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

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Purpose: This study aims to focus on environmental, social and governance (ESG) performance as a whole and individually in its three pillars and their influence on earnings management. Design/methodology/approach: Companies listed on the German Prime Standard (DAX30, TecDAX and MDAX) for the business years 2011-2017 (548 firm-year observations) are included in the empirical quantitative study. A correlation and regression analysis is conducted to analyze the impact of ESG performance as determined by the Asset4 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. This study also suggests 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 recognize that ESG performance and financial reporting should be discussed together.

Original languageEnglish
JournalJournal of Global Responsibility
Issue number4
Pages (from-to)322-338
Number of pages17
Publication statusPublished - 23.10.2019

    Research areas

  • Management studies - financial reporting, ESG performance, earnings management, Corporate governance, Stakeholder theory, Accruals