The bidirectional relationship between ESG performance and earnings management: Empirical evidence from Germany

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Purpose - This study focuses on environmental, social and governance (ESG) performance in total and separated in its three pillars and their influence on earnings management.
Design/methodology/approach - Companies listed on the German Prime Standard (DAX30, TecDAX, MDAX) for the business years 2011-2017 (548 firm-year observations) are included in the empirical-quantitative study. A correlation and regression analysis are conducted in order to analysis the impact of ESG performance as determined by the AssetFour database of Thomson Reuters on accruals-based earnings management (AEM) and real earnings management (REM).
Findings - ESG performance has a negative influence on AEM but not on REM. Moreover, by dividing the three different factors of ESG performance, governance performance has the strongest negative impact on AEM in comparison to environmental and social performance. We also state a bidirectional relationship between ESG performance and earnings management.
Originality/value - The analysis makes a key contribution to research as the link between ESG performance and their three components and earnings management are analyzed for the German two-tier system for the first time. Corporate practice, regulators and researchers should be aware of the notion that ESG performance and financial reporting have many interdependencies and should be discussed together.
ZeitschriftJournal of Global Responsibility
Seiten (von - bis)322-338
Anzahl der Seiten17
PublikationsstatusErschienen - 23.10.2019