerial manipulation of the resources needed for sustainable performance. The main findings suggest a possible managerial tilt toward immediate profits at the expense of long-term sustainability requirements. Given these circumstances, this study expands the scientific background addressed to academics and practitioners, emphasizing the crucial need for greater awareness and accountability of sustainability, as well as a greater focus on avoiding and minimizing opportunistic management behaviors.